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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark One)                                   |                                                                                   
|-------------------------------------------- | ----------------------------------------------------------------------------------
|ý                                            | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended September 30, 2003
|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(State or other jurisdiction of incorporation or organization)                                      |  | 22-3499261(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|500 Craig Road, Suite 201, Manalapan, New Jersey 07726(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, $.01 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

The
aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sale price of such stock as
reported by the OTC Bulletin Board, as of the last business day of the Registrant's most recently completed second fiscal quarter, was $6,412,762 based upon 20,686,329 shares held by
non-affiliates.

The
number of shares of Common Stock, $.01 par value, outstanding as of December 23, 2003 was 23,648,576.

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This Annual Report on Form 10-K 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 our brief operating history; our ability to raise additional capital; our ability to achieve and manage
growth; our ability to successfully identify suitable acquisition candidates, complete acquisitions or integrate the acquired business into our operations; our ability to attract and retain qualified
personnel; our ability to develop new services; our ability to cross-sell our services to existing clients; our ability to enhance and expand existing offices; our ability to open new
offices; general economic conditions; our ability to continue to maintain workers' compensation, general liability and other insurance coverages; the continued cooperation of our creditors; and other
factors discussed in Item 1 of this Annual Report under the caption "Factors Affecting Future Operating Results" and 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 Financial
Statements and notes appearing elsewhere in this Annual Report.

In this Annual Report on Form 10-K, references to "Stratus", "the Company", "we", "us" and "our" refer to Stratus
Services Group, Inc.

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FORM 10-K

STRATUS SERVICES GROUP, INC.
Form 10-K for the Fiscal Year Ended September 30, 2003

Table of Contents

|PART I                        |  |                                                                                                                   |  |   
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --
|ITEM 1.                       |  | BUSINESS                                                                                                          |  | 4 
|ITEM 2.                       |  | PROPERTIES                                                                                                        |  | 17
|ITEM 3.                       |  | LEGAL PROCEEDINGS                                                                                                 |  | 17
|ITEM 4.                       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                               |  | 17
|PART II                       |  |                                                                                                                   |  |   
|ITEM 5.                       |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                          |  | 18
|ITEM 6.                       |  | SELECTED FINANCIAL DATA                                                                                           |  | 19
|ITEM 7.                       |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                             |  | 20
|ITEM 7A.                      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                                         |  | 33
|ITEM 8.                       |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                       |  | 33
|ITEM 9.                       |  | CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               |  | 33
|ITEM 9A.                      |  | CONTROLS AND PROCEDURES                                                                                           |  | 33
|PART III                      |  |                                                                                                                   |  |   
|ITEM 10.                      |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTIONS 16(c) OF THE EXCHANGE ACT. |  | 35
|ITEM 11.                      |  | EXECUTIVE COMPENSATION                                                                                            |  | 37
|ITEM 12.                      |  | SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                  |  | 40
|ITEM 13.                      |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                    |  | 43
|ITEM 14.                      |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                            |  | 44
|PART IV                       |  |                                                                                                                   |  |   
|ITEM 15.                      |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                                   |  | 45
|INDEX TO FINANCIAL STATEMENTS |  | F-1                                                                                                              

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PART I

ITEM 1. BUSINESS

General

We are a national business services company engaged in providing outsourced labor and operational resources on a long-term, contractual basis. We were
incorporated in Delaware in March 1997 and began operations in August 1997 with the purchase of certain assets of Royalpar Industries, Inc. and its subsidiaries. This purchase
provided us with a foundation to become a national provider of comprehensive staffing services. We believe that as businesses increasingly outsource a wider range of human resource functions in order
to focus on their core operations, they will require more sophisticated and diverse services from their staffing providers.

We
offer different groups of staffing services comprised of Staffing Services, SMARTSolutions and Information Technology Services. Our Staffing Services offering provides
temporary workers for short-term needs, extended-term temporary employees, temporary-to-permanent placements, recruiting, permanent placements, payroll
processing, on-site supervising and human resource consulting. Our SMARTSolutions technology, available through our Staffing Services branch offices, provides a comprehensive,
customized staffing program designed to reduce labor and management costs and increase workforce efficiency. Stratus Technology Services ("STS") provides information technology ("IT") staffing
solutions to Fortune 1000, middle market and emerging companies. STS offers expertise in a wide variety of technology practices and disciplines ranging from networking professionals to internet
development specialists and application programmers. All service groups seek to act as business partners to our clients rather than merely a vendor. In doing so, they seek to systematically enhance
client productivity and positively impact our and our clients' financial results. We are headquartered at 500 Craig Road, Suite 201, Manalapan, New Jersey 07726 and our telephone number is
(800) 777-1557.

Between
September 1997 and December 2003, we completed ten acquisitions of staffing businesses, representing thirty offices in seven states. In March 2002, we sold
our Engineering Division and in fiscal 2003 we sold the assets of eight of our offices located in Nevada, New Jersey, Florida and Colorado. As of December 23, 2003 we were providing services
from 27 locations in 7 states. We also maintain a presence on the Internet with our website at www.stratusservices.com, an informational site designed to give prospective customers and employees
additional information regarding our operations.

Financial Information About Industry Segments

We disclose segment information in accordance with SFAS NO. 131, "Disclosure about Segments of an Enterprise and Related Information." We operate as one business
segment which provides different types of staffing services. In accordance with SFAS 131, in concluding that our operations comprise a single operating segment, we have taken into account that
we do not compile discrete financial information, other than revenue information, by service offering. As a result, in assessing our performance and making decisions regarding resources to be
allocated within our company, our Chief Executive Officer and other members of management review consolidated financial information as well as discrete financial information compiled for each of our
branch offices.

Principal Services & Markets

Our business operations are classified as one segment of different types of staffing services that consists of Staffing Services, SMARTSolutions and
Information Technology Services service offerings, each service offering having a particular specialty niche within our broad array of targeted markets for all our staffing services.

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Staffing Servicesincludes both personnel placement and employer services such as payrolling, outsourcing, on-site management
and administrative services. Payrolling typically involves the placement of individuals identified by a customer as short-term seasonal or special use workers on our payroll for a
designated period. Outsourcing represents a growing trend among businesses to contract with third parties to provide a particular function or business department for an agreed price over a designated
period. On-site services involve the placement of one of our employees at the customer's place of business to manage all of the customer's temporary staffing requirements. Administrative
services include skills testing, drug testing and risk management services. Skills testing available to our customers include cognitive, personality and psychological evaluation and drug testing that
is confirmed through an independent, certified laboratory.

Staffing
Services can also be separated into assignment types into supplemental staffing, long-term staffing and project staffing. Supplemental staffing provides workers to
meet variability in employee cycles, and assignments typically range from days to months. Long-term staffing provides employees for assignments that typically last three to six months but
can sometimes last for years. Project staffing provides companies with workers for a time specific project and may include providing management, training and benefits.

Staffing
services are marketed through our on-site sales professionals throughout our nationwide network of offices. Generally, new customers are obtained through customer
referrals, telemarketing, advertising and participating in numerous community and trade organizations.

SMARTSolutions.SMARTSolutions is a customized staffing program provided through our staffing
services offices designed to reduce labor and management costs and increase workplace efficiency. While we assist the client in attempting to reach certain targets and milestones, our billings do not
depend on the success or failure of the client achieving or not achieving such milestones.

While
SMARTSolutions is designed to be most effective in manufacturing, distribution and telemarketing operations, it is marketed to all companies that have at least 50
people dedicated to specific work functions that involve repetitive tasks measurable through worker output and could benefit from proactive workforce management. Since SMARTSolutions is a
more sophisticated offering of our traditional staffing services, we have developed a national marketing team dedicated strictly to marketing these programs. However, the team utilizes our Staffing
Services branch staff to identify companies within their geographic regions that could potentially benefit from a SMARTSolutions program. Once identified, the team assumes full
responsibility for the sales process. A significant portion of our SMARTSolutions clients have been obtained through this process or from "word of mouth" recommendations from current
SMARTSolutions customers.

Stratus Technology Services, LLC.We provide Information Technology ("IT") services throughout our branch network through our
affiliate, Stratus Technology Services, LLC ("STS"). STS was formed in November 2000 as a 50/50 joint venture between us and Fusion Business Services, LLC, a New Jersey based
technology project management firm, to consolidate and manage the company-wide technology services business into a single entity focused on establishing market share in the IT market for
staffing services. See "Part III-Item 13 Certain Relationships and Related Party Transactions". STS markets its services to client companies seeking staff for project staffing,
system maintenance, upgrades, conversions, installations, relocations, etc. STS provides broad-based professionals in such disciplines as finance, pharmaceuticals, manufacturing and media which
include such job specifications as Desktop Support Administrators, Server Engineers, Programmers, Mainframe IS Programmers, System Analysts, Software Engineers and Programmer Analysts. In addition,
STS, through its roster of professionals, can initiate and manage turnkey IT projects and provide outsourced IT support on a twenty-four hour, seven day per week basis.

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Business Strategy

Our objective is to become a leading provider of staffing services throughout the United States. Key elements of our business strategy include:

FOCUS
ON SALES WITHIN THE CLERICAL, LIGHT INDUSTRIAL AND LIGHT TECHNICAL SECTOR. We focus on placing support personnel in markets for clerical, light industrial and light technical
temporary staffing. We believe that these services are the foundation of the temporary staffing industry, will remain so for the foreseeable future and best leverage our assets and expertise. We also
believe that employees performing these functions are, and will remain, an integral part of the labor market in local, regional and national economies around the world. We believe that we are
well-positioned to capitalize on these business segments because of our ability to attract and retain qualified personnel and our knowledge of the staffing needs of customers.

ENHANCE
RECRUITING OF QUALIFIED PERSONNEL. We believe that a key component of our success is our ability to recruit and maintain a pool of qualified personnel and regularly place them
into desirable positions. We use comprehensive methods to assess, select and, when appropriate, train our temporary employees in order to maintain a pool of qualified personnel to satisfy ongoing
customer demand. We offer our temporary employees comprehensive benefit, retention and recognition packages, including bonuses, vacation pay and holiday pay.

EMPHASIZE
BUSINESS CORRIDORS. Our strategy is to capitalize on our presence along the I-95 business corridor from New York to Delaware, to grow our presence in the California
West Coast markets, and to build market share by targeting small to mid-sized customers, including divisions of Fortune 500 companies. We believe that in
many cases, such markets are less competitive and less costly in which to operate than the more central areas of metropolitan markets, where a large number of staffing services companies frequently
compete for business and occupancy costs are relatively high. In addition, we believe that business corridor markets are more likely to provide the opportunity to sell recurring business that is
characterized by relatively higher gross margins. We focus on this type of business while also selectively servicing strategic national and regional contracts. While we have, in fiscal 2003, made our
growth through acquisitions a secondary focus to our internal growth, we are continuously evaluating other potential acquisition opportunities.

MAINTAIN
ENTREPRENEURIAL AND DECENTRALIZED OFFICES WITH STRONG CORPORATE SUPPORT. We seek to foster an entrepreneurial environment by operating each office as a separate profit center,
by giving managers and staff considerable operational autonomy and financial incentives. We have designed programs to encourage a "team" approach in all aspects of sales and recruiting, to improve
productivity and to maximize profits. We believe that this structure allows us to recruit and retain highly motivated managers who have demonstrated the ability to succeed in a competitive
environment. This structure also allows managers and staff to focus on branch operations while relying on corporate headquarters for support in back-office operations, such as risk
management programs and unemployment insurance, credit, collections, advice on legal and regulatory matters, quality standards and marketing.

ENHANCE
INFORMATION SYSTEMS. We believe our management information systems are instrumental to the success of our operations. Our business depends on our ability to store, retrieve,
process and manage significant amounts of data. We continually evaluate the quality, functionality and performance of our systems in an effort to ensure that these systems meet our operation needs.
During fiscal 2001, we completed the implementation and rollout of the Keynote Staffing Business Software System. This AS/400 based system comes complete with a rich automated skill search capability,
quality and performance measurement reporting capabilities and user friendly, proactive tools that we believe will improve the level of service our branch offices are capable of delivering.

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In
addition, we have fully upgraded both our hardware and software at our corporate headquarters to accommodate potential future growth. We have implemented a nationwide area network
based upon a reliable, secure, inexpensive, and high performance Virtual Private Network, or VPN. Our VPN integrates all of our offices onto one large area network, capable of multiple changes in a
LIVE environment. Through our VPN, all of our locations can share common data through various servers and a mid-range system which runs our Keynote application. All VPN access includes,
but is not limited to, all back office software systems, internet access and real time e-mail access.

We
believe that our investments in information technology will increase our management's ability to store, retrieve, process and manage information. As a result, we believe we will be
able to improve service to our customers and employees by reducing errors and speeding the resolution of inquiries,
while more efficiently allocating resources devoted to developing and maintaining the Company's information technology infrastructure.

CONTROL
COSTS THROUGH EMPHASIS ON RISK MANAGEMENT. Workers' compensation and unemployment insurance premiums are significant expenses in the temporary staffing industry. Workers'
compensation costs are particularly high in the light industrial sector. Furthermore, there can be significant volatility in these costs. We have a dedicated risk management department that has
developed risk management programs and loss control strategies that we believe will improve management's ability to control these employee-related costs through pre-employment safety
training, safety assessment and precautions in the workplace, post-accident procedures and return to work programs. We believe that its emphasis on controlling employee-related costs
enables branch office managers to price services more competitively and improve profitability.

Growth Strategy

Our current strategy for growing our business and improving our financial performance focuses evenly on a combination of internal growth, sales of underperforming
offices and strategic external and complementary acquisitions.

INTERNAL GROWTH.A significant element of our growth strategy has been, and continues to be, our focus on internal growth. Our internal
growth strategy consists of the following:



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SALES OF UNDER-PERFORMING OFFICES.In order to improve our financial performance and generate cash for operations, we sold the assets of seven of our
offices which were not performing up to management's expectations in fiscal 2003. The offices sold were located in Elizabeth, New Jersey; New Brunswick, New Jersey; Paterson, New Jersey; Perth Amboy,
New Jersey; Trenton, New Jersey; Miami Springs, Florida and Colorado Springs, Colorado. The terms of these sales are described in this report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of OperationsResults of OperationsDiscontinued Operations/Acquisition or Disposition of Assets."

PURSUIT OF COMPLEMENTARY AND STRATEGIC ACQUISITIONS.We intend to focus on opportunities for growth through acquisitions in existing as well as new
markets. While we have, in Fiscal 2003, made our growth through acquisitions a secondary focus to our internal growth, we are continuously evaluating other potential acquisition opportunities.

In
evaluating potential acquisition candidates, we focus on independent staffing companies with a history of profitable operations, a strong management team, a recognized presence in
secondary markets and compatible corporate philosophies and culture. We have used, and may continue to use, a team approach by making select corporate officers and outside consultants responsible for
identifying prospective acquisitions, performing due diligence, negotiating contracts and subsequently integrating the acquired companies. The integration of newly acquired companies generally
involves standardizing each company's accounting and financial procedures with those of ours. Acquired companies typically are brought under our uniform risk management program and key personnel of
acquired companies often become part of field management. Marketing, sales, field operations and personnel programs must be reviewed and, where appropriate, conformed to the practices of our existing
operations.

Between
September 1997 and December 2003, we completed eleven acquisitions of primarily staffing companies or divisions of staffing companies. These acquisitions included
forty offices located in nine states and collectively generated over $90 million in revenue for the twelve months preceding such acquisitions. Pursuant to our acquisition strategy we made the
following purchases:



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Due
to these acquisitions, as well as new offices we opened, the number of our offices increased from five in five states after the Royalpar, Inc. acquisition in August 1997 to forty in
nine states at December 17, 2002. As a result of the sale in Fiscal 2003 of under-performing offices, these numbers are now 27 in 7 states as of December 23, 2003.

Competitive Business Conditions

Staffing companies provide one or more of four basic services to clients: (i) flexible staffing; (ii) Professional Employer Organization ("PEO")
services; (iii) placement and search; and (iv) outplacement. According to the American Staffing Association (formerly the National Association of Temporary and Staffing Services), 2002
staffing industry revenues were approximately $61.8 billion. Although staffing industry revenues declined in 2001 and 2002, temporary help sales, which constitute the largest share of staffing
industry revenues, increased more than 300% from 1990 through 2000, according to the American Staffing Association. During the first quarter of 2003, revenues of U.S. staffing firms totaled
$13.1 billion, an increase of five percent over the same period of 2002. According to the American Staffing Association, over 90% of businesses use staffing companies for temporary help. We
believe that the U.S. staffing industry is highly fragmented and has been experiencing

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consolidation
in recent years, particularly with respect to temporary staffing companies. We believe that the industry is consolidating in response to:



Although
some consolidation activity has already occurred, we believe that consolidation in the U.S. staffing industry will continue and that there will be numerous available acquisition
candidates.

Historically,
the demand for temporary staffing employees has been driven by a need to temporarily replace regular employees. More recently, competitive pressures have forced businesses
to focus on reducing costs, including converting fixed labor costs to variable and flexible costs. Increasingly, the use of temporary staffing employees has become widely accepted as a valuable tool
for managing personnel costs and for meeting specialized or fluctuating employment requirements. Organizations also use temporary staffing to reduce administrative overhead by outsourcing operations
that are not part of their core business operations, such as recruiting, training and benefits administration. By utilizing staffing services companies, businesses are able to avoid the management and
administrative costs that
would be incurred if full time employees were employed. An ancillary benefit, particularly for smaller business, is that the use of temporary personnel reduces certain employment costs and risks, such
as workers' compensation and medical and unemployment insurance, that a temporary personnel provider can spread over a much larger pool of employees.

In
the past decade, the staffing industry has seen an evolution of services move away from "temp help" or supplemental staffing to more permanent staffing relationships. The industry has
developed specialization among various sectors and can be classified into four categories: integrated staffing service providers, professional services providers, information technology providers and
commodity providers. Integrated staffing services provide a vendor-on-premise, acting as the general contractor managing the workforce and maintaining the payroll. Through this
arrangement, providers are able to establish long-term relationships with their customers, reduce cyclicality of employees, and maintain relationships with customers that are less
price-sensitive. The professional services provider supplies employees in the fields of engineering, finance, legal, accounting and other professions. In general, these services are less cyclical than
the light industrial and clerical segments and carry higher margins. Information technology companies offer technical employees to maintain and implement all forms of information systems. The
commodity segment of the staffing industry is the traditional temporary employer business in which an employee of the service is placed at the customer for a short period. It is characterized by
intense competition and low margins. This sector is most exposed to economic cycles and price competition to win market share. Growth in this segment has been constrained over the past three years due
to a competitive labor market for low-end workers.

We
compete with other companies in the recruitment of qualified personnel, the development of client relationships and the acquisition of other staffing and professional service
companies. A large percentage of temporary staffing and consulting companies are local operators with fewer than five offices and have developed strong local customer relationships within local
markets. These operators actively compete with us for business and, in most of these markets; no single company has a dominant share of the market. We also compete with larger,
full-service and specialized competitors in national, regional and local markets. The principal national competitors include MPS Group, Manpower, Inc., Kelly Services, Inc.,
Olsten Corporation, Interim Services, Inc., and Norrell Corporation, all of which may have greater marketing, financial and other resources than Stratus. We believe that the primary competitive
factors in obtaining and retaining clients are the number and location of offices, an understanding of clients' specific job requirements, the ability to provide temporary personnel in a

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timely
manner, the monitoring of the quality of job performance and the price of services. The primary competitive factors in obtaining qualified candidates for temporary employment assignments are
wages, responsiveness to work schedules and number of hours of work available. We believe our long-term client relationships and strong emphasis on providing service and value to our
clients and temporary staffing employees makes us highly competitive.

Customers

During the year ended September 30, 2003, we provided services to 1900 customers in 21 states. Our five largest customers represented 27% of our revenue
from continuing operations but no one customer exceeded 10% and only one customer exceeded 8%.

Governmental Regulation

Staffing services firms are generally subject to one or more of the following types of government regulation: (1) regulation of the employer/employee
relationship between a firm and its temporary employees; and (2) registration, licensing, record keeping and reporting requirements. Staffing services firms are the legal employers of their
temporary workers. Therefore, laws regulating the employer/employee relationship, such as tax withholding and reporting, social security or retirement, anti-discrimination and workers'
compensation, govern these firms. State mandated workers' compensation and unemployment insurance premiums have increased in recent years and have directly increased our cost of services. In addition,
the extent and type of health insurance benefits that employers are required to provide employees have been the subject of intense scrutiny and debate in recent years at both the national and state
level. Proposals have been made to mandate that employers provide health insurance benefits to staffing employees, and some states could impose sales tax, or raise sales tax rates on staffing
services. Further increases in such premiums or rates, or the introduction of new regulatory provisions, could substantially raise the costs associated with hiring and employing staffing employees.

Certain
states have enacted laws that govern the activities of "Professional Employer Organizations," which generally provide payroll administration, risk management and benefits
administration to client companies. These laws vary from state to state and generally impose licensing or registration requirements for Professional Employer Organizations and provide for monitoring
of the fiscal responsibility of these organizations. We believe that Stratus is not a Professional Employer Organization and not subject to the laws that govern such organizations; however, the
definition of "Professional Employer Organization" varies from state to state and in some states the term is broadly defined. If we are determined to be a Professional Employer Organization, we can
give no assurance that we will be able to satisfy licensing requirements or other applicable regulations. In addition, we can give no assurance that the states in which we operate will not adopt
licensing or other regulations affecting companies that provide commercial and professional staffing services.

Trademarks

We have not obtained federal registration of any of the trademarks we use in our business, including SMARTSolutions, SMARTReport, and SMARTTraining, our slogan,
name or logo. Currently, we are asserting Common Law protection by holding the marks out to the public as the property of Stratus. However, no assurance can be given that this Common Law assertion
will be effective to prevent others from using any of our marks concurrently or in other locations. In the event someone asserts ownership to a mark, we may incur legal costs to enforce any
unauthorized use of the marks or defend ourselves against any claims.

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Employees

As of September 30, 2003, we were employing 5,158 total employees. Of that amount, 311 were classified as staff employees and 4,847 were classified as
field or "temp" employees, those employees placed at client facilities.

A
key factor contributing to future growth and profitability will be the ability to recruit and retain qualified personnel. To attract personnel, we employ recruiters, called "Staffing
Specialists" who regularly visit schools, churches and professional associations and present career development programs to various organizations. In addition, applicants are obtained from referrals
by existing staffing employees and from advertising on radio, television, in the Yellow Pages, newspapers and through the Internet. Each applicant for a Staffing Services position is interviewed with
emphasis on past work experience, personal characteristics and individual skills. We maintain software-testing and training programs at our offices for applicants and employees who may be trained and
tested at no cost to the applicant or customer. Management Personnel are targeted and recruited for specific engagements. We usually advertise for professionals who possess specialized education,
training or work experience.

To
promote loyalty and improve retention among our employees and to differentiate ourselves from competing staffing firms, we offer a comprehensive benefits package after only ninety
days of employment instead of the industry standard of one hundred eighty days. The benefits package includes paid time off, holiday and vacation time, medical coverage, dental, vision, prescription,
mental health, life insurance and disability coverage. The average length of assignment for employees ranges from six months to five years depending on the client requirements.

Factors Affecting Future Operating Results

This Form 10-K contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as
well as our plans and strategies. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Numerous factors could cause
actual results to differ significantly from the results described in these forward-looking statements, including the following risk factors.

We have limited liquid resources and a history of net losses.

Our auditors have qualified their opinion on our financial statements for the year ended September 30, 2003, with a qualification which raises substantial
doubt about our ability to continue as a going concern. Our ability to continue in business depends upon the continued cooperation of our creditors, our ability to generate sufficient cash flow to
meet our continuing obligations on a timely basis and our ability to obtain additional financing. At September 30, 2003, we had limited liquid resources and owed $1,056,812 under promissory
notes that were past due or due upon demand. In addition, approximately $4,400,000 of payroll taxes was delinquent and we had a cash overdraft, representing outstanding checks of $699,057. Current
liabilities at September 30, 2003 were $24,112,324 and current assets were $16,132,990. The difference of $7,979,334 is a working capital deficit, which is primarily the result of losses
incurred during the last two years. While we have plans to use the funds raised from a proposed offering of securities to reduce our indebtedness, we can give no assurance that we will raise
sufficient capital to eliminate our working capital deficit or that our creditors will not seek to enforce their remedies against us, which could include the imposition of insolvency proceedings.

Fluctuations in the general economy could have an adverse impact on our business.

Demand for our staffing services is significantly affected by the general level of economic activity and unemployment in the United States. Companies use
temporary staffing services to manage personnel costs and staffing needs. When economic activity increases, temporary employees are often added before full-time employees are hired.
However, as economic activity slows, many companies

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reduce
their utilization of temporary employees before releasing full-time employees. In addition, we may experience less demand for our services and more competitive pricing pressure
during periods of economic downturn. Therefore, any significant economic downturn could have a material adverse effect on our business, results of operations, cash flows or financial condition.

We may be unable to continue and manage our growth.

Our ability to continue growth will depend on a number of factors, including: the strength of demand for temporary employees in our markets; the availability of
capital to fund acquisitions; the ability to maintain or increase profit margins despite pricing pressures; and existing and emerging competition. We must also adapt our infrastructure and systems to
accommodate growth and recruit and train additional qualified personnel. Furthermore, the United States economy is continuing to show signs of an economic slowdown. Should the economic slowdown or a
recession continue for an extended period, competition for customers in the staffing industry would increase and may adversely impact management's allocation of our resources and result in declining
revenues.

We rely heavily on executive management and could be adversely affected if our executive management team was not available.

We are highly dependent on our senior executives, including Joseph J. Raymond, our Chairman, CEO and President since September 1, 1997; Michael A.
Maltzman, Executive Vice President and Chief Financial Officer who has been serving in that capacity since September 1, 1997; and on the other members of our senior management team. We entered
into an employment agreement with Mr. Raymond effective September 1, 1997 for continuing employment until he chooses to retire or until his death and that agreement remains in effect as
written. Employment arrangements with all of our executive officers are at-will. The loss of the services of either Mr. Raymond or Mr. Maltzman and other senior executives or
other key executive personnel could have a material adverse effect on our business, results of operations, cash flows or financial condition.

We rely heavily on our management information systems and our business would suffer if our systems fail or cannot be upgraded or replaced on a timely
basis.

We believe our management information systems are instrumental to the success of our operations. Our business depends on our ability to store, retrieve, process
and manage significant amounts of data. We continually evaluate the quality, functionality and performance of our systems in an effort to ensure that these systems meet our operational needs. We have,
in the past, encountered delays in implementing, upgrading or enhancing systems and may, in the future, experience delays or increased costs. There can be no assurance that we will meet anticipated
completion dates for system replacements, upgrades or enhancements that such work will be competed in the cost-effective manner, or that such replacements, upgrades and enhancements will
support our future growth or provide significant gains in efficiency. The failure of the replacements, upgrades and enhancements to meet these expected goals could result in increased system costs and
could have a material adverse effect on our business, results of operations, cash flows or financial condition.

Increases in employee-related costs would have an adverse effect on our business.

Our employee-related costs fluctuate and an increase in these costs could have a significant effect on our ability to achieve profitability. We are responsible
for all employee-related expenses for the temporary employees, including workers' compensation, unemployment insurance, social security taxes, state and local taxes and other general payroll expenses.
We maintain workers' compensation insurance on a fully-insured, guaranteed cost basis with various private carriers and state insurance funds. We accrue for workers' compensation costs based upon
payroll dollars paid to temporary employees. The accrual rates vary based upon the specific risks associated with the work performed by the temporary

13

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employee.
Unemployment insurance premiums are set by the states in which our employees render their services. A significant increase in these premiums or in workers' compensation-related costs or our
inability to continue to maintain workers' compensation coverage could have a material adverse effect on our business, results of operations, cash flows or financial condition.

Our financial results will suffer if we lose any of our significant customers.

As is common in the temporary staffing industry, certain of our engagements to provide services to our customers are of a non-exclusive,
short-term nature and subject to termination by the customer with little or no notice. During fiscal 2002 and 2003, no single customer of ours accounted for more than 10% of our sales or
services. Nonetheless, the loss of any of our significant customers could have an adverse effect on our business, results of operations, cash flows or financial condition. We are also subject to
credit risks associated with our trade receivables. During fiscal 2002 and fiscal 2003, we incurred costs of $1,650,000 and $875,000, respectively, for bad debts. Should any of our principal customers
default on their large receivables, our business results of operations, cash flows or financial condition could be adversely affected.

We have experienced significant fluctuations in our operating results and anticipate that these fluctuations may continue.

Fluctuations in our operating results could have a material adverse effect on the price of our common stock. Operating results may fluctuate due to a number of
factors, including the demand for our services, the level of competition within our markets, our ability to increase the productivity of our existing offices, control costs and expand operations, the
timing and integration of acquisitions and the availability of qualified temporary personnel. In addition, our results of operations could be, and have in the past been, adversely affected by severe
weather conditions. Moreover, our results of operations have also historically been subject to seasonal fluctuations. Demand for temporary staffing historically has been greatest during our fourth
fiscal quarter due largely to the planning cycles of many of our customers. Furthermore, sales for the first fiscal quarter are typically lower due to national holidays as
well as plant shutdowns during and after holiday season. These shutdowns and post-holiday season declines negatively impact job orders received by us, particularly in the light industrial
sector. Due to the foregoing factors, we have experienced in the past, and may possibly experience in the future, results of operations below the expectations of public market analysts and investors.

If we are not able to attract and retain the services of qualified temporary personnel, our business will suffer.

Our success depends upon our ability to attract and retain qualified personnel who possess the skills and experience necessary to meet the staffing requirements
of our customers. We have experienced and may continue to experience significant difficulties in hiring and retaining sufficient numbers of qualified personnel to satisfy the needs of our customers.
During periods of increased economic activity and low unemployment, the competition among temporary staffing firms for qualified personnel increases. Many regions in which we operate have in the past,
and may continue to experience, historically low rates of unemployment and we have experienced, and may continue to experience, significant difficulties in hiring and retaining sufficient numbers of
qualified personnel to satisfy the needs of our customers. Furthermore, we may face increased competitive pricing pressures during such periods. While the current economic environment is facing
uncertainties, competition for individuals with the requisite skills is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be
available to us in sufficient numbers and on terms of employment acceptable to us. We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing
customer needs and emerging technologies. Furthermore, a substantial number of our temporary employees during any given year will terminate their employment with us to accept regular staff employment
with our customers. The inability to

14

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attract
and retain qualified personnel could have a material adverse effect on the business, results of operations, cash flows or financial condition.

Our success depends upon the performance of our field management.

We are dependent on the performance and productivity of our local managers, particularly branch and regional managers. This loss of some of our key managers could
have an adverse effect on our operations, including our ability to establish and maintain customer relationships. Our ability to attract and retain business is significantly affected by local
relationships and the quality of services rendered by branch, area, regional and zone managerial personnel. If we are unable to attract and retain key employees to perform these services, our
business, results of operations, cash flows or financial condition could be adversely affected. Furthermore, we may be dependent on the senior management of companies that may be acquired in the
future. If any of these individuals do not continue in their management roles, there could be material adverse effects on our business, results of operations, cash flows or financial condition.

We may be subject to claims as a result of actions taken by our temporary staffing personnel.

Actions taken by our temporary staffing employees could subject us to significant liability. Providers of temporary staffing services place people in the
workplaces of other businesses. An inherent risk of such activity includes possible claims of errors and omissions, discrimination or harassment, theft of customer property, misappropriation of funds,
misuse of customers' proprietary information, employment of undocumented workers, other criminal activity or torts, claims under health and safety regulations and other claims. There can be no
assurance that we will not be subject to these types of claims, which may result in negative publicity and our payment of monetary damages or fines, which, if substantial, could have a material
adverse effect on our business, results of operations, cash flows or financial condition.

Future acquisitions could increase the risk of our business.

While we intend to pursue acquisitions in the future, there can be no assurance that we will be able to expand our current market presence or successfully enter
other markets through acquisitions. Competition for acquisitions may increase to the extent other temporary services firms, many of which have significantly greater financial resources than us, seek
to increase their market share through acquisitions. In addition, we are subject to certain limitations on the incurrence of additional indebtedness under our credit facilities, which may restrict our
ability to finance acquisitions. Further, there can be no assurance that we will be able to identify suitable acquisition candidates or, if identified, complete such acquisitions or successfully
integrate such acquired businesses into our operations. Acquisitions also involve special risks, including risks associated with unanticipated problems, liabilities and contingencies, diversion of
management's attention and possible adverse effects on earnings resulting from increased interest costs and workers' compensation costs, as well as difficulties related to the integration of the
acquired businesses, such as retention of management. Furthermore, once integrated, acquisitions may not achieve comparable levels of revenue or profitability as our existing locations. In addition,
to the extent that we consummate acquisitions in which a portion of the consideration is in the form of common stock, current shareholders may experience dilution. The failure to identify suitable
acquisitions, to complete such acquisitions or successfully integrate such acquired businesses into our operations could have a material adverse effect on our business, results of operations, cash
flows or financial condition.

Short sales of our common stock could place downward pressure on the price of our common stock.

Selling stockholders and others may engage in short sales of our common stock. Short sales could place downward pressure on the price of our common stock. In that
case, we could be required to issue

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an
increasingly greater number of shares of our common stock upon future conversions of our Series E Preferred Stock, sales of which could further depress the price of our common stock. The
downward pressure on the price of our common stock resulting from conversions of the Series E Preferred Stock could encourage additional short sales by selling stockholders and others.

There is no limit on the number of shares which are issuable upon conversion of our Series E Preferred Stock and if the price of our common stock
decreases, the number of shares issuable upon conversion will continue to increase.

The number of shares issuable upon conversion of our Series E Preferred Stock depends upon the market price of our common stock. The conversion price of
the Series E Preferred Stock is equal to 75% of the average of the closing bid prices of the common stock for the five trading days preceding the conversion. As a result, the lower the price of
our common stock at the time of conversion, the greater the number of shares the converting holder will receive and the more the interests of our existing stockholders will be diluted. For example,
assuming that the market value of our common stock is $.25 per share after giving effect to our proposed one-for-four reverse stock split, the number of shares of common stock
that we would be required to issue upon conversion of the outstanding shares of Series E Preferred Stock, would increase from an aggregate of approximately 20,323,733 shares, based upon a
conversion price of $.1875, to approximately:



Potential conversions of our convertible preferred stock will reduce the percentage ownership interest of existing stockholders and may cause a
reduction in our share price.

As of December 23, 2003 we had outstanding 1,458,933 shares of Series A Preferred Stock, 38,107 shares of Series E Preferred Stock and 6,000
shares of Series F Preferred stock. If all of the holders of preferred stock convert their preferred stock into shares of common stock, we will be required to issue no less than 27,782,666
shares of common stock based on an assumed conversion price of $.1875 per share for the Series E Preferred Stock. If the trading price of the common stock is low when the conversion price of
the Series E Preferred Stock is determined, we would be required to issue a higher number of shares of common stock, which could cause a further reduction in each of our stockholder's
percentage ownership interests in our company. In addition, if a holder of preferred stock converts our preferred stock and sells the common stock, it could result in an imbalance of supply and demand
for our common stock and a decrease in the market price of our common stock. The further our stock price declines, the more the conversion price of our Series E Preferred Stock will fall and
the greater the number of shares we will have to issue upon conversion.

Regulatory and legal uncertainties could harm our business.

The implementation of unfavorable governmental regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us
to incur significant compliance costs, cause the development of the affected markets to become impractical or otherwise adversely affect our financial performance. If we are determined to be a
"Professional Employer Organization," we cannot assure you that we will be able to satisfy licensing requirements or other applicable regulations. Certain states have enacted laws which govern the
activities of Professional Employer Organizations, which generally provide payroll administration, risk management and benefits administration to client

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companies.
These laws vary from state to state and generally impose licensing or registration requirements for Professional Employer Organizations and provide for monitoring of the fiscal
responsibility of these organizations. We believe that Stratus is not a Professional Employer Organization and not subject to the laws which govern such organizations; however, the definition of
Professional Employer Organization varies from state to state and in some states the term is broadly defined. In addition, we can give no assurance that the states in which we operate will not adopt
licensing or other regulations affecting companies which provide commercial and professional staffing services.

We are controlled by our Chairman, who is our principal stockholder, and our management.

As of December 23, 2003, our Chairman of the Board, Joseph J. Raymond, owned or had the right to vote shares representing approximately 36.6% of the
outstanding voting power of our capital stock. Our
directors and executive officers, as a group, own or have the right to vote shares representing approximately 38.0% of the outstanding voting power of our capital stock. As a result,
Mr. Raymond and, if they should determine to act together, our directors and executive officers as a group, will be able to exercise significant influence over the outcome of any matters which
might be submitted to our stockholders for approval, including the election of directors and the authorization of other corporate actions requiring stockholder approval.

ITEM 2. PROPERTIES

We own no real property. We lease approximately 6,841 square feet in a professional office building in Manalapan, New Jersey as our corporate headquarters. That
facility houses all of our centralized corporate functions, including the Executive management team, payroll processing, accounting, human resources and legal departments. Our lease expires on
September 30, 2007. As of September 30, 2003, we leased 27 additional facilities, primarily flexible staffing offices, in 7 states. We believe that our facilities are generally adequate
for our needs and we do not anticipate any difficulty in replacing such facilities or locating additional facilities, if needed.

ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal 2003, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

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PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

On April 11, 2000, our registration statement on Form SB-2 (Commission File No. 333-83255) for our initial public offering
of common stock, $.01 par value, became effective and our shares commenced trading on the Nasdaq SmallCap Market under the symbol "SERV" on April 26, 2000. On February 27, 2002, our
common stock was delisted from the Nasdaq SmallCap Market and is currently trading on the NASD OTC Bulletin Board under the symbol "SERV.OB". There were approximately 229 holders of record of common
stock as of December 23, 2003. This number does not include the number of shareholders whose shares were held in "nominee" or "street name". The table below sets forth, for the periods
indicated, the high and low sales prices of our common stock as reported by the Nasdaq Stock Market and by the NASD OTC Bulletin Board.

Fiscal Year 2002

High

LowQuarter Ended December 31, 2001

1.19

0.51Quarter Ended March 31, 2002

1.00

0.25Quarter Ended June 30, 2002

0.75

0.13Quarter Ended September 30, 2002

0.30

0.08Fiscal Year 2003

High

LowQuarter Ended December 31, 2002

0.55

0.12Quarter Ended March 31, 2003

0.45

0.22Quarter Ended June 30, 2003

0.55

0.20Quarter Ended September 30, 2003

0.33

0.10


On
December 18, 2003, the closing price of our common stock as reported by the NASD OTC Bulletin Board was $.21 per share. We have never paid cash dividends on our common stock
and we intend to retain earnings, if any, to finance future operations and expansion. In addition, our credit agreement restricts the payment of dividends, therefore, we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Any future payment of dividends on our common stock will depend upon our financial condition, capital requirements and earnings as well as
other factors that the Board of Directors deems relevant.

See
"Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management" for information regarding securities authorized for issuance under equity
compensation plans.

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ITEM 6. SELECTED FINANCIAL DATA.

(In thousands except per share)

The
selected financial data that follows should be read in conjunction with our financial statements and the related notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in this report. The financial results for prior years have been reclassified to present the operations of certain sold branches as discontinued
operations.

|                                                                                             |  | Year Ended September 30, |       
|-------------------------------------------------------------------------------------------- |  | ------------------------ | ------
|
|Income statement data:                                                                       |  |                          |       
|Revenues                                                                                     |  | $                        | 76,592
|Gross profit                                                                                 |  |                          | 11,406
|Operating (loss) from continuing operations                                                  |  |                          | (2,656
|Net (loss) from continuing operations                                                        |  |                          | (4,433
|Net earnings (loss) from continuing operations attributable to common stockholders           |  |                          | (6,063
|Per share data:                                                                              |  |                          |       
|Net earnings (loss) from continuing operations attributable to common stockholders  basic   |  | $                        | (.34  
|Net earnings (loss) from continuing operations attributable to common stockholders  diluted |  | $                        | (.34  
|Cash dividends declared                                                                      |  |                          |      
|
|
|Balance sheet data:                                                                          |  |                          |       
|Net working capital (deficiency)                                                             |  | $                        | (7,979
|Long-term obligations, including current portion                                             |  |                          | 4,001 
|Convertible debt                                                                             |  |                          | 40    
|Put option liability                                                                         |  |                          | 823   
|Redeemable convertible preferred stock                                                       |  |                          | 3,810 
|Stockholders' equity (deficiency)                                                            |  |                          | (4,915
|Total assets                                                                                 |  |                          | 25,151

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Introduction

We provide 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 provide, we recognize revenues based on hours worked by assigned personnel. Generally, we bill our
customers a pre-negotiated, fixed rate per hour for the hours worked by our temporary employees. Therefore we do not separate our various service offerings into separate offering segments.
We do not routinely provide discrete financial information about any particular service offering. We also do not conduct any regular reviews of, nor make decisions about, allocating any particular
resources to a particular service offering to assess its performance. As set forth below, certain of our service offerings target specific markets, but we do not necessarily conduct separate marketing
campaigns for such services. We are responsible for workers' compensation, unemployment compensation insurance, Medicare and Social Security taxes and other general payroll related expenses for all of
the temporary employees we place. These expenses are included in the cost of revenue. Because we pay our temporary employees only for the hours they actually work, wages for our temporary personnel
are a variable cost that increases or decreases in proportion to revenues. Gross profit margin varies depending on the type of services offered. In some instances, temporary employees placed by us may
decide 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 are 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.

Critical Accounting Policies and Estimates

The following accounting policies are considered by us to be "critical" because of the judgments and uncertainties affecting the application of these policies and
because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

Revenue Recognition

We recognize revenue as the services are performed by our workforce. Our customers are billed weekly. At balance sheet dates, there are accruals for unbilled
receivables and related compensation costs.

During
fiscal 2003, we changed our method of reporting the revenues for payrolling services from gross billing to a net revenue basis. Unlike traditional staffing services, under a
payrolling arrangement, our customer recruits and identifies individuals for us to hire to provide services to the customer. We become the statutory employer although the customer maintains
substantially all control over those employees. Accordingly, Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" requires that we do
not reflect the direct payroll costs paid to such employees in revenues and cost of revenue.

Allowance for Doubtful Accounts Receivable

We provide customary credit terms to our customers and generally do not require collateral. We perform ongoing credit evaluations of the financial condition of
our customers and maintain an allowance for doubtful accounts receivable based upon historical collection experience and expected collectibility of accounts. As of September 30, 2003, we had
recorded an allowance for doubtful

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accounts
of approximately $1,733,000. The actual bad debts may differ from estimates and the difference could be significant.

Goodwill and Intangible Assets

Effective October 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and other
Intangible Assets". The provisions of SFAS No. 142 require that intangible assets not subject to amortization and goodwill be tested for impairment annually, or more frequently, if events or
changes in circumstances indicate that the carrying value may not be recoverable. Amortization of goodwill and intangible assets with indefinite lives, including such assets recorded in past business
combinations, ceased upon adoption. Thus no amortization for such goodwill was recognized in the accompanying statement of operations for the year ended September 30, 2003, compared to $289,177
and $332,636 for the years ended September 30, 2002 and 2001, respectively.

In
order to assess the fair value of our goodwill as of the adoption date, we engaged an independent valuation firm to assist in determining the fair value. The valuation process
appraised our assets and liabilities using a combination of present value and multiple of earnings valuation techniques. Based upon the results of the valuations, it was determined that there was no
impairment of goodwill.

Valuation Allowance Against Deferred Income Tax Assets

Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We have recorded a valuation allowance of approximately $8.0 million to offset the entire
balance of the deferred tax asset as of September 30, 2003. The valuation allowance was recorded as a result of the losses incurred by us and our belief that it is more likely than not that we
will be unable to recover the net deferred tax assets.

Results of Operations

Discontinued Operations/Acquisition or Disposition of Assets

In March 2002, we completed the sale of the assets of our Engineering Services Division (the "Division") to SEA Consulting Services Corporation (the
"Purchaser"). Prior to the sale, the assets of the Division had been transferred to SEP, LLC ("SEP"), a limited liability company in which we held a 70% interest and Sahyoun Holdings LLC, a company
wholly owned by Charles Sahyoun, the President of the Division, owned the remaining 30% interest.

Under
the terms of the Asset Purchase Agreement executed in connection with the transaction, we received an initial cash payment of $1,560,000, which represented 80% of the initial
$2,200,000 installment of the purchase price payable to SEP after the satisfaction of certain liabilities and expenses of SEP. Sahyoun Holdings, LLC received the other 20% of the initial net
installment of the purchase price, or $440,000. The Asset Purchase Agreement required the Purchaser to make certain additional payments to SEP based upon the operating results of the acquired business
through December 31, 2007.

Pursuant
to an allocation and indemnity agreement entered into by us, Sahyoun Holdings, LLC and Mr. Sahyoun (the "Allocation and Indemnity Agreement"), we were entitled to
$250,000 of a payment due in 2002 and $250,000 of a payment due in 2003. On April 15, 2002, by letter agreement between us, Sahyoun Holdings, LLC and Joseph J. Raymond, Sr., our Chairman and
Chief Executive Officer, the parties agreed to a modification of the Allocation and Indemnity Agreement. Per that letter agreement, Sahyoun Holdings, LLC provided us with $200,000 cash in exchange for
our

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short-term,
90-day demand note, due and payable by August 1, 2002 in the amount of $250,000. The $250,000 was paid by us from our share of the payment which was received
by us in June 2002.

Sahyoun
Holdings LLC and Mr. Sahyoun guaranteed the $250,000 payment due to us in 2003, regardless of the operating results of SEA. In December 2002, Mr. Sahyoun and
we agreed to offset the $250,000 against $250,000 of accrued commissions due Mr. Sahyoun. As a result, we will not be entitled to any additional payments under the Asset Purchase Agreement.

Effective
January 1, 2002, we purchased substantially all of the tangible and intangible assets, excluding accounts receivable, of seven offices of PES. The initial purchase price
was $1,480,000, represented by a $1,100,000 promissory note and 400,000 shares of our common stock. There was an additional $334,355 of costs incurred in connection with the acquisitions. In addition,
PES is entitled to earnout payments of 15% of pretax profit of the acquired business up to a total of $1.25 million or the expiration of ten years, whichever occurs first. The note bears
interest at 6% a year and is payable over a ten-year period in equal quarterly payments. See Note 3 to the Financial Statements included with this Report.

Effective
December 1, 2002, we purchased substantially all of the tangible and intangible assets, excluding accounts receivable, of six offices of Elite Personnel
Services, Inc. Pursuant to a Asset Purchase Agreement dated November 19, 2002 between us and Elite (the "Elite Purchase Agreement"), the purchase price paid at closing (the "Base
Purchase Price") was $1,264,000, all of which was represented by a promissory note (the "Note") payable over eight years, in equal monthly installments. Imputed interest at the rate of 4% per year is
included in the Note amount. Accordingly, the net Base Purchase Price was $1,083,813.

In
addition to the Base Purchase Price, Elite may also receive as deferred purchase price an amount equal to 10% of "Gross Profits" as defined in the Elite Purchase Agreement, of the
acquired business between $2,500,000 and $3,200,000 per year, plus 15% of Gross Profits of the acquired business in excess of $3,200,000 per year, for a minimum of one year from the effective date of
the transaction, and for a period of two years from the effective date if Gross Profits for the first year reach specified levels.

On
September 29, 2003, we completed the sale of substantially all of the tangible and intangible assets, excluding accounts receivable, of our Las Vegas, Nevada office. Pursuant
to the terms of an Asset Purchase Agreement between us and US Temp Services, Inc. ("US Temps") dated September 29, 2003, the purchase price for the purchased assets was $105,000, all of
which was paid by means of a promissory note, which bears interest at the rate of 6% per year and is payable in monthly installments of $2,029.94, over a 5 year period. The note is secured by a
security interest on all of the purchased assets. The purchase price for the assets acquired by US Temps was arrived at through arms-length negotiations between the parties.

On
September 10, 2003, we completed the sale, effective as of September 15, 2003 (the "Effective Date"), of substantially all of the tangible and intangible assets,
excluding accounts receivable, of five of our New Jersey offices to D/O Staffing LLC ("D/O"). The offices sold are the following: Elizabeth, New Jersey; New Brunswick, New Jersey; Paterson, New
Jersey; Perth Amboy, New Jersey and Trenton, New Jersey. Pursuant to the terms of an asset purchase agreement between D/O and us dated September 10, 2003 (the "D/O Purchase Agreement"), the
base purchase price for the purchased assets was $1,250,000 payable as follows:



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Additionally,
we may be entitled to receive as a deferred purchase price (the "Bonus"), an amount equal to $125,000 if, for the one year period measured from the Effective Date, the
purchased assets generate for D/O at least $18,000,000 in actual billings by client accounts serviced by us as of the closing and transferred by us to D/O pursuant to the D/O Purchase Agreement. The
Bonus, if any, is payable by way of a promissory note, payable over a 24 month period and bearing interest at an interest rate of 6% per year.

The
purchase price for the assets was arrived at through arms-length negotiations between the parties.

On
August 22, 2003, we completed the sale, effective as of August 18, 2003 (the "ALS Effective Date") of substantially all of the tangible and intangible assets, excluding
accounts receivable, of our Miami Springs, Florida office. Pursuant to the terms of the Asset Purchase Agreement between us and ALS, LLC, a Florida limited liability company ("ALS") dated
August 22, 2003 (the "Purchase Agreement"), the purchase price for the purchased assets was $128,000, all of which was paid by means of a promissory note, which bears interest at the rate of 7%
per annum, with payments over a 60 month period. The amount of the monthly payments due under the note will be the greater of $10 per month or 20% of the monthly net profits generated by the
staffing business originating from the purchased assets, commencing October 31, 2003. However, until such time as all outstanding receivables due and owing by us to ALS, as of the date of the
Purchase Agreement in the amount of $289,635.30, have been paid in full, these monthly payments shall be deducted from any and all amounts due from us to ALS. The note is secured by a security
interest in all of the purchased assets.

The
purchase price for the assets acquired by ALS was arrived at through negotiations with a related party purchaser. The son of our President and Chief Executive Officer is a 50% member
in ALS, LLC. We believe that the terms of the transaction are comparable to those which would have been obtained in a transaction with an unrelated party. Proceeds from the Note will be used to pay
down existing debt and for working capital purposes.

On
March 9, 2003, we completed the sale of substantially all of the tangible and intangible assets, excluding accounts receivable, of our Colorado Springs, Colorado office.
Pursuant to the terms of an asset purchase agreement between us and US Temps dated March 9, 2003, the purchase price for the purchased assets was $20,000, all which was paid by means of a
promissory note, which bears interest at the rate of 6% per year and is payable in monthly installments of $608.44, over a three year period. The note is secured by a security interest on all of the
purchased assets.

Continuing Operations

Year Ended September 30, 2003 Compared to the Year Ended September 30, 2002

Revenues.Revenues increased 67.0% to $76,592,209 for the year ended September 30, 2003 from
$45,859,801 for the year ended September 30, 2002. Approximately $28.6 million of the increase was attributable to the acquisitions in January and December, 2002. Excluding acquisitions
revenues increased 4.6%. This increase was a result of an increase in billable hours.

Gross Profit.Gross profit increased 38.5% to $11,405,778 for the year ended September 30,
2003 from $8,235,085 for the year ended September 30, 2002, primarily as a result of increased revenues. Gross profit as a percentage of revenues decreased to 14.9% for the year ended
September 30, 2003, from 18.0% for the year ended September 30, 2002. This decrease was a result of increased pricing competition for staffing services and increases in the cost of
workers' compensation insurance and state unemployment taxes. In addition, we have been assessed the penalty rate by the New Jersey Department of Labor for state unemployment taxes because of payment
delinquencies (see "Liquidity and Capital Resources"). The estimated additional expense in the year ended September 30, 2003 is $700,000.

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Selling, General and Administrative Expenses.Selling, general and administrative expenses, not
including depreciation and amortization and provision for doubtful accounts, increased 19.8% to $11,611,826 for the year ended September 30, 2003 from $9,314,927 for the year ended
September 30, 2002. Selling, general and administrative expenses, not including depreciation and amortization and provision for doubtful accounts, as a percentage of revenues decreased to 15.2%
for the year ended September 30, 2003 from 20.3% for the year ended September 30, 2002. The increase in the dollar amount is primarily a result of the acquisitions in January and
December 2002, whereas the percentage of revenue decrease is attributable to significant cost reductions implemented by us and the increase in revenues with no proportionate increase in
selling, general and administrative expenses.

Loss on Impairment of Goodwill.As a result of the steady decline in revenue and earnings of certain
previously acquired business units, we determined that there was a permanent impairment of goodwill and accordingly, recorded an impairment loss of $300,000 in the year ended September 30,
2002.

Depreciation and Amortization.Depreciation and amortization expenses not including amortization of
goodwill of $169,849 in the year ended September 30, 2002, increased 20.5% to $922,246 for the year ended September 30, 2003 from $595,744 for the year ended September 30, 2002.
Depreciation and amortization as a percentage of revenues decreased to 1.2% for the year ended September 30, 2003 from 1.3% for the year ended September 30, 2002. The increase in the
dollar amount was due to capital expenditures and the amortization of intangibles associated with the acquisition in December 2002.

Provision for Doubtful Accounts.Provision for doubtful accounts decreased 25.0% to $775,000 for the
year ended September 30, 2003 from $1,033,820 for the year ended September 30, 2002. Provision for doubtful accounts as a percentage of revenues decreased to 1.0% for the year ended
September 30, 2003 from 2.3% for the year ended September 30, 2002. The greater amount in 2002 was due to a change in estimate in light of the downturn in the economy at that time and
our evaluation of the recoverability of certain of our accounts.

Other Charges.During the period May 1, 2001 through May 20, 2002, we maintained
workers' compensation insurance with an insurance company, with a deductible of $150,000 per incident. We had established reserves based upon our evaluation of the status of claims still open in
conjunction with claims reserve information provided to us by the insurance company. We believe that the insurance company has paid and reserved claims in excess of what should have been paid or
reserved. Although we believe we can recover some of the amounts already paid, this can only be pursued through litigation against the insurance company. Since there is no assurance we will prevail,
we recorded $753,000 of additional payments made and reserves in the year ended September 30, 2003.

Interest and Financing Costs.Interest and financing costs increased to $1,887,900 for the year ended
September 30, 2003 from $1,689,635 for the year ended September 30, 2002. Included in the amounts for the year September 30, 2002, is $104,535, which is the portion of the
discount on the beneficial conversion feature of convertible debt and $291,755 of costs we incurred in connection with the issuance of the convertible debt. Interest and financing costs, not including
these convertible debt costs, as a percentage of revenue decreased to 2.5% for the year ended September 30, 2003, from 2.8% for the year ended September 30, 2002. The increase in the
dollar amount is attributable to the increase in borrowings under our line of credit because of increased revenues and additional loans required to provide funding for our operations.

Net (Loss) Attributable to Common Stockholders.As a result of the foregoing, we had a net loss and
net loss attributable to common stockholders of $(4,433,132) and $(6,063,006), respectively, for the year ended September 30, 2003, compared to a net loss and net loss attributable to common
stockholders of $(7,085,633) and $(8,127,443) for the year ended September 30, 2002.

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Year Ended September 30, 2002 Compared to the Year Ended September 30, 2001

Revenues.Revenues increased 56.7% to $45,859,801 for the year ended September 30, 2002 from
$29,274,041 for the year ended September 30, 2001. Approximately $15.4 million of the increase was attributable to acquisitions. Excluding acquisitions revenues increased 3.8%. This
increase was a result of an increase in billable hours.

Gross Profit.Gross profit increased 15.1% to $8,235,085 for the year ended September 30, 2002
from $7,151,723 for the year ended September 30, 2001. Gross profit as a percentage of revenues decreased to 18.0% for the year ended September 30, 2002 from 24.4% for the year ended
September 30, 2001. This decrease was a result of increased pricing competition of staffing services. We also saw a deterioration in margins as a result of the downturn in the economy.

Selling, General and Administrative Expenses.Selling, general and administrative expenses, not
including depreciation and amortization and provision for doubtful accounts, decreased 4.6% to $9,314,927 for the year ended September 30, 2002 from $8,902,660 for the year ended
September 30, 2001. Selling, general and administrative expenses, not including depreciation and amortization and provision for doubtful accounts, as a percentage of revenues decreased to 20.3%
for the year ended September 30, 2002 from 30.4% for the year ended September 30, 2001. The decrease is attributable to significant cost reductions implemented by us, which were offset
in part by additional costs associated with the expansion of our business.

Loss on Impairment of Goodwill.As a result of the steady decline in revenue and earnings of certain
previously acquired business units, and in the case of one business unit, the loss of a major customer, we determined that there was a permanent impairment of goodwill and accordingly, recorded an
impairment loss of $302,000 and $700,000 in the year ended September 30, 2002 and 2001, respectively.

Depreciation and Amortization.Depreciation and amortization expenses increased 78.5% to $765,593 for
the year ended September 30, 2002 from $428,845 for the year ended September 30, 2001. Depreciation and amortization as a percentage of revenues increased to 1.7% for the year ended
September 30, 2002 from 1.5% for the year ended September 30, 2001. The increase was primarily due to the amortization of goodwill and other intangibles associated with acquisitions and
the impact of increased capital expenditures.

Provision for Doubtful Accounts.Provision for doubtful accounts increased 93.2% to $1,033,820 for
the year ended September 30, 2002 from $535,000 for the year ended September 30, 2001. Provision for doubtful accounts as a percentage of revenues increased to 2.3% for the year ended
September 30, 2002 from 1.8% for the year ended September 30, 2001. The increase was due to a change in estimate in light of the downturn in the economy and our evaluation of the
recoverability of certain of our accounts.

Finance Charges.Finance charges for the year ended September 30, 2001 were the amounts
charged under an agreement with a factor, which was terminated on December 12, 2000.

Loss on Sale of Investment.In the year ended September 30, 2002, we sold 63,025,000 shares,
representing our entire 26.3% investment in a publicly-traded foreign company for net proceeds of $206,631 and realized a loss of $2,159,415.

Interest and Financing Costs.Interest and financing costs decreased to $1,689,635 for the year ended
September 30, 2002 from $1,707,730 for the year ended September 30, 2001. Included in the amounts for the years ended September 30, 2002 and 2001, is $104,535 and $1,213,747,
respectively, which is the portion of the discount on the beneficial conversion feature of convertible debt and $291,755 and $135,374, respectively, of costs we incurred in connection with the
issuance of the

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convertible
debt. Interest and financing costs, not including these convertible debt costs, as a percentage of revenue increased to 2.8% for the year ended September 30, 2002, from 1.2% for the
year ended September 30, 2001. This increase was primarily the result of debt incurred by us in connection with acquisitions.

Income Taxes.Income tax expense for the year ended September 30, 2001, is the result of a
change in judgment about the reliability of deferred tax assets.

Net (Loss) Attributable to Common Stockholders.As a result of the foregoing, we had a net loss and
net loss attributable to common stockholders of ($7,085,633) and ($8,127,443), respectively, for the year ended September 30, 2002, compared to a net loss and net loss attributable to common
stockholders of ($5,940,772) and ($6,003,772) for the year ended September 30, 2001.

Liquidity and Capital Resources

At September 30, 2003, we had limited liquid resources. Current liabilities were $24,112,324 and current assets were $16,132,990. The difference of
$7,979,334 is a working capital deficit, which is primarily the result of losses incurred during the last two years. These conditions raise 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 or selling branches that are not profitable, consolidating branches and reductions in staffing and other selling, general and administrative expenses. We continue to pursue other sources of
equity or long-term debt financings. We also continue to negotiate payment plans and other accommodations with our creditors.

In
order to raise capital to sustain our operations, we have filed a Registration Statement on Form S-1 with respect to a proposed offering of securities (the
"Offering"). We are seeking to raise a minimum of $1,000,000 and a maximum of $10,000,000 through the sale of units consisting of common stock and warrants to purchase common stock. The Offering is
being underwritten on a best efforts basis and we can give no assurance that we will be successful in raising any funds in the Offering. The Registration Statement filed in connection with the
proposed Offering has not yet become effective. The securities may not be sold nor may offers to buy the securities be accepted prior to the time the Registration Statement becomes effective.

Net
cash used in operating activities was $2,432,131 and $3,679,332 in the years ended September 30, 2003 and 2002, respectively.

Net
cash provided by investing activities was $819,725 and $1,256,236 in the years ended September 30, 2003 and 2002, respectively. The sale of certain branches in the year ended
September 30, 2003 generated net cash proceeds of $1,120,770, which was used to fund operating activities. The sale of our Engineering Division and sale of an investment in the year ended
September 30, 2002 generated net cash proceeds of $1,709,079 and $206,631, respectively, which was used to fund operating activities. Cash used for acquisitions for the year ended
September 30, 2003 and 2002, was $61,644 and $336,726, respectively. The balance in both periods was primarily for capital expenditures.

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Net
cash provided by financing activities was $1,503,313 and $2,413,920 in the years ended September 30, 2003 and 2002, respectively. We had net borrowings of $573,158 and
$432,536 under our line of credit in the years ended September 30, 2003 and 2002, respectively. We also received net proceeds, less redemptions, of $24,879 from the issuance of convertible debt
in the year ended September 30, 2002. During the years ended September 30, 2003 and 2002, we received $1,442,650 and $2,154,214, respectively, in proceeds from the issuance of our Common
Stock and Preferred Stock and we redeemed $455,000 of Series B Preferred Stock in the year ended September 30, 2002. Net borrowings during the year ended September 30, 2002
include $200,000 advanced to us by Source One Personnel, Inc. ("Source One"). This loan was represented by a promissory note bearing interest at a rate of 7% per year and was made in connection
with a modification of Source One's agreement to forbear from exercising remedies under promissory notes we issued to it in connection with an acquisition transaction completed in July 2001 in
the principal amounts of $600,000 and $1,800,000, respectively. The $200,000 note and the $600,000 note were repaid in full on July 31, 2002 from the proceeds we received from the issuance of
the Series E Preferred Stock. The $1,800,000 note is payable quarterly over a four year period which commenced in November 2001.

Our
principal uses of cash are to fund temporary employee payroll expense and employer related payroll taxes; investment in capital equipment; start-up expenses of new
offices; expansion of services offered; workers' compensation, general liability and other insurance coverages;
debt service and costs relating to other transactions such as acquisitions. Temporary employees are paid weekly.

At
various times during the years ended September 30, 2002 and 2001, we issued convertible debentures through private placements. The debentures bore interest at 6% a year,
payable quarterly and had a maturity date of five years from issuance. Each debenture was convertible after 120 days from issuance into the number of shares of our common stock determined by
dividing the principal amount of the debenture by the lesser of (a) 120% of the closing bid price of the common stock on the trading day immediately preceding the issuance date or
(b) 75% of the average closing bid price of the common stock for the five trading days immediately preceding the date of the conversion. We had the right to prepay any of the debentures at any
time at a prepayment rate that varied from 115% to 125% of the amount of the debenture depending on when the prepayment was made.

The
discount arising from the 75% beneficial conversion feature was charged to interest expense during the period from the issuance of the debenture to the earliest time at which the
debenture became convertible.

As
a result of conversions of the debentures and certain transactions with the debenture holders, only $40,000 of debentures remained outstanding at September 30, 2002 and 2003.

We
have a loan and security agreement (the "Loan Agreement") with Capital Temp Funds, Inc. which provides for a line of credit up to 85% of eligible accounts receivable, as
defined, not to exceed $12,000,000. Until December 2000, advances under the Loan Agreement bore interest at a rate of prime plus 11/2%. (See below) The Loan Agreement restricts
our ability to incur other indebtedness, pay dividends and repurchase stock. Borrowings under the Loan Agreement are collateralized by substantially all of our assets. As of September 30, 2003,
$8,312,275 was outstanding under the credit agreement.

At
September 30, 2003, we were in violation of the following covenants under the Loan Agreement:



We
have received a waiver from the lender on all of the above violations. In December 2002 we entered into a modification of the Loan Agreement. The modification provided that
borrowings under

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the
Loan Agreement bear interest at a rate of prime plus 13/4% as long as we are in violation of any of the covenants under the Loan Agreement. Effective April 10, 2003, we
entered into another modification of the Loan Agreement which provides that borrowings under the Loan Agreement bear interest at 3% above the prime rate.

Holders
of the 1,458,933 outstanding shares of our Series A Preferred Stock are entitled to dividends at a rate of $.21 per share per annum when and if declared by our Board of
Directors in preference and priority to any payment of dividends on our common stock or any other series of our capital stock. Dividends on the Series A Preferred Stock may be paid in
additional shares of Preferred Stock if the shares of common stock issuable upon the conversion of the Series A Preferred Stock have been registered for resale under the Securities Act of 1933.
We are obligated to pay quarterly dividends to holders of our Series E Preferred Stock at a rate of 6% per annum of the stated value of the stock in preference and priority to any payment of
dividends on our common stock. We are obligated to pay monthly dividends on our Series F Preferred Stock at a rate of 7% per annum of the stated value of the stock in preference and priority to
any payment of dividends on our common stock. The aggregate stated values of the Series E and Series F Preferred Stock was $4,025,835 and $800,000, respectively, as of
September 30, 2003. At June 30, 2003, we had 5,000 shares of Series H Preferred Stock outstanding with an aggregate stated value of $500,000; however, in July 2003, the
holder of all outstanding shares of Series H Preferred Stock exchanged such shares for 5,087 shares of Series E Preferred Stock. Dividends on the Series E and Series F
Preferred Stock may be paid at the Company's option in shares of common stock (valued at the conversion price of the applicable class of preferred stock) if such shares have been registered for resale
under the Securities Act of 1933.

We
are obligated to redeem any shares of Series A Preferred Stock outstanding on June 30, 2008 at a redemption price of $3.00 per share together with accrued and unpaid
dividends. We have the option to pay the redemption price through the issuance of shares of common stock. For purposes of determining the number of shares we will be required to issue if we pay the
redemption price in shares of common stock, the common stock will have a value equal to the average closing price of the common stock during the five trading days preceding the date of redemption.

In
July 2003, we entered into an agreement with Artisan (UK) plc, the parent company of Artisan.com Limited, pursuant to which we have agreed to redeem the aggregate 1,458,933
shares of our Series A Preferred Stock owned by Artisan.com Limited and Cater Barnard (USA) plc, an affiliate of Artisan. These shares represent all of the shares of Series A Preferred
Stock currently outstanding. Our obligation to redeem the Series A Preferred Stock is contingent upon our sale of not less than $4,000,000 of units in our proposed best efforts offering of
units ("Units"). If we sell at least $4,000,000 of Units in the Offering, we will be obligated to pay $500,000 to Artisan within 15 days after the $4,000,000 of Units are sold. In addition, we
will be obligated to pay Artisan an additional $250,000 by January 31, 2005 or, at our option, issue to Artisan shares of our common stock having an aggregate market value of $250,000, based
upon the average closing bid prices of the common stock for the 30 trading days preceding January 31, 2005. If we fail to make the $250,000 payment in cash or stock, we will be required to pay
Artisan $300,000 in cash, plus interest calculated on a daily basis at a rate of 18% from the date of the default to the date the default is cured. We have also agreed to issue to Artisan a number of
shares of our common stock which will represent 5.5% of our outstanding common stock, subject to certain adjustments, upon completion of our sale of $4 million of Units in the Offering.
Further, upon final completion of the Offering, we will be required to issue additional shares of common stock so that the total number of shares of common stock issued to Artisan will equal 5.5% of
our common stock after giving effect to the assumed exercise of all warrants and options that then have exercise prices equal to or less than the then current market price of our common stock and the
conversion of all convertible securities that then have conversion prices equal to or less than the then current market price of our common stock.

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Other
fixed obligations that we had as of September 30, 2003 include:



All
of our offices are leased through operating leases that are not included on the balance sheet. As of September 30, 2003, future minimum lease payments under lease agreements
having initial terms in excess of one year were: 2004$547,000, 2005 -$295,000, 2006$185,000 and 2007$169,000.

We
may be required to make certain "earnout" payments to sellers of businesses that we have acquired in recent years, including Source One, PES and Elite. The amount of these payments,
if any, will depend upon the results of the acquired businesses. There were no earnout payments made in fiscal 2003. There is $244,000 included in "Accounts payable and accrued expenses" on the
balance sheet as of September 30, 2003 for estimated earnout payments that we recorded as part of the acquisition of Elite.

Source
One has the right to require us to repurchase 400,000 shares of our common stock at a price of $2.00 per share at any time after July 27, 2003 and before the later of
July 27, 2005 and the full payment of the outstanding note that we issued to it in connection with the acquisition transaction completed with Source One in July 2001. Source One notified
us that it was exercising this right on July 29, 2003. We are attempting to negotiate an arrangement which would permit us to pay this

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amount
over an extended period of time or upon receipt of financing. No assurance can be given that Source One will agree to such an arrangement. In addition, the holder of the $80,000 note which was
due in April 2002 has the right to require us to repurchase 20,000 shares of common stock at a price of $1.00 per share plus interest at a rate of 15% per year until the note is paid in full.

In
January 2003, a $367,216 judgment was awarded against us to an insurance carrier. As of September 30, 2003, the judgment has not yet been paid in full; however, we have
entered into an agreement with the plaintiff which permits us to satisfy the judgment by making payments of $25,000 per month through April 15, 2004 with a final payment of $30,000 due on
May 15, 2004. The unpaid balance of $192,216 at September 30, 2003 is included in "Accounts payable and accrued expenses" on the balance sheet.

During
fiscal 2003, we were notified by both the New Jersey Department of Labor and the California Department of Industrial Relations that, if certain payroll delinquencies were not
cured, judgment would be entered against us. As of September 30, 2003, there was still an aggregate of $4.4 million in delinquent payroll taxes outstanding which are included in
liabilities in the September 30, 2003 balance sheet set forth herein at Pages F-3 and F-4. Judgment has not been entered against us, as we continue to work with these
state agencies to pay down outstanding delinquencies.

In
April 2003, we were served with a Complaint and named as one of several Defendants in the matter ofLopez v. RSI Home Products, Inc., et
al.,("RSI"), in the Superior Court of California, Orange County. RSI is one of our former customers. The case is a class action proceeding alleging failure to pay hourly wages
and overtime wages, failure to provide rest periods and meal periods or compensation in lieu thereof, failure to pay wages of terminated or resigned employees, knowing and intentional failure to
comply with itemized employee wage statement provisions, violation of the unfair competition law, and breach of fiduciary duty. The matter has been settled among the parties and the parties await
Court
approval of the settlement. However, the settlement will not have any adverse effect on our financial condition or results of operations.

As
of September 30, 2003, 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' equity (deficiency) at that date was $(4,914,685).

We
engaged in various transactions with related parties during fiscal 2003 including the following:



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We
believe that all transactions with related parties have been on terms no less favorable to us than those that could have been obtained from unaffiliated third parties.

Seasonality

Our business follows the seasonal trends of our customer's business. Historically, we have experienced lower revenues in the first calendar quarter with revenues
accelerating during the second and third calendar quarters and then starting to slow again during the fourth calendar quarter.

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 June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations". SFAS No. 141 establishes
new standards for accounting and reporting requirements for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after
June 30, 2001. SFAS No. 141 also requires that acquired intangible assets be recognized as assets apart from goodwill if they meet one of the two specified criteria. Additionally, the
statement adds certain disclosure requirements to those required by APB 16, including disclosure of the primary reasons for the business combination and the allocation of the purchase price paid to
the assets acquired and liabilities assumed by major balance sheet caption. This statement is required to be applied to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for using the purchase method for which the date of acquisition is

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July 1,
2001 or later. Use of the pooling-of-interests method is prohibited. The adoption of SFAS No. 141 did not have an impact on the Company's financial
condition or results of operations.

In
June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142, which must be applied to fiscal years beginning after
December 15, 2001, modifies the accounting and reporting of goodwill and intangible assets. The pronouncement requires entities to discontinue the amortization of goodwill, reallocate all
existing goodwill among its reporting segments based on criteria set by SFAS No. 142, and perform initial impairment test by applying a fair-value-based analysis on the goodwill in
each reporting segment. Any impairment at the initial adoption date shall be recognized as the effect of a change in accounting principle. Subsequent to the initial adoption, goodwill shall be tested
for impairment annually or more frequently if circumstances indicate a possible impairment.

Under
SFAS No. 142, entities are required to determine the useful life of other intangible assets and amortize the value over the useful life. If the useful life is determined to
be indefinite, no amortization will be recorded. For intangible assets recognized prior to the adoption of SFAS No. 142, the useful life should be reassessed. Other intangible assets are
required to be tested for impairment in a manner similar to goodwill. The Company adopted SFAS No. 142 and completed a transitional impairment test, as required by SFAS No. 142, and
determined that there was no impairment of goodwill as of October 1, 2002.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains the requirements of SFAS
No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and the fair value of the asset. SFAS No. 144 removes goodwill from its scope.
SFAS No. 144 is applicable to financial statements issued for fiscal years beginning after December 15, 2001, or for our fiscal year ending September 30, 2003. The adoption of
SFAS No. 144 did not have any material adverse impact on the Company's financial position or results of our operations.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which nullifies EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was
recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002.
The adoption of SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact
on the Company's financial position and results of operations.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". Interpretation 46 changes the criteria by which one company includes
another entity in its consolidated financial statements. Previously, the criteria were based on control through voting interest. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns
or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The consolidation requirements apply to older entities in the first fiscal year or
interim period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the

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variable
interest entity was established. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations.

In
April 2003, the FASB Issued SFAS No. 149, "Amendment of SFAS 33 on Derivative Instruments and Hedging Activities". SFAS No. 149 is intended to result in more
consistent reporting of contracts as either freestanding derivative instruments subject to SFAS No. 33 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative
features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The Company does not expect that the adoption of SFAS No. 149 will have an impact on its financial position, results of operations
or cash flows.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes
the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires
that those instruments be classified as liabilities (or assets in certain circumstances) in statements of financial position. This statement affects the issuer's accounting for three types of
freestanding financial instruments including (1) mandatorily redeemable shares that are required to be redeemed at a specified or determinable date or upon an event certain to occur,
(2) put options and forward purchase contracts, which involves financial instruments embodying an obligation that the issuer must or could choose to settle by issuing a variable number of its
shares or other equity instruments based solely on something other than the issuer's own equity shares and (3) certain obligations that can be settled with shares, the monetary value of which
is (i) fixed, tied solely or predominantly to a variable such as a market index, or (ii) varies inversely with the value of the issuers' shares. For public companies, SFAS No. 150
became effective at the beginning of the first interim period beginning after June 15, 2003. As a result of SFAS No. 150, we have classified put options that were previously classified
as "Temporary equity" and our Series A redeemable convertible preferred stock as liabilities at September 30, 2003.

ITEM 7A. 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 Loan and Security Agreement with Capital
Tempfunds, Inc. This credit agreement provides for a line of credit up to 85% of eligible accounts receivable, not to exceed $12,000,000. Advances under this credit agreement bear interest at a
rate of prime plus 3%.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The response to this item is submitted in a separate section of this report commencing on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

No change in accountants or disagreement requiring disclosure pursuant to applicable regulations took place within the reporting period or in any subsequent
interim period.

ITEM 9A. CONTROLS AND PROCEDURES

At the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operations of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chairman and

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Chief
Executive Officer along with our Chief Financial Officer, who concluded that our disclosure controls and procedures were effective as of the date of the evaluation. Their were no significant
changes in our internal controls during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to have materially affected, our internal controls
subsequent to the date we carried out our evaluation.

Disclosure
controls and procedures are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported with the time periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTIONS 16(c) OF THE EXCHANGE ACT.

The Board of Directors and Officers

The name and age of each the directors and the executive officers of the Company and their respective positions with the Company are set forth below. Additional
biographical information concerning each of the directors and the executive officers follows the table.

|Name                  |  | Age |  | Position                                                    
|--------------------- |  | --- |  | ------------------------------------------------------------
|Joseph J. Raymond     |  | 68  |  | Chairman of the Board, President and Chief Executive Officer
|Michael J. Rutkin     |  | 52  |  | Director                                                    
|Harry Robert Kingston |  | 81  |  | Director                                                    
|Donald W. Feidt       |  | 71  |  | Director                                                    
|Sanford I. Feld       |  | 75  |  | Director                                                    
|Michael A. Maltzman   |  | 55  |  | Chief Financial Officer & Treasurer                         
|J. Todd Raymond       |  | 35  |  | Corporate Secretary                                         

Joseph J. Raymondhas served as Chairman of the Board and Chief Executive Officer of Stratus since its inception in 1997. Prior thereto,
he served as Chairman of the Board, President and Chief Executive Officer of Transworld Home Healthcare, Inc. (NASDAQ:TWHH), a provider of healthcare services and products, from 1992 to 1996.
From 1987 through 1997, he served as Chairman of the Board and President of Transworld Nurses, Inc., a provider of nursing and paraprofessional services, which was acquired by Transworld Home
Healthcare, Inc. in 1992.

Michael J. Rutkinhas served as a Director of Stratus since November 1997 and was Chief Operating Officer and President from
March 1997 to October 1998. Since November 1998, Mr. Rutkin has served as General Manager/Chief Executive Officer of Battleground Country Club. From 1996 to 1998,
Mr. Rutkin served as Vice President of Transworld Management Services, Inc. From February 1993 to October 1996, he served as Chief Operating Officer of HealthCare Imaging
Services, Inc. Prior thereto, Mr. Rutkin was the Executive Vice President of Advanced Diagnostic Imaging from February 1987 to February 1993. From March 1981 to
September 1984, he served as Director of New Business Development for the United States Pharmaceutical Division of CIBA-Geigy. Mr. Rutkin is the
brother-in-law of Joseph J. Raymond.

Harry Robert Kingstonhas served as a Director of Stratus since November 1997. From 1977 until his retirement in 1989, he served as
the President and Chief Executive Officer of MainStream Engineering Company, Inc., an engineering staffing firm located in California. From 1965 to 1968, he served as President and Partner of
VIP Engineering Company, a subsidiary of CDI Corporation, a staffing and engineering services business. From 1968 to 1977, Mr. Kingston served as Vice President for CDI Corporation.

Donald W. Feidthas served as a Director of Stratus since November 1997. From 1987 to December 1998, Mr. Feidt was a
Managing Partner of Resource Management Associates, an information technology consulting company. Since December 1998, Mr. Feidt has served as a Vice President to the Chief Executive
Officer of Skila Inc., a global web-based business intelligence platform company providing services to the medical industry.

35

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Sanford I. Feldhas served as a Director of the Company since November 1997. Mr. Feld is currently president of Leafland
Associates, Inc., an advisor to Feld Investment and Realty Management, a real estate development and management company. He also serves as Chairman of Flavor and Food Ingredients, a private
savory and flavor company. From 1973 to 1979, he served as Director of the Chelsea National Bank of New York City.

Michael A. Maltzmanhas served as Treasurer and Chief Financial Officer of Stratus since September 1997 when it acquired the assets
of Royalpar Industries, Inc. Mr. Maltzman served as a Chief Financial Officer of Royalpar Industries, Inc., from April 1994 to August 1997. From June 1988 to
July 1993, he served as Vice President and Chief Financial Officer of Pomerantz Staffing Services, Inc., a national staffing company. Prior thereto, he was a Partner with Eisner &
Lubin, a New York accounting firm. Mr. Maltzman is a Certified Public Accountant.

J. Todd Raymondhas served as Secretary of the Company since September 1997 and as General Counsel from September 1997 until
March 2002. He currently serves as Secretary, Controller and General Counsel of Telx Group, Inc., a telecommunications company. From December 1994 to January 1996,
Mr. Raymond was an associate and managing attorney for Pascarella & Oxley, a New Jersey general practice law firm. Prior thereto, Mr. Raymond acted as in-house counsel
for Raymond & Perri, an accounting firm. From September 1993 to September 1994, Mr. Raymond was an American Trade Policy Consultant for Sekhar-Tunku Imran Holdings Sdn
Berhad, a Malaysian multi-national firm. He is the nephew of Joseph J. Raymond.

Code of Ethics and Business Conduct

We have adopted a Code of Ethics and Business Conduct that applies to all of our directors, officers and employees, including our Chief Executive Officer, our
Chief Financial Officer and other senior financial officers. Our Code of Ethics and Business Conduct is posted on our website, www.stratusservices.com, under the "Employee Information-Legal" caption.
We intend to disclose on our website any amendment to, or waiver of, a provision of the Code of Ethics and Business Conduct that applies to our Chief Executive Officer, our Chief Financial Officer or
our other senior financial officers.

Audit Committee Financial Expert

Our Board of Directors has determined that Michael Rutkin is the Audit Committee's financial expert. Mr. Rutkin is the
brother-in-law of Joseph J. Raymond, our Chairman, President and Chief Executive Officer, and thus is not considered "independent" under NASD Rule 4200(a)(15).

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than ten percent of a registered class
of the Company's equity securities, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file.

Based
solely on the Company's review of the copies of such forms it has received, the Company believes that all of its executive officers, directors and greater than ten percent
stockholders complied with all filing requirements applicable to them with respect to events or transactions during fiscal 2003, except that each of Joseph J. Raymond, Michael A. Maltzman, J. Todd
Raymond, Sanford I. Feld and Donald W. Feidt were late in filing their Forms 4, which were due in connection with the grant of options made to such individuals in March, 2003.

36

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ITEM 11. EXECUTIVE COMPENSATION

The following table provides certain summary information regarding compensation paid by the Company during the fiscal years ended September 30, 2001, 2002
and 2003 to the Chief Executive Officer of the Company and to the Company's only other executive officer who earned compensation of $100,000 or more in fiscal 2003 (together with the Chief Executive
Officer, the "Named Executive Officers"):

|                                                          |  | Annual Compensation |  | Long Term
Compensation Awards
|--------------------------------------------------------- |  | ------------------- |  | -----------------------------
|
|Joseph J. Raymond
Chairman and Chief Executive
Officer    |  | 2003
2002
2001      |  | 94,231
49,472
175,000        
|Michael A. Maltzman
Treasurer and Chief Financial
Officer |  | 2003
2002
2001      |  | 165,000
165,000
165,000      

Directors' Compensation

Directors who are employees of the Company are not compensated for serving on the Board of Directors. Non-employee directors are paid a fee of $1,000
per Board of Directors or committee meeting attended in person and $500 for telephonic attendance.

Employment Agreements

In September 1997, the Company entered into an employment agreement (the "Raymond Agreement") with Joseph J. Raymond, Chairman and Chief Executive Officer,
which had an initial term that expired in September 2000. The Raymond Agreement has been extended through September 30, 2007. Pursuant to the Raymond Agreement and subsequent amendments,
Mr. Raymond is entitled to a minimum annual base salary of $175,000 which is reviewed periodically and subject to such increases as the Board of Directors, in its sole discretion, may
determine. During the term of the Raymond Agreement, if Stratus is profitable, Mr. Raymond is entitled to a bonus/profit sharing award equal to .4% of Stratus' gross margin, but not in excess
of 100% of his base salary. If Stratus is not profitable, he is entitled to a $10,000 bonus. Mr. Raymond is eligible for all benefits made available to senior executive employees, and is
entitled to the use of an automobile. In fiscal 2002 and 2003, Mr. Raymond voluntarily did not take a substantial portion of his minimum annual base salary.

In
the event Stratus terminates Mr. Raymond without "Good Cause", Mr. Raymond will be entitled to severance compensation equal to 2.9 times his base salary then in effect
plus any accrued and unpaid bonuses and unreimbursed expenses. As defined in the Raymond Agreement "Good Cause" shall exist only if Mr. Raymond:



37

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Mr. Raymond
is also entitled to severance compensation in the event that he terminates the Raymond Agreement for "Good Reason" which includes:



In
the event that the aggregate amount of compensation payable to Mr. Raymond would constitute an "excess parachute payment" under the Internal Revenue Code of 1986, as amended
(the "Code"), then the amount payable to Mr. Raymond will be reduced so as not to constitute an "excess parachute payment." All severance payments are payable within 60 days after the
termination of employment.

Mr. Raymond
has agreed that during the term of the Raymond Agreement and for a period of one year following the termination of his employment, he will not engage in or have any
financial interest in any business enterprise in competition with Stratus that operates anywhere within a radius of 25 miles of any offices maintained by the Company as of the date of the termination
of employment.

The
Company has entered into an employment agreement with Mr. Maltzman which provides for a base salary of $165,000 per annum. Mr. Maltzman is entitled to profit sharing
awards based upon the Company's overall profitability. The agreement with Mr. Maltzman is terminable by either party at any time without cause. However, in the event that this agreement is
terminated by the Company without cause or by Mr. Maltzman with good reason, Mr. Maltzman will be entitled to a severance payment equal to the greater of one month's salary for each year
worked or three months salary. In addition, the Company will pay Mr. Maltzman any earned but unused vacation time and any accrued but unpaid profit sharing. The Company is also required to
maintain insurance and benefits for Mr. Maltzman during the severance period.

38

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Option Grants

Shown below is further information with respect to grants of stock options in fiscal 2003 to the Named Officers by the Company which are reflected in the Summary
Compensation Table set forth under the caption "Executive Compensation."

|                    |  | Individual Grants |     |      |   |   |      | 
|------------------- |  | ----------------- | --- | ---- | - | - | ---- | 
|
|
|
|Joseph J. Raymond   |  | 1,102,115         | (1) | 61.6 | % | $ | .23  | 
|Michael A. Maltzman |  | 385,448           | (1) | 21.6 | % |   | ..23 | 

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Option Exercises and Fiscal Year-End Values

Shown below is information with respect to options exercised by the Named Executive Officers during fiscal 2003 and the value of unexercised options to purchase
the Company's Common Stock held by the Named Executive Officers at September 30, 2003.

|                    |  |   |  |   |  | Number of Securities Underlying Unexercised Options at FY End
(#) |  | Value of Unexercised In-The-Money Options at FY End ($)
|------------------- |  | - |  | - |  | ----------------------------------------------------------------- |  | -------------------------------------------------------
|
|
|Joseph J. Raymond   |  |  |  |  |  | 3,929,230                                                         |  | 1,025,000                                              
|Michael A. Maltzman |  |  |  |  |  | 1,045,896                                                         |  | 25,000                                                 

No
options were exercised by the Named Executive Officers during the fiscal year ended September 30, 2003.

---

39

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ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of December 23, 2003 with respect to (a) each person who is known by the Company to be the beneficial
owner (as defined in Rule 13d-3 ("Rule 13d-3") of the Securities and Exchange Act of 1934) of more than five percent (5%) of the Company's Common Stock,
Series A Preferred Stock and Series F Preferred Stock and (b) the beneficial ownership of Common Stock, Series A Preferred Stock and Series F Preferred Stock by each
director and each of the Company's current Executive Officers who earned in excess of $100,000 in fiscal 2003 and by all directors and executive officers as a group. Except as set forth in the
footnotes to the table, the stockholders have sole voting and investment power over such shares.

|                                                                                                   |  | Common Stock |      | Series A Preferred Stock |   | Series F Preferred Stock |    
|-------------------------------------------------------------------------------------------------- |  | ------------ | ---- | ------------------------ | - | ------------------------ | ---
|
|Joseph J. Raymond                                                                                  |  | 14,398,368   | (1)  | 43.7                     | % | 1,458,933                | (2)
|Artisan.com Limited                                                                                |  | 2,275,933    | (4)  | 9.82                     | % | 1,375,933                | (5)
|Cater Barnard (USA) plc                                                                            |  | 83,000       | (6)  | (7                       | ) | 83,000                   | (8)
|Michael A. Maltzman                                                                                |  | 732,116      | (9)  | 3.25                     | % |                         |    
|Michael J. Rutkin                                                                                  |  | 232,175      | (10) | (7                       | ) |                         |    
|Sanford I Feld                                                                                     |  | 109,832      | (11) | (7                       | ) |                         |    
|H. Robert Kingston                                                                                 |  | 93,332       | (12) | (7                       | ) |                         |    
|Donald W. Feidt                                                                                    |  | 80,000       | (13) | (7                       | ) |                         |    
|All Directors and Executive Officers as a Group (8)Persons) (1)(2)(3)(9)(10) (11)(12)(13) and (14) |  | 16,119,467   |      | 47.5                     | % | 1,458,933                |    

---

40

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Agreement with holder of Series A Preferred Stock

In July 2003, we entered into an agreement with Artisan (UK) plc, the parent company of Artisan.com Limited, pursuant to which we have agreed to redeem the
aggregate 1,458,933 shares of our Series A Preferred Stock owned by Artisan.com Limited and Cater Barnard (USA) plc, an affiliate of Artisan. These shares represent all of the shares of
Series A Preferred Stock currently outstanding. Our obligation to redeem the Series A Preferred Stock is contingent upon our sale of not less than $4,000,000 of units in our proposed
best efforts Offering. If we sell at least $4,000,000 of units in the Offering, we will be obligated to pay $500,000 to Artisan within 15 days after the $4,000,000 of units are sold. In
addition, we will be obligated to pay Artisan an additional $250,000 by January 31, 2005 or, at our option, issue to Artisan shares of our common stock having an aggregate market value of
$250,000, based upon the average closing bid prices of the common stock for the 30 trading days preceding January 31, 2005. If we fail to make the $250,000 payment in cash or stock, we will be
required to pay Artisan $300,000 in cash, plus interest calculated on a daily basis at a rate of 18% from the date of the default to the date the default is cured. We have also agreed to issue to
Artisan a number of shares of our common stock which will represent 5.5% of our outstanding common stock, subject to certain adjustments, upon completion of our sale of $4 million of units in
the Offering. Further, upon final completion of the Offering, we will be required to issue additional shares of common stock so that the total number of shares of common stock issued to Artisan will
equal 5.5% of our common stock after giving effect to the assumed exercise of all warrants and options that then have exercise prices equal to or less than the then current market price of our common
stock and the conversion of all convertible securities that then have conversion prices equal to or less than the then current market price of our common stock.

41

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Securities Authorized for Issuance under Equity Compensation Plans

The number of stock options outstanding under our equity compensation plans, the weighted average exercise price of outstanding options, and the number of
securities remaining available for issuance, as of September 30, 2003, was as follows:

|Plan Category                                                  |  | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (a) |  | Weighted-average exercise
price of outstanding
options, warrants and
rights (b) |      | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders (1)     |  | 5,494,478                                                                                       |  | $                                                                               | 1.01 |                                                                                                                                                
|Equity compensation plans not approved by security holders (2) |  | 2,270,000                                                                                       |  | $                                                                               | 3.11 |                                                                                                                                                
|Total                                                          |  | 7,764,478                                                                                       |  | $                                                                               | 1.63 |                                                                                                                                                

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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Jeffrey J. Raymond, the son of Joseph J. Raymond, our Chairman and Chief Executive Officer, serves as a consultant to us pursuant to an agreement
which requires him to supervise the collection of certain accounts receivable, to use his best efforts to maintain relationships with certain clients and to assist in due diligence investigations of
acquisitions of other companies. Total consulting fees paid to Jeffrey Raymond were $53,000 in fiscal 2003.

During
the fiscal year 2003, we paid consulting fees of $86,000 to RVR Consulting, Inc., a corporation of which Joseph J. Raymond, Jr., the son of Joseph J.
Raymond, our Chairman and Chief Executive Officer is an officer and 100% stockholder.

In
November 2000, we formed the Stratus Technology Services, LLC joint venture ("STS") with Fusion Business Services, LLC. Jamie Raymond, son of Joseph J. Raymond, Chairman
and CEO, is the managing member of STS and Fusion, which owns a 50% interest in Stratus Technology Services, LLC.

At
various times throughout our history, we have borrowed funds from Joseph J. Raymond, our Chairman and CEO. As of September 30, 2003, we owed $75,000 to
Mr. Raymond pursuant to a non-interest bearing promissory note which is due on demand.

In
fiscal 2003, a son, brother and brother-in-law of Joseph J. Raymond Sr., our Chairman, President and Chief Executive Officer, each loaned $100,000 to
us. The loans are unsecured and due on demand. In fiscal 2003, we borrowed $116,337 from the Kingston Family Revocable Trust under a promissory note that was issued in May 2003 and due upon
demand and which bears interest only in the event of default, at a rate equal to the lesser of 18% per year or the maximum interest rate permitted by law. The Kingston Family Revocable Trust is a
trust formed for the benefit of the family of H. Robert Kingston, one of our directors.

During
fiscal 2003, Advantage Services Group, LLC ("Advantage"), a company in which Joseph J. Raymond, Jr., the son of our President and Chief Executive Officer, holds a
50% interest, provided payrolling services to certain of our customers under an arrangement pursuant to which we paid Advantage a fee equal to the cost of providing such services plus a specified
percentage above Advantage's cost. The total amount paid to Advantage under this arrangement in fiscal 2003 was
$1,224,131. In November 2003, we agreed to pay Advantage $20,000 per month until we have paid Advantage $225,000 owed to it in connection with this arrangement. Our obligation to pay this
amount is secured by a warrant to purchase 2,000,000 shares of our common stock. The warrant, which is exercisable only if we default on our payment obligations to Advantage, has an exercise price
equal to the lower of $.15 per share or 75% of the then current market price of the common stock.

In
November 2003, we entered into payrolling agreements with Advantage with respect to four of our accounts that require that we pay Advantage a fee ranging between 2% to 3% above
its cost. We have pledged our accounts with these customers as security for our obligations to Advantage under these agreements. In addition, if the aggregate payroll of employees provided under these
agreements does not equal at least $8 million by November 30, 2004, we will be required to pay Advantage an amount equal to 8% of the shortfall.

On
August 22, 2003, we completed the sale, effective as of August 18, 2003 of substantially all of the tangible and intangible assets, excluding accounts receivable, of our
Miami Springs, Florida office to ALS, LLC. Pursuant to the terms of the Asset Purchase Agreement between us and ALS, the purchase price for the purchased assets was $128,000, which was paid by a
promissory note which bears interest at the rate of 7% per year, with payments over a 60 month period. The amount of the monthly payments due under the note will be the greater of $10 per month
or 20% of the monthly net profits generated by the staffing business originating from the purchased assets, commencing October 31, 2003. However, until such time as all outstanding amounts due
and owing by us to ALS, as of the date of the Purchase Agreement in the amount of $289,635, have been paid in full, these monthly payments shall

43

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be
deducted from any and all amounts due from us to ALS. The note is secured by a security interest in all of the purchased assets.

Joseph J.
Raymond, Jr., the son of our President and Chief Executive Officer is a 50% member in ALS, LLC. ALS, LLC is the holding Company for Advantage.

In
February 2003, Pinnacle Investment Partners, L.P. ("Pinnacle") converted a $100,000 short-term note that we previously issued to it into 1,000 shares of
Series E Preferred Stock. In addition, Pinnacle purchased 6,000 shares of Series E Preferred Stock from us for an aggregate purchase price of $60,000. Because the Series E
Preferred Stock was convertible into our common stock, Pinnacle may have been the beneficial owner of 5% or more of our common stock during fiscal 2003. The terms of the Series E Preferred
Stock have been amended to restrict conversions which would result in a holder of the Series E Preferred Stock becoming the beneficial owner of 5% or more of our common stock.

We
believe that all transactions with related parties have been on terms no less favorable to us than those that could have been obtained from unaffiliated third parties.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table set forth the aggregate fees billed to us for the year ended September 30, 2003 by Amper, Politziner & Mattia, P.C., our
independent auditors:

2003Audit Fees

$
116,897Audit-Related Fees


89,654Financial Information SystemsDesign and Implementation Fees


0Tax Fees


22,290All Other Fees


4,900


Audit
fees represent amounts billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our
Forms 10-Q and Forms 8-K for the fiscal year. Audit Related Fees represent amounts charged for reviewing various registration statements filed by us with the
Securities and Exchange Commission during the year and audits of 401K plans. Before Amper, Politziner & Mattia, P.C. was engaged by us to render audit or non-audit services, the
engagement was approved by our Audit Committee. Our Board of Directors is of the opinion that the Audit Related Fees charged by Amper, Politziner & Mattia, P.C. are consistent with Amper,
Politziner & Mattia, P.C. maintaining its independence from us.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

On
September 25, 2003, the Company filed a report on Form 8-K to report on (i) the completion on September 10, 2003, effective
September 15, 2003, of the sale of substantially all of the tangible and intangible assets, excluding accounts receivable, of five of the Company's New Jersey offices to D/O Staffing, LLC, a
New Jersey limited liability company; and (ii) the completion, on August 18, 2003, of the sale of substantially all of the tangible and intangible assets, excluding accounts receivable,
of the Company's Miami Springs, Florida office to ALS, LLC, a Florida limited liability company.

|Number |  | Description                                                                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1    |  | Asset Purchase Agreement, dated July 9, 1997, among Stratus Services Group, Inc. and Royalpar Industries, Inc., Ewing Technical Design, Inc., LPL Technical Services, Inc. and Mainstream
Engineering Company, Inc., as amended by Amendment No. 1 to the Asset Purchase Agreement, dated as of July 29, 1997.(1)
|2.2    |  | Asset Purchase Agreement, effective January 1, 1999, by and between Stratus Services Group, Inc. and B&R Employment Inc.(1)                                                                                                                                                                                      
|2.3    |  | Asset Purchase Agreement, dated June 16, 2000, by and between Stratus Services Group, Inc. and Outsource International of America, Inc.(5)                                                                                                                                                                       
|2.4    |  | Asset Purchase Agreement, dated October 13, 2000, by and between Stratus Services Group, Inc. and Outsource International of America, Inc.(6)                                                                                                                                                                    
|2.5    |  | Asset Purchase Agreement, dated January 2, 2001, by and between Stratus Services Group, Inc. and Cura Staffing Inc. and Professional Services, Inc.(15)                                                                                                                                                          
|2.6    |  | Asset Purchase Agreement, dated July 27, 2001, by and between Stratus Services Group, Inc. and Source One Personnel, Inc.(8)                                                                                                                                                                                     
|2.7    |  | Asset Purchase Agreement, dated December 27, 2001, by and between Stratus Services Group, Inc. and Provisional Employment Solutions, Inc.(9)                                                                                                                                                                     
|2.8    |  | Asset Purchase Agreement, dated as of January 24, 2002 among Stratus Services Group, Inc., Charles Sahyoun, Sahyoun Holdings, LLC and SEA Consulting Services Corporation. Information has been omitted from the exhibit pursuant to an order
granting confidential treatment.(16)                               
|2.9    |  | Asset Purchase Agreement dated as of March 4, 2002, by and among Wells Fargo Credit, Inc. and Stratus Services Group, Inc.(22)                                                                                                                                                                                   
|2.10   |  | Asset Purchase Agreement dated November 19, 2002, by and between Stratus Services Group, Inc. and Elite Personnel Services, Inc.(23)                                                                                                                                                                             
|2.11   |  | Asset Purchase Agreement dated as of September 10, 2003 between Registrant and D/O Staffing, LLC.(29) (filed herewith)                                                                                                                                                                                           
|2.12   |  | Asset Purchase Agreement dated as of August 18, 2003 between Registrant and ALS, LLC. (filed herewith)                                                                                                                                                                                                           
|3.1    |  | Amended and Restated Certificate of Incorporation of the Registrant.(1)                                                                                                                                                                                                                                          
|3.1.1  |  | Certificate of Designation, Preferences and Rights of Series A Preferred Stock.(10)                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                  

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|3.1.2  |  | Certificate of Amendment to Certificate of Designation.(14)                                                                                                                                                                           
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1.3  |  | Certificate of Designation, Preferences and Rights of Series B Preferred Stock.(14)                                                                                                                                                   
|3.1.4  |  | Certificate of Designation, Preferences and Rights of Series E Preferred Stock.(21)                                                                                                                                                   
|3.1.5  |  | Certificate of Amendment to Certificate of Designation, Preferences and Rights of Series E Preferred Stock.(21)                                                                                                                       
|3.1.6  |  | Certificate of Designation, Preferences and Rights of Series F Preferred Stock.(21)                                                                                                                                                   
|3.1.7  |  | Certificate of Designation, Preferences and Rights of Series H Preferred Stock.(24)                                                                                                                                                   
|3.1.8  |  | Certificate of Amendment to Certificate of Designation, Preferences and Rights of Series E Preferred Stock. (filed herewith)                                                                                                          
|3.2    |  | By-Laws of the Registrant.(2)                                                                                                                                                                                                         
|4.1.1  |  | Specimen Common Stock Certificate of the Registrant.(1)                                                                                                                                                                               
|4.1.2  |  | Form of 6% Convertible Debenture.(11)                                                                                                                                                                                                 
|4.1.3  |  | Specimen Series A Preferred Stock Certificate of the Registrant.(14)                                                                                                                                                                  
|4.1.4  |  | Agreement dated as of June 26, 2001 between Stratus Services Group, Inc. and Artisan (UK) plc.(10)                                                                                                                                    
|4.1.5  |  | Subscription Agreement dated as of June 26, 2001 between Stratus Services Group, Inc. and Artisan.com Limited.(10)                                                                                                                    
|4.1.8  |  | Specimen Series E Stock Certificate of Registrant.(21)                                                                                                                                                                                
|4.1.9  |  | Specimen Series F Stock Certificate of Registrant.(21)                                                                                                                                                                                
|4.1.10 |  | Exchange Agreement between Pinnacle Investment Partners, LP and the Registrant.(21)                                                                                                                                                   
|4.1.11 |  | Exchange Agreement between Transworld Management Services, Inc. and the Registrant.(21)                                                                                                                                               
|4.1.12 |  | Stock Purchase Agreement between Joseph J. Raymond, Sr., and the Registrant regarding Series F Preferred Stock.(21)                                                                                                                   
|4.2.1  |  | Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus Services Group, Inc., dated November 30, 1998, between Alan Zelinsky and Stratus Services Group, Inc., and supplemental letter thereto dated December 2,
1998.(1)
|4.2.2  |  | Warrant for the Purchase of 40,000 Shares of Common Stock of Stratus Services Group, Inc., dated November 23, 1998, between David Spearman and Stratus Services Group, Inc.(1)                                                        
|4.2.3  |  | Warrant for the Purchase of 10,000 Shares of Common Stock of Stratus Services Group, Inc., dated November 30, 1998, between Sanford Feld and Stratus Services Group, Inc., and supplemental letter thereto dated December 2,
1998.(1) 
|4.2.4  |  | Warrant for the Purchase of 20,000 Shares of Common Stock of Stratus Services Group, Inc., dated November 30, 1998, between Peter DiPasqua, Jr. and Stratus Services Group, Inc.(1)                                                   
|4.2.5  |  | Warrant for the Purchase of 20,000 Shares of Common Stock of Stratus Services Group, Inc., dated December 2, 1998, between Shlomo Appel and Stratus Services Group, Inc.(1)                                                           
|4.2.6  |  | Form of Underwriter's Warrant Agreement, including form of warrant certificate.(7)                                                                                                                                                    
|4.2.7  |  | Warrant for the Purchase of common stock dated as of December 4, 2000 issued to May Davis Group, Inc.(13)                                                                                                                             
|4.2.8  |  | Warrant for the Purchase of common stock dated as of December 4, 2000 issued to Hornblower & Weeks, Inc.(13)                                                                                                                          
|       |  |                                                                                                                                                                                                                                       

46

---

|4.2.9   |  | Warrant for the Purchase of common stock dated as of December 12, 2001 issued to International Capital Growth.(15)                                                                
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.2.10  |  | Warrant for the Purchase of Common Stock dated as of April 9, 2002 issued to CEOCast.(21)                                                                                         
|4.2.11  |  | Warrant for the Purchase of Common Stock dated as of October 17, 2001 issued to Stetson Consulting.(22)                                                                           
|4.2.12  |  | Warrant for the Purchase of Common Stock dated as of November 3, 2003 issued to Advantage Services Group, LLC. (filed herewith)                                                   
|9.1.1   |  | Voting proxy agreement between Artisan (UK) plc, Stratus Services Group, Inc. and Joseph J. Raymond, Sr.(17)                                                                      
|10.1.1  |  | Employment Agreement dated September 1, 1997, between Stratus Services Group, Inc. and Joseph J. Raymond.(1)                                                                      
|10.1.6  |  | Executive Employment Agreement dated September 1, 1997 between Stratus Services Group, Inc. and Michael A. Maltzman.(1)                                                           
|10.1.7  |  | Consulting Agreement, dated as of August 11, 1997, between Stratus Services Group, Inc. and Jeffrey J. Raymond.(1)                                                                
|10.1.8  |  | Non-Competition Agreement, dated June 19, 2000 between Stratus Services Group, Inc. and Outsource International of America, Inc.(5)                                               
|10.1.9  |  | Non-Competition Agreement, dated October 27, 2000 between Stratus Services Group, Inc. and Outsource International of America, Inc.(6)                                            
|10.1.10 |  | Option to purchase 1,000,000 shares of Stratus Services Group, Inc. Common Stock issued to Joseph J. Raymond.(11)                                                                 
|10.1.11 |  | Option to purchase 500,000 shares of Stratus Services Group, Inc. Common Stock issued to Joseph J. Raymond.(19)                                                                   
|10.1.12 |  | Option to purchase 1,750,000 shares of Stratus Services Group, Inc. Common Stock issued to Joseph J. Raymond.(19)                                                                 
|10.1.13 |  | Non-Competition Agreements dated December 1, 2002 between Stratus Services Group, Inc. and each of Elite Personnel Services, Inc. and Bernard Freedman.(23)                       
|10.1.14 |  | Employment Agreement dated December 1, 2002 between Stratus Services Group, Inc. and Bernard Freedman.(23)                                                                        
|10.2.1  |  | Lease, effective October 1, 2002, for offices located at 500 Craig Road, Manalapan, New Jersey 07726(22)                                                                          
|10.3.1  |  | Loan and Security Agreement, dated December 8, 2000, between Capital Tempfunds, Inc. and Stratus Services Group, Inc.(11)                                                         
|10.3.2  |  | First Amendment to Loan and Security Agreement between Capital Tempfunds, Inc. and Stratus Services Group, Inc. (filed herewith)                                                  
|10.3.3  |  | Second Amendment to Loan and Security Agreement between Capital Tempfunds, Inc. and Stratus Services Group, Inc. (filed herewith)                                                 
|10.3.4  |  | Third Amendment to Loan and Security Agreement between Capital Tempfunds, Inc. and Stratus Services Group, Inc. (filed herewith)                                                  
|10.3.5  |  | Fourth Amendment to Loan and Security Agreement between Capital Tempfunds, Inc. and Stratus Services Group, Inc. (filed herewith)                                                 
|10.4.2  |  | Promissory Note and Security Agreement in the amount of $400,000, dated as of June 19, 2000, issued by Stratus Services Group, Inc. to Outsource International of America, Inc.(5)
|        |  |                                                                                                                                                                                   

47

---

|10.4.3 |  | Promissory Note in the amount of $100,000, dated as of June 19, 2000, issued by Stratus Services Group, Inc. to Outsource International of America, Inc.(5)                                
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4.4 |  | Promissory Note and Security Agreement in the amount of $75,000, dated as of October 27, 2000, issued by Stratus Services Group, Inc. to Outsource International of America, Inc.(6)       
|10.4.5 |  | Promissory Note and Security Agreement in the amount of $600,000, dated as of July 27, 2001, issued by Stratus Services Group, Inc. to Source One Personnel, Inc.(8)                       
|10.4.6 |  | Promissory Note and Security Agreement in the amount of $1.8 million, dated as of July 27, 2001, issued by Stratus Services Group, Inc. to Source One Personnel, Inc.(8)                   
|10.4.7 |  | Promissory Note in the amount of $1,264,000 dated as of December 1, 2002, issued by Stratus Services Group, Inc. to Elite Personnel Services, Inc.(23)                                     
|10.5.1 |  | Registration Rights Agreement, dated August, 1997, by and among Stratus Services Group, Inc. and AGR Financial, L.L.C.(1)                                                                  
|10.5.2 |  | Registration Rights Agreement, dated August 1997, by and among Stratus Services Group, Inc. and Congress Financial Corporation (Western).(1)                                               
|10.5.3 |  | Form of Registration Rights Agreement, dated December 4, 2000, by and among Stratus Services Group, Inc. and purchasers of the Stratus Services Group, Inc. 6% Convertible Debenture.(11)  
|10.5.4 |  | Registration Rights Agreement, dated as of December 4, 2000, between Stratus Services Group, Inc., May Davis Group, Inc., Hornblower & Weeks, Inc. and the other parties named therein.(13)
|10.6.1 |  | Stock Purchase and Investor Agreement, dated August 1997, by and between Stratus Services Group, Inc. and Congress Financial Corporation (Western).(1)                                     
|10.6.2 |  | Stock Purchase and Investor Agreement, dated August 1997, by and among Stratus Services Group, Inc. and AGR Financial, L.L.C.(1)                                                           
|10.6.3 |  | Form of Securities Purchase Agreement, dated December 4, 2000 by and between Stratus Services Group, Inc. and purchasers of the Stratus Services Group, Inc. 6% Convertible Debenture.(11) 
|10.7.1 |  | 1999 Equity Incentive Plan(1)                                                                                                                                                              
|10.7.2 |  | 2000 Equity Incentive Plan(11)                                                                                                                                                             
|10.7.3 |  | 2001 Equity Incentive Plan(12)                                                                                                                                                             
|10.7.4 |  | 2002 Equity Incentive Plan(19)                                                                                                                                                             
|10.7.5 |  | Form of Option issued under 1999 Equity Incentive Plan.(19)                                                                                                                                
|10.7.6 |  | Form of Option issued under 2000 Equity Incentive Plan.(19)                                                                                                                                
|10.7.7 |  | Form of Option issued under 2001 Equity Incentive Plan.(19)                                                                                                                                
|10.7.8 |  | Form of Option issued under 2002 Equity Incentive Plan.(19)                                                                                                                                
|10.8   |  | Debt to Equity Conversion Agreement by and between Stratus Services Group, Inc. and B&R Employment, Inc.(3)                                                                                
|10.8.1 |  | Amendment to Debt to Equity Conversion Agreements by and between Stratus Services Group and B&R Employment, Inc.(2)                                                                        
|10.8.2 |  | Forbearance Agreement dated January 24, 2002 between Stratus Services Group, Inc. and Source One Personnel.(20)                                                                            
|       |  |                                                                                                                                                                                            

48

---

|10.8.3 |  | Modification of Forbearance Agreement dated June 4, 2002 between Stratus Services Group, Inc. and Source One Personnel, together with Exhibits thereto.(21)                                           
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10  |  | Allocation and Indemnity Agreement dated as of January 24, 2002 among the Company, Charles Sahyoun and Sahyoun Holdings, LLC.(20)                                                                     
|10.11  |  | Letter Agreement dated April 15, 2002 between Stratus Services Group, Inc., Sahyoun Holdings, LLC and Joseph J. Raymond, Sr. amending the Allocation and Indemnity Agreement dated April 18, 2002.(17)
|10.12  |  | Exchange Agreement dated March 11, 2002 by and between Transworld Management Services, Inc. and Stratus Services Group, Inc.(22)                                                                      
|10.13  |  | Securities Purchase Agreement dated March 11, 2002, by and between Pinnacle Investment Partners, LP and Stratus Services Group, Inc.(22)                                                              
|10.14  |  | Operating Agreement of Stratus Technology Services. (filed herewith)                                                                                                                                  
|10.15  |  | Form of Securities Purchase Agreement between the Registrant and Series E Shareholders.(27)                                                                                                           
|10.16  |  | Compromise Agreement between the Registrant and Series E Shareholders dated July 30, 2003(27)                                                                                                         
|10.17  |  | Redemption Agreement dated July 31, 2003 between Artisan (UK) plc and the Company.(27)                                                                                                                
|10.18  |  | Agreement to Exchange Series H Preferred Shares for Series E Preferred Shares between the Company and Pinnacle Investment Partners, L.P.(27)                                                          
|10.19  |  | Letter Agreement regarding Employer Service Agreements between Stratus Services Group, Inc. and Advantage Services Group, LLC. (filed herewith)                                                       
|10.20  |  | Letter Agreement regarding Receivables between Stratus Services Group, Inc. and Advantage Services Group, LLC. (filed herewith)                                                                       
|21     |  | Subsidiaries of Registrant.(15)                                                                                                                                                                       
|23.1   |  | Consent of Amper, Politzner & Mattia, P.A., Independent Accountants. (filed herewith)                                                                                                                 
|24     |  | Power of Attorney (located on signature pages of this filing).                                                                                                                                        
|31.1   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)                                                                                  
|31.2   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)                                                                                  
|32.1   |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)                                                                                  
|32.2   |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)                                                                                  

---

|Footnote 1 |  | Incorporated by reference to similarly numbered Exhibits filed with Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Registration Statement No. 333-83255) as filed with the Securities
and Exchange Commission on September 3, 1999.
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Footnote 2 |  | Incorporated by reference to similarly numbered Exhibits filed with Amendment No. 6 to the Company's Registration Statement on Form SB-2 (Registration Statement No. 333-83255) as filed with the Securities and Exchange Commission on
February 1, 2000. 
|           |  |                                                                                                                                                                                                                                                           

49

---

|Footnote 3  |  | Incorporated by reference to similarly numbered Exhibits filed with Amendment No. 3 to the Company's Registration Statement on Form SB-2 (Registration Statement No. 333-83255) as filed with the Securities and Exchange Commission on
December 17, 1999.
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Footnote 4  |  | Incorporated by reference to similarly numbered Exhibits filed with Amendment No. 7 to the Company's Registration Statement on Form SB-2 (Registration Statement No. 333-83255) as filed with the Securities and Exchange Commission on
March 17, 2000.   
|Footnote 5  |  | Incorporated by reference to the Exhibits to the Company's Form 8-K, as filed with the Securities and Exchange Commission on June 30, 2000                                                                                                                
|Footnote 6  |  | Incorporated by reference to the Exhibits to the Company's Form 8-K, as filed with the Securities and Exchange Commission on November 3, 2000                                                                                                             
|Footnote 7  |  | Incorporated by reference to Exhibit 1.2 filed with Amendment No. 5 to the Company's Registration Statement on Form SB-2 (Registration Statement No. 333-83255) as filed with the Securities and Exchange Commission on
February 11, 2000.                
|Footnote 8  |  | Incorporated by reference to the Exhibits to the Company's Form 8-K, as filed with the Securities and Exchange Commission on August 9, 2001.                                                                                                              
|Footnote 9  |  | Incorporated by reference to the Exhibits to the Company's Form 8-K, as filed with the Securities and Exchange Commission on January 2, 2002.                                                                                                             
|Footnote 10 |  | Incorporated by reference to Exhibit 3 filed with Form 10-Q for the Quarter ended June 30, 2001 as filed with the Securities and Exchange Commission on August 14, 2001.                                                                                  
|Footnote 11 |  | Incorporated by reference to similarly number Exhibits to the Company's Form 10-KSB, as filed with the Securities and Exchange Commission on December 29, 2000.                                                                                           
|Footnote 12 |  | Incorporated by reference to similarly numbered Exhibits filed with the Company's Registration Statement on Form S-1 (Registration Statement No. 333-55312) as filed with the Securities and Exchange Commission on February 9,
2001.                     
|Footnote 13 |  | Incorporated by reference to the similarly numbered Exhibits to the Company's Form S-1/A, as filed with the Securities and Exchange Commission on April 11, 2001.                                                                                         
|Footnote 14 |  | Incorporated by reference to the Exhibits to the Company Form 8-K, as filed with the Securities and Exchange Commission on April 4, 2002.                                                                                                                 
|Footnote 15 |  | Incorporated by reference to similarly numbered Exhibits filed with the Registrant's Form 10K for the fiscal year ended September 30, 2001, and filed with the Securities and Exchange Commission on January 25, 2002.                                    
|Footnote 16 |  | Incorporated by reference to similarly numbered Exhibits filed with the Registrant's Form 10-K/A for the fiscal year ended September 30, 2001, as filed with the Securities and Exchange Commission on March 5, 2002.                                     
|Footnote 17 |  | Incorporated by reference to the Exhibits to the Company's Form 10-Q for the quarter ended March 31, 2002, as filed with the Securities and Exchange Commission on May 15, 2002.                                                                          
|Footnote 18 |  | Incorporated by reference to the Exhibits to the Company's Form 8-K, as filed with the Securities and Exchange Commission on April 4, 2002.                                                                                                               
|Footnote 19 |  | Incorporated by reference to the Exhibits to the Company's Form S-8, as filed with the Securities and Exchange Commission on September 17, 2002.                                                                                                          
|            |  |                                                                                                                                                                                                                                                           

50

---

|Footnote 20 |  | Incorporated by reference to the similarly numbered Exhibits to the Company's Form 10-K, as filed with the Securities and Exchange Commission on January 25, 2002, as amended by the Company's Form 10-K/A, as filed with the Securities
and Exchange Commission on March 5, 2002.
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Footnote 21 |  | Incorporated by reference to the Company's 10-Q, for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on August 14, 2002.                                                                                                                    
|Footnote 22 |  | Incorporated by reference to the similarly numbered Exhibits filed with the Company's Registration Statement on Form S-1 (Registration Statement No. 333-100149) as filed with the Securities and Exchange Commission on September 27,
2002.                                      
|Footnote 23 |  | Incorporated by reference to Exhibits to the Company's Form 8-K, as filed with the Securities and Exchange Commission on November 26, 2002.                                                                                                                                       
|Footnote 24 |  | Incorporated by reference to the similarly numbered Exhibits to the Company's Form 10-K, as filed with the Securities and Exchange Commission on December 23, 2002.                                                                                                               
|Footnote 25 |  | Incorporated by reference to the Exhibits to the Company's Form S-1, as filed with the Securities and Exchange Commission on February 2, 2003.                                                                                                                                    
|Footnote 26 |  | Incorporated by reference to the Exhibits to the Company's Form S-1, as filed with the Securities and Exchange Commission on March 20, 2003.                                                                                                                                      
|Footnote 27 |  | Incorporated by reference to the similarly numbered exhibits to the Company's Form 10-Q for the quarterly period ended June 30, 2003, as filed with the Securities and Exchange Commission on August 13, 2003.                                                                    
|Footnote 28 |  | Incorporated by reference to similarly numbered exhibits filed with the Company's Report on Form 8-K as filed with the Securities and Exchange Commission on September 25, 2003.                                                                                                  

51

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.

| |  | STRATUS SERVICES GROUP, INC.
| |  | ----------------------------
| |  | By:                         
| |  | Date: December 24, 2003     

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Joseph J. Raymond and each of them, as his
true lawful attorney-in-fact and agent, with full power of substitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all
amendments to this Form 10-K/A, and to file the same, together with all the exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and being requisite and necessary to be done in
and about the
premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of
them, of his or her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                                 |  | Title                                                                                   |  | Date             
|----------------------------------------- |  | --------------------------------------------------------------------------------------- |  | -----------------
|                                          |  |                                                                                         |  |                  
|/s/JOSEPH J. RAYMONDJoseph J. Raymond     |  | Chief Executive Officer (Principal Executive Officer)                                   |  | December 24, 2003
|/s/MICHAEL A. MALTZMANMichael A. Maltzman |  | Vice President and Chief Financial Officer (Principal Financing and Accounting Officer) |  | December 24, 2003
|/s/MICHAEL J. RUTKINMichael J. Rutkin     |  | Director                                                                                |  | December 24, 2003
|/s/H. ROBERT KINGSTONH. Robert Kingston   |  | Director                                                                                |  | December 24, 2003
|/s/SANFORD I. FELDSanford I. Feld         |  | Director                                                                                |  | December 24, 2003
|/s/DONALD W. FEIDTDonald W. Feidt         |  | Director                                                                                |  | December 24, 2003

52

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STRATUS SERVICES GROUP, INC.        INDEX TO FINANCIAL STATEMENTS        As of September 30, 2003 and 2002  and for the Years Ended September 30, 2003, 2002 and 2001

|Independent Auditors Report |                                    | F-2
|--------------------------- | ---------------------------------- | ---
|Financial Statements        |                                    |    
|                            | Balance Sheets                     |    
|                            | Statements of Operations           |    
|                            | Statements of Cash Flows           |    
|                            | Statements of Stockholders' Equity |    
|                            | Statements of Comprehensive Income |    
|                            | Notes to Financial Statements      |    

F-1

---

INDEPENDENT AUDITORS' REPORT

To the Stockholders of
Stratus Services Group, Inc.

We
have audited the accompanying balance sheets of Stratus Services Group, Inc. as of September 30, 2003 and 2002, and the related statements of operations, stockholders'
equity, cash flows and comprehensive income for each of the three years in the period ended September 30, 2003. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stratus Services Group, Inc. as of
September 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting
principles generally accepted in the United States of America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In
connection with our audits of the financial statements referred to above, we audited the financial Schedule II. In our opinion, the financial schedule, when considered in
relation to the financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.

| | /s/ AMPER, POLITZINER & MATTIA, P.C.AMPER, POLITZINER & MATTIA, P.C.
| | --------------------------------------------------------------------

Edison, New Jersey
December 19, 2003

F-2

---



STRATUS SERVICES GROUP, INC.        Balance Sheets

|                                                                                                                                                          |                                                                                       | September 30,                                                                                                                                                                                              |                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------
|
|Assets                                                                                                                                                    |                                                                                       |                                                                                                                                                                                                            |                                        
|Current assets                                                                                                                                            |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Cash and cash equivalents                                                             |                                                                                                                                                                                                            | $                                      
|                                                                                                                                                          | Accounts receivableless allowance for doubtful accounts of $1,733,000 and $1,742,000 |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Unbilled receivables                                                                  |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Notes receivable (current portion)                                                    |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Other receivables                                                                     |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Prepaid insurance                                                                     |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Prepaid expenses and other current assets                                             |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            | 16,132,990                             
|Notes receivable (net of current portion)                                                                                                                 |                                                                                       |                                                                                                                                                                                                            | 95,166                                 
|Note receivablerelated party                                                                                                                             |                                                                                       |                                                                                                                                                                                                            | 128,000                                
|Property and equipment, net of accumulated depreciation                                                                                                   |                                                                                       |                                                                                                                                                                                                            | 937,718                                
|Intangible assets, net of accumulated amortization                                                                                                        |                                                                                       |                                                                                                                                                                                                            | 1,501,579                              
|Goodwill                                                                                                                                                  |                                                                                       |                                                                                                                                                                                                            | 5,816,353                              
|Deferred registration costs                                                                                                                               |                                                                                       |                                                                                                                                                                                                            | 374,365                                
|Other assets                                                                                                                                              |                                                                                       |                                                                                                                                                                                                            | 164,380                                
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       | $                                                                                                                                                                                                          | 25,150,551                             
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|Liabilities and Stockholders' Equity                                                                                                                      |                                                                                       |                                                                                                                                                                                                            |                                        
|Current liabilities                                                                                                                                       |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Loans payable (current portion)                                                       |                                                                                                                                                                                                            | $                                      
|                                                                                                                                                          | Loans payablerelated parties                                                         |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Notes payableacquisitions (current portion)                                          |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Line of credit                                                                        |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Cash overdraft                                                                        |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Insurance obligation payable                                                          |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Accounts payable and accrued expenses                                                 |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Accrued payroll and taxes                                                             |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Payroll taxes payable                                                                 |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Put options liability                                                                 |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            | 24,112,324                             
|Loans payable (net of current portion)                                                                                                                    |                                                                                       |                                                                                                                                                                                                            | 37,890                                 
|Notes payableacquisitions (net of current portion)                                                                                                       |                                                                                       |                                                                                                                                                                                                            | 2,065,280                              
|Convertible debt                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            | 40,000                                 
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|Series A voting redeemable convertible preferred stock, $.01 par value, 1,458,933 shares issued and outstanding. (including unpaid dividends of $651,752) |                                                                                       |                                                                                                                                                                                                            | 3,809,752                              
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            | 30,065,246                             
|Temporary equityput options                                                                                                                              |                                                                                       |                                                                                                                                                                                                            |                                       
|Commitments and contingencies                                                                                                                             |                                                                                       |                                                                                                                                                                                                            |                                        
|Stockholders' equity                                                                                                                                      |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          | Preferred stock, $.01 par value, 5,000,000 shares authorized                          |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       | Series A voting redeemable convertible preferred stock, $.01 par value, 1,458,933 shares issued and outstanding, liquidation preference of $4,376,799 (including unpaid dividends of $345,376)             |                                        
|                                                                                                                                                          |                                                                                       | Series E non-voting convertible preferred stock, $.01 par value, 40,257 and 16,683 shares issued and outstanding, liquidation preference of $4,025,835 (including unpaid dividends of $60,295 and $20,000) |                                        
|                                                                                                                                                          |                                                                                       | Series F voting convertible preferred stock, $.01 par value, 8,000 and 10,000 shares issued and outstanding, liquidation preference of $800,000 (including unpaid dividends of $28,000 and $-0-)           |                                        
|                                                                                                                                                          |                                                                                       | Series H non-voting convertible preferred stock, $.01 par value, -0- and 5,000 shares issued and outstanding                                                                                               |                                        
|Common stock, $.01 par value, 100,000,000 shares authorized; 19,795,038 and 11,522,567 shares issued and outstanding                                      |                                                                                       |                                                                                                                                                                                                            | 197,950                                
|Additional paid-in capital                                                                                                                                |                                                                                       |                                                                                                                                                                                                            | 11,728,943                             
|Accumulated deficit                                                                                                                                       |                                                                                       |                                                                                                                                                                                                            | (21,755,718                            
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            | Total stockholders' equity (deficiency)
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        
|                                                                                                                                                          |                                                                                       | $                                                                                                                                                                                                          | 25,150,551                             
|                                                                                                                                                          |                                                                                       |                                                                                                                                                                                                            |                                        

See accompanying summary of accounting policies and notes to financial statements.

F-3

---

STRATUS SERVICES GROUP, INC.        Statements of Operations

|                                                                     |                                            | Years Ended September 30, |           
|-------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | ----------
|
|Revenues                                                             |                                            | $                         | 76,592,209
|Cost of revenues                                                     |                                            |                           | 65,186,431
|                                                                     |                                            |                           |           
|Gross profit                                                         |                                            |                           | 11,405,778
|Selling, general and administrative expenses                         |                                            |                           | 13,309,072
|Loss on impairment of goodwill                                       |                                            |                           |          
|Other charges                                                        |                                            |                           | 753,000   
|                                                                     |                                            |                           |           
|Operating (loss) from continuing operations                          |                                            |                           | (2,656,294
|                                                                     |                                            |                           |           
|Other income (expenses)                                              |                                            |                           |           
|                                                                     | Finance charges                            |                           |           
|                                                                     | Interest and financing costs               |                           |           
|                                                                     | (Loss) on sale of investment               |                           |           
|                                                                     | Other income (expense)                     |                           |           
|                                                                     |                                            |                           |           
|                                                                     |                                            |                           | (1,776,838
|                                                                     |                                            |                           |           
|(Loss) from continuing operations before income taxes                |                                            |                           | (4,433,132
|Income taxes                                                         |                                            |                           |          
|                                                                     |                                            |                           |           
|(Loss) from continuing operations                                    |                                            |                           | (4,433,132
|Discontinued operationsearnings (loss) from discontinued operations |                                            |                           | (1,322,967
|Gain (loss) on sale of discontinued operations                       |                                            |                           | (21,020   
|                                                                     |                                            |                           |           
|Net (loss)                                                           |                                            |                           | (5,777,119
|                                                                     | Dividends and accretion on preferred stock |                           |           
|                                                                     |                                            |                           |           
|Net (loss) attributable to common stockholders                       |                                            | $                         | (7,406,993
|                                                                     |                                            |                           |           
|                                                                     | Basic:                                     |                           |           
|                                                                     | Earnings (loss) from continuing operations |                           | $         
|                                                                     | Earnings from discontinued operations      |                           |           
|                                                                     | Net earnings (loss)                        |                           | $         
|                                                                     | Diluted:                                   |                           |           
|                                                                     | Earnings (loss) from continuing operations |                           | $         
|                                                                     | Earnings from discontinued operations      |                           |           
|                                                                     | Net earnings (loss)                        |                           | $         
|Weighted average shares, outstanding per common share                |                                            |                           |           
|                                                                     | Basic                                      |                           |           
|                                                                     | Diluted                                    |                           |           

See accompanying summary of accounting policies and notes to financial statements.

F-4

---



STRATUS SERVICES GROUP, INC.        Statements of Cash Flows

|                                          |                                                                                       | Years Ended September 30,                                                                                            |                  
|----------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | -----------------
|
|Cash flows from operating activities      |                                                                                       |                                                                                                                      |                  
|                                          | Net earnings (loss) from continuing operations                                        |                                                                                                                      | $                
|                                          | Net earnings (loss) from discontinued operations                                      |                                                                                                                      |                  
|                                          | Adjustments to reconcile net earnings (loss) to net cash used by operating activities |                                                                                                                      |                  
|                                          |                                                                                       | Depreciation                                                                                                         |                  
|                                          |                                                                                       | Amortization                                                                                                         |                  
|                                          |                                                                                       | Provision for doubtful accounts                                                                                      |                  
|                                          |                                                                                       | Loss on impairment of goodwill                                                                                       |                  
|                                          |                                                                                       | Deferred financing costs amortization                                                                                |                  
|                                          |                                                                                       | Loss on sale of investment                                                                                           |                  
|                                          |                                                                                       | Gain (loss) on extinguishments of convertible debt                                                                   |                  
|                                          |                                                                                       | Accrued penalties on Series B Convertible Preferred Stock                                                            |                  
|                                          |                                                                                       | (Gain) loss on sales of discontinued operations                                                                      |                  
|                                          |                                                                                       | Deferred taxes                                                                                                       |                  
|                                          |                                                                                       | Interest expense amortization for the intrinsic value of the beneficial conversion feature of convertible debentures |                  
|                                          |                                                                                       | Common stock and warrants issued for fees                                                                            |                  
|                                          |                                                                                       | Imputed interest                                                                                                     |                  
|                                          |                                                                                       | Accrued interest                                                                                                     |                  
|                                          |                                                                                       | Compensationstock options                                                                                           |                  
|                                          | Changes in operating assets and liabilities                                           |                                                                                                                      |                  
|                                          |                                                                                       | Due from factor/accounts receivable                                                                                  |                  
|                                          |                                                                                       | Prepaid insurance                                                                                                    |                  
|                                          |                                                                                       | Prepaid expenses and other current assets                                                                            |                  
|                                          |                                                                                       | Other assets                                                                                                         |                  
|                                          |                                                                                       | Insurance obligation payable                                                                                         |                  
|                                          |                                                                                       | Accrued payroll and taxes                                                                                            |                  
|                                          |                                                                                       | Payroll taxes payable                                                                                                |                  
|                                          |                                                                                       | Accounts payable and accrued expenses                                                                                |                  
|                                          |                                                                                       |                                                                                                                      |                  
|                                          |                                                                                       |                                                                                                                      | Total adjustments
|                                          |                                                                                       |                                                                                                                      |                  
|                                          |                                                                                       |                                                                                                                      | (2,432,131       
|                                          |                                                                                       |                                                                                                                      |                  
|Cash flows (used in) investing activities |                                                                                       |                                                                                                                      |                  
|                                          | Purchase of property and equipment                                                    |                                                                                                                      |                  
|                                          | Proceeds from sale of investment                                                      |                                                                                                                      |                  
|                                          | Payments for business acquisitions                                                    |                                                                                                                      |                  
|                                          | Net proceeds from sale of discontinued operations                                     |                                                                                                                      |                  
|                                          | Costs incurred in connection with investment                                          |                                                                                                                      |                  
|                                          | Collection of notes receivable                                                        |                                                                                                                      |                  
|                                          | Loans receivable                                                                      |                                                                                                                      |                  
|                                          |                                                                                       |                                                                                                                      |                  
|                                          |                                                                                       |                                                                                                                      | 819,725          
|                                          |                                                                                       |                                                                                                                      |                  
|Cash flows from financing activities      |                                                                                       |                                                                                                                      |                  
|                                          | Payments of registration costs                                                        |                                                                                                                      |                  
|                                          | Proceeds from issuance of common stock                                                |                                                                                                                      |                  
|                                          | Proceeds from issuance of preferred stock                                             |                                                                                                                      |                  
|                                          | Proceeds from loans payable                                                           |                                                                                                                      |                  
|                                          | Payments of loans payable                                                             |                                                                                                                      |                  
|                                          | Proceeds from loans payablerelated parties                                           |                                                                                                                      |                  
|                                          | Payments of loans payablerelated parties                                             |                                                                                                                      |                  
|                                          | Payments of notes payableacquisitions                                                |                                                                                                                      |                  
|                                          | Net proceeds from line of credit                                                      |                                                                                                                      |                  
|                                          | Net proceeds from convertible debt                                                    |                                                                                                                      |                  
|                                          | Redemption of convertible debt                                                        |                                                                                                                      |                  
|                                          | Proceeds from temporary equityput options                                            |                                                                                                                      |                  
|                                          | Cash overdraft                                                                        |                                                                                                                      |                  
|                                          | Cost in connection with common stock issued for acquisition                           |                                                                                                                      |                  
|                                          | Redemption of preferred stock                                                         |                                                                                                                      |                  
|                                          | Purchase of treasury stock                                                            |                                                                                                                      |                  
|                                          | Dividends paid                                                                        |                                                                                                                      |                  
|                                          |                                                                                       |                                                                                                                      |                  
|                                          |                                                                                       |                                                                                                                      | 1,503,513        
|                                          |                                                                                       |                                                                                                                      |                  
|Net change in cash and cash equivalents   |                                                                                       |                                                                                                                      | (108,893         
|                                          |                                                                                       |                                                                                                                      |                  
|Cash and cash equivalentsbeginning       |                                                                                       |                                                                                                                      | 162,646          
|                                          |                                                                                       |                                                                                                                      |                  
|Cash and cash equivalentsending          |                                                                                       | $                                                                                                                    | 53,753           
|                                          |                                                                                       |                                                                                                                      |                  
|                                          |                                                                                       |                                                                                                                      |                  

F-5

---

|Supplemental disclosure of cash paid                   |                                                                                                                                    |  |   |           |   |   |           |   |   |           
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------- |  | - | --------- | - | - | --------- | - | - | ----------
|                                                       | Interest                                                                                                                           |  | $ | 2,042,821 |   | $ | 1,937,930 |   | $ | 739,872   
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|Schedule of noncash investing and financing activities |                                                                                                                                    |  |   |           |   |   |           |   |   |           
|                                                       | Fair value of assets acquired                                                                                                      |  | $ | 1,266,519 |   | $ | 1,816,727 |   | $ | 4,568,674 
|                                                       | Less: cash paid                                                                                                                    |  |   | (176,644  | ) |   | (336,727  | ) |   | (1,218,674
|                                                       | Less: common stock and put options issued                                                                                          |  |   |          |   |   | (380,000  | ) |   | (800,000  
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Liabilities assumed                                                                                                                |  | $ | 1,089,875 |   | $ | 1,100,000 |   | $ | 2,550,000 
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Purchase of treasury stock in exchange for loans                                                                                   |  | $ |          |   | $ |          |   | $ | 402,000   
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of common stock in exchange for investment                                                                                |  | $ |          |   | $ |          |   | $ | 61,000    
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of common stock upon conversion of convertible debt                                                                       |  | $ |          |   | $ | 736,003   |   | $ | 542,500   
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of Series E Preferred Stock in exchange for Series H Preferred Stock                                                      |  | $ | 508,250   |   | $ |          |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of Series B Preferred Stock in exchange for convertible and other debt (including $160,000 loans payablerelated parties) |  | $ |          |   | $ | 1,016,499 |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of Series E Preferred Stock in exchange for Series B Preferred Stock                                                      |  | $ |          |   | $ | 875,210   |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of common stock in exchange for accounts payable and accrued expenses                                                     |  | $ | 37,500    |   | $ | 59,000    |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of common stock for fees                                                                                                  |  | $ | 27,500    |   |   |           |   |   |           
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of common stock upon conversion of convertible preferred stock                                                            |  | $ | 925,000   |   | $ |          |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of Series E Preferred Stock in exchange for penalties                                                                     |  | $ | 362,792   |   | $ |          |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of Series F Preferred Stock in exchange for accrued dividends                                                             |  | $ | 84,943    |   | $ |          |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of warrants for fees                                                                                                      |  | $ | 19,500    |   | $ | 55,000    |   | $ |          
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of preferred stock in exchange for investment                                                                             |  | $ |          |   | $ |          |   | $ | 1,592,000 
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of preferred stock for fees in connection with private placement ($410,000) and investment ($727,000)                     |  | $ |          |   | $ |          |   | $ | 1,137,000 
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Issuance of common stock for fees in connection with private placement and investment                                              |  | $ |          |   | $ |          |   | $ | 30,000    
|                                                       |                                                                                                                                    |  |   |           |   |   |          
|                                                       | Cumulative dividends and accretion on preferred stock                                                                              |  | $ | 1,582,217 |   | $ | 1,030,143 |   | $ | 63,000    
|                                                       |                                                                                                                                    |  |   |           |   |   |          

See accompanying summary of accounting policies and notes to financial statements.

F-6

---

STRATUS SERVICES GROUP, INC.        Statement of Stockholders' Equity (Deficiency)

|                                                                                         |  |   |            | Common Stock |   | Preferred Stock
|---------------------------------------------------------------------------------------- |  | - | ---------- | ------------ | - | ---------------
|
|BalanceSeptember 30, 2000                                                               |  | $ | 6,799,445  |              | $ | 57,120         
|Net (loss)                                                                               |  |   | (5,847,457 | )            |   |               
|Unrealized loss on securities available for sale                                         |  |   | (1,200,000 | )            |   |               
|Dividends and accretion on preferred stock                                               |  |   | (63,000    | )            |   |               
|Purchase and retirement of treasury stock                                                |  |   | (15,125    | )            |   | (33            
|Purchase of treasury stock                                                               |  |   | (652,000   | )            |   |               
|Beneficial conversion feature of convertible debt                                        |  |   | 1,213,747  |              |   |               
|Warrants issued in connection with issuance of convertible debt                          |  |   | 88,000     |              |   |               
|Compensation expense in connection with stock options granted (no tax effect)            |  |   | 67,900     |              |   |               
|Beneficial conversion feature of convertible debt redeemed                               |  |   | (631,881   | )            |   |               
|Conversion of convertible debt                                                           |  |   | 429,448    |              |   | 5,194          
|Issuance of common stock in connection with acquisition                                  |  |   |           |              |   | 4,000          
|Proceeds from the private placements of common stock (net of costs of $432,228) for cash |  |   | 1,002,772  |              |   | 14,497         
|Issuance of shares for services provided                                                 |  |   | 30,000     |              |   | 300            
|Issuance of stock in exchange for investment                                             |  |   | 61,000     |              |   | 500            
|Issuance of stock with put options                                                       |  |   |           |              |   | 600            
|                                                                                         |  |   |            |              |   |                
|BalanceSeptember 30, 2001                                                               |  | $ | 1,282,849  |              | $ | 82,178         

See
accompanying summary of accounting policies and notes to financial statements.

F-7

---



STRATUS SERVICES GROUP, INC.        Statement of Stockholders' Equity (Deficiency)

|                                                                                         |  | Treasury Stock |          | Additional
Paid-In
Capital |   | Deferred
Compensation |   | Accumulated
Other
Comprehensive
Loss |         | Accumulated
Deficit |  
|---------------------------------------------------------------------------------------- |  | -------------- | -------- | -------------------------- | - | --------------------- | - | ------------------------------------ | ------- | ------------------- | -
|BalanceSeptember 30, 2000                                                               |  | $              |         |                            | $ | 10,554,782            |   | $                                    | (67,900 | )                   |  
|Net (loss)                                                                               |  |                |         |                            |   |                      |   |                                      |        |                     |  
|Unrealized loss on securities available for sale                                         |  |                |         |                            |   |                      |   |                                      |        |                     |  
|Dividends and accretion on preferred stock                                               |  |                |         |                            |   | (63,000               | ) |                                      |        |                     |  
|Purchase and retirement of treasury stock                                                |  |                |         |                            |   | (15,092               | ) |                                      |        |                     |  
|Purchase of treasury stock                                                               |  |                | (652,000 | )                          |   |                      |   |                                      |        |                     |  
|Beneficial conversion feature of convertible debt                                        |  |                |         |                            |   | 1,213,747             |   |                                      |        |                     |  
|Warrants issued in connection with issuance of convertible debt                          |  |                |         |                            |   | 88,000                |   |                                      |        |                     |  
|Compensation expense in connection with stock options granted (no tax effect)            |  |                |         |                            |   |                      |   |                                      | 67,900  |                     |  
|Beneficial conversion feature of convertible debt redeemed                               |  |                |         |                            |   | (631,881              | ) |                                      |        |                     |  
|Conversion of convertible debt                                                           |  |                | 652,000  |                            |   | (227,746              | ) |                                      |        |                     |  
|Issuance of common stock in connection with acquisition                                  |  |                |         |                            |   | (4,000                | ) |                                      |        |                     |  
|Proceeds from the private placements of common stock (net of costs of $432,228) for cash |  |                |         |                            |   | 988,275               |   |                                      |        |                     |  
|Issuance of shares for services provided                                                 |  |                |         |                            |   | 29,700                |   |                                      |        |                     |  
|Issuance of stock in exchange for investment                                             |  |                |         |                            |   | 60,500                |   |                                      |        |                     |  
|Issuance of stock with put options                                                       |  |                |         |                            |   | (600                  | ) |                                      |        |                     |  
|                                                                                         |  |                |          |                            |   |                       |   |                                      |         |                     |  
|BalanceSeptember 30, 2001                                                               |  | $              |         |                            | $ | 11,992,685            |   | $                                    |        |                     | $

See
accompanying summary of accounting policies and notes to financial statements.

F-8

---

STRATUS SERVICES GROUP, INC.        Statement of Stockholders' Equity (Deficiency)

|                                                                                             |  |   |            | Common Stock |   | Preferred Stock | 
|-------------------------------------------------------------------------------------------- |  | - | ---------- | ------------ | - | --------------- | 
|
|Net (loss)                                                                                   |  |   | (6,386,585 | )            |   |                | 
|Dividends and accretion on preferred stock                                                   |  |   | (135,667   | )            |   |                | 
|Beneficial conversion feature of convertible debt and convertible preferred stock            |  |   | 136,000    |              |   |                | 
|Beneficial conversion feature of convertible debt redeemed                                   |  |   | (69,541    | )            |   |                | 
|Conversion of convertible debt                                                               |  |   | 736,003    |              |   | 25,375          | 
|Issuance of common stock in connection with acquisition                                      |  |   | 378,000    |              |   | 4,000           | 
|Proceeds from the private placements of common stock (net of costs of $9,750) for cash       |  |   | 222,083    |              |   | 2,777           | 
|Issuance of warrants for services provided                                                   |  |   | 55,000     |              |   |                | 
|Issuance of Series B preferred stock in exchange for loans payable                           |  |   | 934,907    |              |   |                | 
|Issuance of common stock in exchange for accounts payable and accrual expenses               |  |   | 59,000     |              |   | 896             | 
|Proceeds from the issuance of preferred stock (net of costs $402,870) for cash               |  |   | 2,162,131  |              |   |                | 
|Redemption of Series B Preferred Stock                                                       |  |   | (455,000   | )            |   |                | 
|Redemption of convertible debt                                                               |  |   | (20,577    | )            |   |                | 
|Reclassification adjustment for loss on securities available for sale included in net income |  |   | 1,200,000  |              |   |                | 
|Reclassification of Series A Preferred Stock to Stockholders' Equity                         |  |   | 2,916,000  |              |   |                | 
|Conversion of Series B Preferred Stock to Series E Preferred Stock                           |  |   | 28,080     |              |   |                | 
|Forgiveness of dividends on Series B Preferred Stock                                         |  |   |           |              |   |                | 
|                                                                                             |  |   |            |              |   |                 | 
|BalanceSeptember 30, 2002                                                                   |  | $ | 3,042,683  |              | $ | 115,226         | 

See
accompanying summary of accounting policies and notes to financial statements.

F-9

---



STRATUS SERVICES GROUP, INC.        Statement of Stockholders' Equity (Deficiency)

|                                                                                             |  | Treasury
Stock |   | Additional
Paid-In
Capital |   | Deferred
Compensation |   | Accumulated
Other
Comprehensive
Loss |   | Accumulated
Deficit |  
|-------------------------------------------------------------------------------------------- |  | -------------- | - | -------------------------- | - | --------------------- | - | ------------------------------------ | - | ------------------- | -
|Net (loss)                                                                                   |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Dividends and accretion on preferred stock                                                   |  |                |  |                            |   | (1,041,810            | ) |                                      |  |                     |  
|Beneficial conversion feature of convertible debt and convertible preferred stock            |  |                |  |                            |   | 831,000               |   |                                      |  |                     |  
|Beneficial conversion feature of convertible debt redeemed                                   |  |                |  |                            |   | (69,541               | ) |                                      |  |                     |  
|Conversion of convertible debt                                                               |  |                |  |                            |   | 710,628               |   |                                      |  |                     |  
|Issuance of common stock in connection with acquisition                                      |  |                |  |                            |   | 374,000               |   |                                      |  |                     |  
|Proceeds from the private placements of common stock (net of costs of $9,750) for cash       |  |                |  |                            |   | 219,306               |   |                                      |  |                     |  
|Issuance of warrants for services provided                                                   |  |                |  |                            |   | 55,000                |   |                                      |  |                     |  
|Issuance of Series B preferred stock in exchange for loans payable                           |  |                |  |                            |   | (81,592               | ) |                                      |  |                     |  
|Issuance of common stock in exchange for accounts payable and accrual expenses               |  |                |  |                            |   | 58,104                |   |                                      |  |                     |  
|Proceeds from the issuance of preferred stock (net of costs $402,870) for cash               |  |                |  |                            |   | (402,870              | ) |                                      |  |                     |  
|Redemption of Series B Preferred Stock                                                       |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Redemption of convertible debt                                                               |  |                |  |                            |   | (20,577               | ) |                                      |  |                     |  
|Reclassification adjustment for loss on securities available for sale included in net income |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Reclassification of Series A Preferred Stock to Stockholders' Equity                         |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Conversion of Series B Preferred Stock to Series E Preferred Stock                           |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Forgiveness of dividends on Series B Preferred Stock                                         |  |                |  |                            |   | 2,400                 |   |                                      |  |                     |  
|                                                                                             |  |                |   |                            |   |                       |   |                                      |   |                     |  
|BalanceSeptember 30, 2002                                                                   |  | $              |  |                            | $ | 12,626,733            |   | $                                    |  |                     | $

See
accompanying summary of accounting policies and notes to financial statements.

F-10

---

STRATUS SERVICES GROUP, INC.        Statement of Stockholders' Equity (Deficiency)

|                                                                                                            |  |   |            | Common Stock |   | Preferred Stock | 
|----------------------------------------------------------------------------------------------------------- |  | - | ---------- | ------------ | - | --------------- | 
|
|Net (loss)                                                                                                  |  |   | (5,777,119 | )            |   |                | 
|Dividends and accretion on preferred stock                                                                  |  |   | (47,657    | )            |   |                | 
|Beneficial conversion feature of convertible debt and convertible preferred stock                           |  |   |           |              |   |                | 
|Issuance of common stock for fees                                                                           |  |   | 27,500     |              |   | 1,000           | 
|Conversion of Series E Preferred Stock for Common Stock                                                     |  |   |           |              |   | 59,224          | 
|Conversion of Series F Preferred Stock for Common Stock                                                     |  |   |           |              |   | 20,000          | 
|Issuance of warrants for services provided                                                                  |  |   | 19,500     |              |   |                | 
|Issuance of Series E preferred stock in exchange for loans payable                                          |  |   | 100,000    |              |   |                | 
|Issuance of common stock in exchange for accounts payable and accrual expenses                              |  |   | 37,500     |              |   | 2,500           | 
|Proceeds from the issuance of Series E Preferred Stock (net of costs $543,600) for cash                     |  |   | 1,492,650  |              |   |                | 
|Issuance of Series E Preferred Stock for penalties                                                          |  |   |           |              |   |                | 
|Issuance of Series E Preferred Stock for accrued penalties                                                  |  |   |           |              |   |                | 
|Conversion of Series H Preferred Stock for Series E Preferred Stock (including $8,750 of accrued dividends) |  |   |           |              |   |                | 
|Reclassification of Series A Preferred Stock to Liabilities                                                 |  |   | (3,809,752 | )            |   |                | 
|                                                                                                            |  |   |            |              |   |                 | 
|BalanceSeptember 30, 2003                                                                                  |  | $ | (4,914,695 | )            | $ | 197,950         | 

See
accompanying summary of accounting policies and notes to financial statements.

F-11

---



STRATUS SERVICES GROUP, INC.        Statement of Stockholders' Equity (Deficiency)

|                                                                                                            |  | Treasury
Stock |   | Additional
Paid-In
Capital |   | Deferred
Compensation |   | Accumulated
Other
Comprehensive
Loss |   | Accumulated
Deficit |  
|----------------------------------------------------------------------------------------------------------- |  | -------------- | - | -------------------------- | - | --------------------- | - | ------------------------------------ | - | ------------------- | -
|Net (loss)                                                                                                  |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Dividends and accretion on preferred stock                                                                  |  |                |  |                            |   | (1,629,874            | ) |                                      |  |                     |  
|Beneficial conversion feature of convertible debt and convertible preferred stock                           |  |                |  |                            |   | 711,000               |   |                                      |  |                     |  
|Issuance of common stock for fees                                                                           |  |                |  |                            |   | 26,500                |   |                                      |  |                     |  
|Conversion of Series E Preferred Stock for Common Stock                                                     |  |                |  |                            |   | 666,476               |   |                                      |  |                     |  
|Conversion of Series F Preferred Stock for Common Stock                                                     |  |                |   |                            |   | 180,000               |   |                                      |   |                     |  
|Issuance of warrants for services provided                                                                  |  |                |  |                            |   | 19,500                |   |                                      |  |                     |  
|Issuance of Series E Preferred Stock in exchange for loans payable                                          |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Issuance of common stock in exchange for accounts payable and accrual expenses                              |  |                |  |                            |   | 35,000                |   |                                      |  |                     |  
|Proceeds from the issuance of Series E Preferred Stock (net of costs $543,600) for cash                     |  |                |  |                            |   | (543,600              | ) |                                      |  |                     |  
|Issuance of Series E Preferred Stock for penalties                                                          |  |                |  |                            |   | (362,792              | ) |                                      |  |                     |  
|Issuance of Series E Preferred Stock for accrued dividends                                                  |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Conversion of Series H Preferred Stock for Series F Preferred Stock (including $8,750 of accrued dividends) |  |                |  |                            |   |                      |   |                                      |  |                     |  
|Reclassification of Series A Preferred Stock to Liabilities                                                 |  |                |  |                            |   |                      |   |                                      |  |                     |  
|                                                                                                            |  |                |   |                            |   |                       |   |                                      |   |                     |  
|BalanceSeptember 30, 2003                                                                                  |  | $              |  |                            | $ | 11,728,943            |   | $                                    |  |                     | $

See
accompanying summary of accounting policies and notes to financial statements.

F-12

---

STRATUS SERVICES GROUP, INC.        Statements of Comprehensive Income

|                                                                                             |  | Years Ended September 30, |           
|-------------------------------------------------------------------------------------------- |  | ------------------------- | ----------
|
|Net (loss)                                                                                   |  | $                         | (5,777,119
|Unrealized loss on securities available for sale                                             |  |                           |          
|Reclassification adjustment for loss on securities available for sale included in net income |  |                           |          
|                                                                                             |  |                           |           
|Comprehensive income (loss)                                                                  |  | $                         | (5,777,119
|                                                                                             |  |                           |           

See
accompanying summary of accounting policies and notes to financial statements.

F-13

---



STRATUS SERVICES GROUP, INC.        Notes to Financial Statements

Note 1Nature of Operations and Summary of Significant Accounting Policies



Stratus Services Group, Inc. (the "Company") is a national provider of staffing and productivity consulting services. As of September 30, 2003, the
Company operated a network of 31 offices in 8 states.

The
Company operates as one business segment. The one business segment consists of its traditional staffing services and SMARTSolutions, a structured program to monitor and
enhance the production of a client's labor resources. The Company's customers are in various industries and are located throughout the United States. Credit is granted to substantially all customers.
No collateral is maintained.



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial statements, the Company incurred significant losses from continuing
operations of $4,433,000 and $7,086,000 during the years ended September 30, 2003 and 2002, respectively, and has a working capital deficit of $7,979,000 at September 30, 2003. 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 or selling branches that are not profitable, consolidating branches and reductions in staffing and other selling, general and administrative expense.

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.



The Company recognizes revenue as the services are performed by its workforce. The Company's customers are billed weekly. At balance sheet dates, there are
accruals for unbilled receivables and related compensation costs.

The
following summarizes revenues:

Years Ended September 30,2003

2002

2001Staffing

$
76,011,503

$
45,153,269

$
28,435,796Payrolling

$
580,706


706,532


838,245$
76,592,209

$
45,859,801

$
29,274,041


F-14

---

Unlike
traditional staffing services, under a payrolling arrangement, the Company's customer recruits and identifies individuals for the Company to hire to provide services to the
customer. The Company becomes the statutory employer although the customer maintains substantially all control over those employees. Accordingly, Emerging Issues Task Force ("EITF") 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent" requires that the Company does not reflect the direct payroll costs paid to such employees in revenues and cost of revenue.



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.



The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash in
bank deposit accounts, which, at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.



Comprehensive income (loss) is the total of net income (loss) and other non-owner changes in equity including unrealized gains or losses on
available-for-sale marketable securities.



The Company utilizes Statement of Financial Accounting Standards No. 128 "Earnings Per Share", (SFAS 128), whereby 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.

F-15

---

Following
is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all years presented.

|                                                        |                                                                  | Year Ended September 30, |           
|------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------ | ----------
|
|Numerator:                                              |                                                                  |                          |           
|Basic EPS                                               |                                                                  |                          |           
|                                                        | Net earnings (loss)                                              |                          | $         
|                                                        | Dividends and accretion on preferred stock                       |                          |           
|                                                        |                                                                  |                          |           
|Net earnings (loss) attributable to common stockholders |                                                                  | $                        | (7,406,993
|                                                        |                                                                  |                          |           
|Denominator:                                            |                                                                  |                          |           
|Basic EPS                                               |                                                                  |                          |           
|                                                        | Weighted average shares outstanding                              |                          |           
|                                                        |                                                                  |                          |           
|                                                        | Per share amount                                                 |                          | $         
|                                                        |                                                                  |                          |           
|Effect of stock options and warrants                    |                                                                  |                          |          
|Dilutive EPS                                            |                                                                  |                          |           
|                                                        | Weighted average shares outstanding including incremental shares |                          |           
|                                                        |                                                                  |                          |           
|                                                        | Per share amount                                                 |                          | $         
|                                                        |                                                                  |                          |           



The investment represented securities available for sale which were stated at fair value. Unrealized holding gains and losses were reflected as a net amount in
accumulated other comprehensive loss until realized. The entire investment, which consisted of an investment in a publicly-traded foreign company (see Note 4), was sold in the year ended
September 30, 2002 at a gross realized loss of $2,159,415. There were no gross realized gains and losses on sales of available-for-sale securities for the years ended
September 30, 2003 and 2001.



Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets as follows:

Method

Estimated Useful
LifeFurniture and fixtures

Declining balance

5 yearsOffice equipment

Declining balance

5 yearsComputer equipment

Straight-line

5 yearsComputer software

Straight-line

3 yearsVans

Straight-line

5 years




Effective October 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142. "Goodwill and other
Intangible Assets". The provisions at SFAS No. 142 require that intangible assets not subject to amortization and goodwill be tested for impairment annually or more frequently if events or
changes in circumstances indicate that the carrying value may not be recoverable. Amortization of goodwill and intangible assets with indefinite lives, including such assets recorded in past business
combinations, ceased upon adoption. Thus no

F-16

---

amortization
for such goodwill was recognized in the accompanying statement of operations for the year ended September 30, 2003, compared to $289,177 and $332,636 for the years ended
September 30, 2002 and 2001, respectively.

In
order to assess the fair value of our goodwill as of the adoption date, we engaged an independent valuation firm to assist in determining the fair value. The valuation process
appraised our assets and
liabilities using a combination of present value and multiple of earnings valuation techniques. Based upon the results of the valuations it was determined that there was no impairment of goodwill.

Prior
to the adoption of SFAS No. 142 on October 1, 2002, the Company amortized goodwill over its estimated useful life of fifteen years and evaluated goodwill for
impairment in conjunction with its other long-lived assets. In this connection, the Company recorded charges of $400,000 and $700,000 in the years ended September 30, 2002 and 2001,
respectively. $100,000 has been reclassified to discontinued operations in the year ended September 30, 2002. The steady decline in revenue and earnings of certain previously acquired business
units and in the case of one business unit, the loss of a major customer, required that the Company adjust the carrying value of the goodwill.



The Company's factoring agreement (see Note 5) with a financing institution ("factor") had been accounted for as a sale of receivables under Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers and Services of Financial Assets and Extinguishment of Liabilities". ("SFAS" No. 125)



Fair values of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined based on borrowing rates currently available to the Company for loans with similar terms or maturity,
approximate the carrying amounts in the financial statements.



The Company accounts for stock based compensation issued to its employees and directors in accordance with Accounting Principle Board No. 25, "Accounting
for Stock Issued to Employees", and has elected to adopt the "disclosure only" provisions of SFAS No. 123 as amended by provisions of SFAS No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require new
permanent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used in reported results.

F-17

---

For
SFAS No. 148 purposes, the fair value of each option granted is estimated as of the date of grant using the Black-Scholer option pricing model with the following weighted
average assumptions used:

Years Ended September 30,2003

2002

2001Risk-free interest rate

4
%
4
%
5
%Dividend yield

0
%
0
%
0
%Expected life

4-7 years

4-7 years

4-7 yearsVolatility

100
%
100
%
84
%


If
the Company had elected to recognize the compensation costs of its stock option plans based on the fair value of the awards under those plans in accordance with SFAS No. 148,
net loss and loss per share would have been adjusted to the proforma amounts below:

Years Ended September 30,2003

2002

2001Net (loss) attributable to common stockholders, as reported

$
(7,406,993
)
$
(7,428,395
)
$
(5,910,457
)Deduct:Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(1,974,862
)

(2,392,090
)

(2,136,353
)Pro forma net (loss) attributable to common stockholders

$
(9,381,855
)
$
(9,820,485
)
$
(8,046,810
)(Loss) from continuing operations per common share attributable to common stockholders:Basicas reported

$
(.42
)
$
(.70
)
$
(.99
)Basicpro forma

$
(.54
)
$
(.93
)
$
(1.35
)Dilutedas reported

$
(.42
)
$
(.70
)
$
(.99
)Basicpro forma

$
(.54
)
$
(.93
)
$
(1.35
)




The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the
enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not
consider realization of such assets to be more likely than not.



Advertising costs are expensed as incurred. The expenses for the years ended September 30, 2003, 2002 and 2001 were $136,000, $122,000 and $143,000,
respectively, and are included in selling, general and administrative expenses.



The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived

F-18

---

Assets"
("SFAS No. 144"). SFAS No. 144 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets.



In June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations". SFAS No. 141 establishes
new standards for accounting and reporting requirements for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after
June 30, 2001. SFAS No. 141 also requires that acquired intangible assets be recognized as assets apart from goodwill if they meet one of the two specified criteria. Additionally, the
statement adds certain disclosure requirements to those required by APB 16, including disclosure of the primary reasons for the business combination and the allocation of the purchase price paid to
the assets acquired and liabilities assumed by major balance sheet caption. This statement is required to be applied to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. Use of the pooling-of-interests method is
prohibited. The adoption of SFAS No. 141 did not have an impact on the Company's financial condition or results of operations.

In
June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142, which must be applied to fiscal years beginning after
December 15, 2001, modifies the accounting and reporting of goodwill and intangible assets. The pronouncement requires entities to discontinue the amortization of goodwill, reallocate all
existing goodwill among its reporting segments based on criteria set by SFAS No. 142, and perform initial impairment tests by applying a fair-value-based analysis on the goodwill in
each reporting segment. Any impairment at the initial adoption date shall be recognized as the effect of a change in accounting principle. Subsequent to the initial adoption, goodwill shall be tested
for impairment annually or more frequently if circumstances indicate a possible impairment.

Under
SFAS No. 142, entities are required to determine the useful life of other intangible assets and amortize the value over the useful life. If the useful life is determined to
be indefinite, no amortization will be recorded. For intangible assets recognized prior to the adoption of SFAS No. 142, the useful life should be reassessed. Other intangible assets are
required to be tested for impairment in a manner similar to goodwill. The Company adopted SFAS No. 142 and completed a transitional impairment test, as required by SFAS No. 142, and
determined that there was no impairment of goodwill as of October 1, 2002.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains the requirements of SFAS
No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an
impairment loss as the difference between the carrying amount and the fair value of the asset. SFAS No. 144 removes goodwill from its scope. SFAS No. 144 is applicable to financial
statements issued for fiscal years beginning after December 15, 2001, or for our fiscal year ending September 30, 2003. The adoption of SFAS No. 144 did not have any material
adverse impact on the Company's financial position or results of our operations.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which nullifies EITF No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as

F-19

---

defined
in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The adoption of SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS
No. 146 did not have a material impact on the Company's financial position and results of operations.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". Interpretation 46 changes the criteria by which one company includes
another entity in its consolidated financial statements. Previously, the criteria were based on control through voting interest. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns
or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after December 15, 2003.
Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not
expect the adoption to have a material impact on the Company's financial position or results of operations.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS 33 on Derivative Instruments and Hedging Activities". SFAS No. 149 is intended to result in more
consistent reporting of contracts as either freestanding derivative instruments subject to SFAS No. 33 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative
features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The Company does not expect that the adoption of SFAS No. 149 will have an impact on its financial position, results of operations
or cash flows.

In
May 2003, the FASB issued FASB Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities (or assets
in certain circumstances) in statements of financial position. This statement affects the issuer's accounting for three types of freestanding financial instruments including (1) mandatorily
redeemable shares that are required to be redeemed at a specified or determinable date or upon an event certain to occur, (2) put options and forward purchase contracts, which involves
financial instruments embodying an obligation that the issuers must or could choose to settle by issuing a variable number of its shares or other equity instruments based solely on
something other than the issuer's own equity shares and (3) certain obligations that can be settled with shares, the monetary value of which is (i) fixed, tied solely or predominantly to
a variable such as a market index, or (ii) varies inversely with the value of the issuers' shares. For public companies, SFAS No. 150 became effective at the beginning of the first
interim period beginning after June 15, 2003. As a result of SFAS No. 150, the Company has classified put options that were previously classified as "Temporary equity" and its
Series A redeemable convertible preferred stock as liabilities at September 30, 2003.



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

F-20

---

Note 2Acquisitions

On October 27, 2000, the Company purchased substantially all of the tangible and intangible assets, excluding accounts receivable, of seven offices of
Tandem, a division of Outsource International, Inc. The initial purchase price for the assets was $125,000; of which $50,000 was paid in cash at the closing and the remaining $75,000 was
represented by a promissory note secured by the assets purchased by the Company. The note was payable in twenty-four equal monthly installments of principal and interest at a variable rate
of prime plus two percent beginning December 1, 2000. In January 2001, the Company exercised an option to repay the outstanding balance of the note plus $175,000 in lieu of an earnout
payment of thirty percent of the Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") of the acquired business for a two-year period.

The
excess of cost paid over net assets acquired resulted in goodwill of $855,718, computed as follows:

Net assets acquiredFurniture and equipment

$
31,650Accrued holiday and vacation pay


(21,758
)9,892Amounts paidCash


50,000Note payable


75,000Earnout payable


175,000Finder's fees ($511,250) and professional fees paid to third parties


565,610865,610Excess of amounts paid over net assets acquiredgoodwill

$
855,718


On
January 2, 2001, the Company purchased substantially all of the tangible and intangible assets of Cura Staffing, Inc. and The WorkGroup Professional
Services, Inc. The purchase price was $175,000 of which $100,000 was paid in cash at the closing and the remaining $75,000 was represented by a 90-day promissory note for $50,000
and $25,000 payable $5,000 a month beginning after the payment of the 90-day promissory note. The promissory note bore interest at 6% a year.

The
excess of cost paid over net assets acquired resulted in goodwill of $228,144, computed as follows:

Net assets acquiredFurniture and equipment

$
11,000Accrued holiday and vacation pay


(12,000
)(1,000
)Amounts paidCash


100,000Note payable and other payables


75,000Finder's fees ($25,000) and professional fees paid to third parties


52,144227,144Excess of amounts paid over net assets acquiredgoodwill

$
228,144


On
July 27, 2001, the Company purchased substantially all of the tangible and intangible assets, excluding accounts receivable of the clerical and light industrial staffing
division of Source One

F-21

---

Personnel, Inc.
("Source One"). As a result of the acquisition, the Company has expanded its presence in the Philadelphia to New York corridor.

The
initial purchase price for the assets was $3,400,000, of which $200,000 in cash, and 400,000 shares of the Company's restricted common stock were paid at the closing and the
remaining $2,400,000 was represented by two promissory notes. In addition, Source One is entitled to earnout payments based upon the acquired business achieving certain performance levels during each
of the three fiscal years beginning October 1, 2001. There was no earnout payment due for the years ended September 30, 2003 and 2002. There was an additional $42,163 of costs paid to
third parties in connection with the acquisition. The first note, representing $600,000, was payable in one installment of $600,000 plus accrued interest at 7% per year, at 180 days after the
closing. The second note, representing $1,800,000 bears interest at 7% per year and is payable over a four-year period in equal quarterly payments beginning 120 days after the
closing. Source One had agreed to allow the Company to defer the payment of the first note and the February 2002 installment of the second note until the earlier of the receipt of the proceeds
from the sale of the Company's Engineering Division (see Note 4) or April 30, 2002. In June 2002, Source One agreed to forbear from exercising remedies against the Company until
June 30, 2002. On July 31, 2002, the Company cured all payment defaults under the first and second notes. In exchange for the forbearance, the Company issued 250,000 shares of its
restricted Common Stock to Source One. Source One has a put option to sell 400,000 shares back to the Company at $2 per share between 24 months after the closing and final payment of the second
note, but not less than 48 months (see Note 17).

The
following table summarizes the fair value of the assets acquired at the date of acquisition based upon a third-party valuation of certain intangible assets:

Property and Equipment

$
105,000Intangible assets


636,300Goodwill


2,700,863Total assets acquired

$
3,442,163


Of
the $636,300 of intangible assets, $127,300 was assigned to a covenant-not-to-compete and $509,000 was assigned to the customer list. The
intangible assets are being amortized over their estimated useful life of four years. Goodwill is not being amortized under the provision of SFAS No. 142. All of the goodwill is expected to be
deductible for tax purposes.

Effective
January 1, 2002, the Company purchased substantially all of the tangible and intangible assets, excluding accounts receivable, of seven offices of Provisional Employment
Solutions, Inc. ("PES"). The initial purchase price was $1,480,000, represented by a $1,100,000 promissory note and 400,000 shares of the Company's common stock. There was an additional
$334,355 of costs paid to third parties in connection with the acquisitions. In addition, PES is entitled to earnout payments of 15% of pretax profit of the acquired business up to a total of
$1.25 million or the expiration of ten years, whichever occurs first. There was no earnout payment due for the years ended September 30, 2003 and 2002. The note bears interest at 6% a
year and is payable over a ten-year period in equal quarterly payments.

The
following table summarizes the fair value of the assets acquired at the date of acquisition based upon a third-party valuation of certain intangible assets:

Property and equipment

$
42,000Intangible assets


468,596Goodwill


1,306,131Total assets acquired

$
1,816,727


F-22

---

Of
the $468,596 of intangible assets, $85,880 was assigned to a covenant-not-to-compete and $382,716 was assigned to the customer list. The intangible
assets are being amortized over their estimated useful life of two to four years. Goodwill is not being amortized under the provision of SFAS No. 142. All of the goodwill is expected to be
deductible for tax purposes.

Effective
as of December 1, 2002, (the "Effective Date"), the Company purchased substantially all of the tangible and intangible assets, excluding accounts receivable, of six
offices of Elite Personnel Services ("Elite"), a California corporation. The Elite branches provide temporary light industrial and clerical staffing in six business locations in California and Nevada.
The Company also took over Elite's Downey, California office, from which Elite serviced no accounts but which it utilized as a corporate office. The Company intends to continue to utilize the Downey
office as a regional corporate facility. The acquisition of Elite furthers the Company's expansion into the California staffing market. Pursuant
to the terms of an Asset Purchase Agreement between the Registrant and Elite dated November 19, 2002 (the "Asset Purchase Agreement"), the purchase price payable at closing (the "Base Purchase
Price") for the assets was $1,264,000, all of which was represented by an unsecured promissory note. In addition to the Base Purchase Price, Elite will also receive as a deferred purchase price, an
amount equal to 10% of the annual "Gross Profits" as defined in the Asset Purchase Agreement of the acquired business between $2,500,000 and $3,200,000, and 15% of the annual Gross Profits of the
acquired business in excess of $3,200,000 for a period of two years from the Effective Date. The note includes a stated imputed interest at 4% per year and is payable over an eight-year
period in equal monthly payments beginning 30 days after the Effective Date. In connection with the transaction, Elite, its President and other key management members entered into
non-competition and non-solicitation agreements pursuant to which they agreed not to compete with the Registrant in the territories of the acquired business for periods ranging
from twelve months to five years, and to not solicit the employees or customers of the acquired business for periods ranging from twelve months to five years.

For
financial accounting purposes, interest on the note has been imputed at a rate of 11% per year. Accordingly, the note and Base Purchase Price has been recorded at $845,875. In
accordance with SFAS No. 141, "Business Combinations" the contingent portion of the purchase price has been recognized as a liability to the extent that the net acquired assets exceed the
purchase price. Accordingly, $244,000 is included in "Accounts payable and accrued expenses" on the attached balance sheet as of September 30, 2003. There was an additional $176,644 of costs
paid to third parties in connection with the acquisition.

The
following summarizes the fair value of the assets acquired at the date of acquisition based upon a third-party valuation of certain intangible assets:

Property and equipment

$
75,000Covenant-not-to-compete


19,500Customer list


1,172,019Total assets acquired

$
1,266,519


The
covenant-not-to-compete and customer list are being amortized over their estimated useful life of five and seven years, respectively.

The
above acquisitions have been accounted for as purchases. The results of operations are included in the Company's statements of operations from the effective date of acquisition.

The
unaudited pro forma results of operations presented below assume that the acquisitions had occurred at the beginning of fiscal 2002. This information is presented for informational
purposes only

F-23

---

and
includes certain adjustments such as goodwill amortization resulting from the acquisitions and interest expense related to acquisition debt.

Unaudited Year Ending September 30,2003

2002Revenues

$
82,170,209

$
75,194,801Net (loss) from continuing operations attributable to common stockholders


(6,003,032
)

(8,513,443
)Net (loss) per share attributable to common stockholdersBasic

$
(.34
)
$
(.81
)Diluted

$
(.34
)
$
(.81
)


The
maturities on notes payable-acquisitions are as follows:

Year Ending September 302004

$
657,2242005


683,0622006


198,0712007


215,3562008


234,356Thereafter through 2013


734,435$
2,722,504


Note 3Discontinued Operations



On January 24, 2002, the Company entered into an agreement to sell the assets of its Engineering Services Division (the "Division") to SEA Consulting
Services Corporation ("SEA").

On
March 28, 2002, the Company completed the sale of the assets of the Division to SEA pursuant to the Asset Purchase Agreement dated as of January 24, 2002, among the
Company, SEP, LLC ("SEP"), Charles Sahyoun, Sahyoun Holders LLC and SEA. The transaction was approved by a vote of the Company's stockholders at the Company's annual meeting of stockholders held on
March 28, 2002.

The
assets of the Division had been transferred to SEP, a limited liability company in which the Company owned a 70% interest, at the time of the execution of the Asset Purchase
Agreement. Sahyoun Holders, LLC, a company wholly-owned by Charles Sahyoun, the President of the Division, owned the remaining 30% interest in SEP.

Under
the terms of the Asset Purchase Agreement, the Company received an initial cash payment of $1,560,000, which represented 80% of the initial $2,200,000 installment of the purchase
price payable to SEP net of a $200,000 broker's fee due to a third party. Sahyoun Holdings, LLC received the other 20% of the initial net installment of the purchase price, or $440,000.

The
Asset Purchase Agreement required SEA to make the following additional payments to SEP:



F-24

---



Pursuant
to an allocation and indemnity agreement entered into by the Company, Sahyoun Holdings, LLC and Charles Sahyoun (the "Allocation and Indemnity Agreement"), the Company was
entitled to $250,000 of the Second Payment and $250,000 of the Third Payment. On April 15, 2002, by letter agreement between the Company, Sahyoun Holdings, LLC and Joseph J. Raymond, Sr., the
Chairman and Chief Executive Officer of the Company, the parties agreed to a modification of the Allocation and Indemnity Agreement. Per that letter agreement, Sahyoun Holdings, LLC provided the
Company with $200,000 cash in exchange for the Company's short-term, 90-day demand note, due and payable by August 1, 2002 in the amount of $250,000. Such $250,000 was
repaid by the Company from its $250,000 share of the Second Payment which was received in June 2002.

Sahyoun
Holdings, LLC and Charles Sahyoun guaranteed the $250,000 payment to be made to the Company from the Third Payment, regardless of the operating results of SEA. In
December 2002, the
Company and Charles Sahyoun agreed to offset the $250,000 of the Third Payment due to the Company against $250,000 of accrued commissions due Charles Sahyoun. As a result, the Company is not entitled
to any additional payments under the Asset Purchase Agreement.

The
transaction resulted in a gain, which was calculated as follows:

Initial cash payment

$
2,200,000Guaranteed additional payments


500,000Less costs of sale:Allocations to Sahyoun Holdings, LLC


(440,000
)Broker's fee


(200,000
)Other costs


(100,921
)Balance


1,959,079Net assets sold


200,023Gain

$
1,759,056


Revenues
from the Division were $2,730,000 and $7,245,000 for the years ended September 30, 2002 and 2001, respectively.



On March 9, 2003, the Company completed the sale of substantially all of the tangible and intangible assets, excluding accounts receivable, of its Colorado
Springs, Colorado office. Pursuant to the terms of an asset purchase agreement between the Company and US Temp Services, Inc. ("US Temps") dated March 9, 2003, the purchase price for the
purchased assets was $20,000 which was paid by a promissory note, which bears interest at the rate of 6% per year and is payable in monthly installments of $608 over a three year period. The note is
secured by a security interest on all of the purchased assets.

The
purchase price for the assets acquired by US Temps was arrived at through arms-length negotiations between the parties and resulted in a gain on sale of $13,958.

On
August 22, 2003, the Company completed the sale, effective as of August 18, 2003 (the "ALS Effective Date") of substantially all of the tangible and intangible assets,
excluding accounts receivable,

F-25

---

of
its Miami Springs, Florida office. Pursuant to the terms of the Asset Purchase Agreement between the Company and ALS, LLC, a Florida limited liability company ("ALS") dated August 22, 2003
(the "Purchase Agreement"), the purchase price for the purchased assets was $128,000, which was paid by a promissory note, which bears interest at the rate of 7% per year with payments over a
60 month period. The amount of the monthly payments due under the note will be the greater of $10 per month or 20% of the monthly net profits generated by the staffing business originating from
the purchased assets, commencing October 31, 2003. However, until such time as all outstanding amounts due and owing by the Company to ALS, as of the date of the Purchase Agreement in the
amount of $289,635, have been paid in full, these monthly payments shall be deducted from any and all amounts due from the Company to ALS. The note is secured by a security interest in all of the
purchased assets.

In
connection with the transaction, ALS entered into a non-compete and non-solicitation agreement pursuant to which ALS agreed not to compete with the Company
with respect to any of the Company's other remaining offices for a period of 18 months.

The
purchase price for the assets acquired by ALS was arrived at through negotiations with a related party purchaser and resulted in a gain on sale of $10,777. The son of our President
and Chief Executive Officer is a 50% member in ALS, LLC.

On
September 10, 2003, the Company completed the sale, effective as of September 15, 2003 (the "Effective Date"), of substantially all of the tangible and intangible
assets, excluding accounts receivable, of five of its New Jersey offices to D/O Staffing LLC ("D/O"). The offices sold are the following: Elizabeth, New Jersey; New Brunswick, New Jersey; Paterson,
New Jersey; Perth Amboy, New Jersey and Trenton, New Jersey. Pursuant to the terms of an asset purchase agreement between D/O and us dated September 10, 2003 (the "D/O Purchase Agreement"), the
base purchase price for the purchased assets was $1,250,000 payable as follows:



Additionally,
the Company may be entitled to receive as a deferred purchase price (the "Bonus"), an amount equal to $125,000 if, for the one year period measured from the Effective Date,
the purchased assets generate for D/O at least $18,000,000 in actual billings by client accounts serviced by the Company as of the Closing and transferred by the Company to D/O pursuant to the D/O
Purchase Agreement. The Bonus, if any, is payable by a promissory note, payable over 24 months and bearing interest at an interest rate of 6% a year.

The
purchase price for the assets was arrived at through arms-length negotiations between the parties and resulted in a (loss) on sale of ($50,354).

On
September 29, 2003, the Company completed the sale of substantially all of the tangible and intangible assets, excluding accounts receivable, of its Las Vegas, Nevada office.
Pursuant to the terms of an asset purchase agreement between the Company and US Temps dated September 29, 2003, the purchase price for the purchased assets was $105,000, all of which was paid
by a promissory note, which bears interest at the rate of 6% per year and is payable in monthly installments of $2,030, over a five year period. The note is secured by a security interest on all of
the purchased assets.

The
purchase price for the assets acquired by US Temps was arrived at through arms-length negotiations between the parties and resulted in a gain on sale of $4,599.

F-26

---

The
net loss on sale for the aforementioned certain branches are calculated as follows:

Sales price:Cash

$
1,150,000Promissory notes


253,000Escrow receivable


100,000$
1,503,000Less costs of sales


(29,229
)Balance


1,473,771Net assets sold


1,494,791(Loss)

$
(21,020
)


Revenues
from the aforementioned certain branches were $18,089,065, $19,261,294 and $20,734,244 for the years ended September 30, 2003, 2002 and 2001, respectively.

The
statements of operations for all periods presented have been reclassified to reflect the operating results of the Division and sold branches as discontinued operations.

Note 4Transactions with Artisan (UK) plc

On June 26, 2001, the Company entered into an agreement to purchase 63,025,000 ordinary shares, representing 26.3% of the outstanding shares of
enterpriseAsia. com ("EPA"), a London AIM listed company (see Note 1), from Artisan (UK) plc ("Artisan"). In exchange, the Company issued to Artisan 850,837 shares of the Company's
Series A preferred stock (see Note 14). This transaction was consummated, effective August 15, 2001.

The
cost of the investment in EPA and value assigned to the preferred stock issued was based upon the market price per share of EPA on the date the transaction was consummated.
Accordingly, the original cost of the investment was $1,592,000 and, therefore, the 850,837 shares of preferred stock were assigned a value of $1.87 per share.

On
July 3, 2001, the Company received $900,000 from Artisan.com Limited ("Artisan.com"), a company affiliated with Artisan, in exchange for 900,000 shares of the Company's common
stock in a private placement. The transaction was in accordance with an agreement dated June 26, 2001 between the Company and Artisan.com.

In
connection with the transactions with Artisan and Artisan.com, the Company issued 608,096 shares of its Series A preferred stock and 30,000 shares of its common stock for
finders' fees to third parties.

The
Company entered into the transactions with Artisan to provide immediate and possible future working capital through the sale of the Company's stock to Artisan and to provide the
Company with business expansion opportunities in Asia through the investment in and relationship with EPA.

The
value of the preferred stock and common stock issued for finders' fees was allocated to the investment in EPA and a reduction to additional paid-in capital based on the
relative value of the original investment of $1,592,000 and the $900,000 received for the 900,000 shares of the Company's common stock. Accordingly, the original cost of the investment in EPA
increased by $757,000 and additional paid-in capital was reduced by $417,700.

The
Company was unable to exercise significant influence over EPA's operating and financial policies. Therefore, the investment in EPA was classified as
available-for-sale securities and was reported at fair value in the attached balance sheet.

F-27

---

The
Company has entered into an agreement with Artisan, the current beneficial owner of the Series A Preferred Stock, which requires the Company to purchase 1,458,933 shares of
Series A Preferred Stock from Artisan.com and one of its affiliates if the Company raises at least $4 million of gross proceeds in a proposed public offering of securities. (See
Note 14)

Note 5Factoring Agreement

The Company had a factoring agreement with an unrelated party under which it was able to sell qualified trade accounts receivable, with limited recourse
provisions. The Company was required to repurchase or replace any receivable remaining uncollected for more than 90 days. During the year ended September 30, 2001, gross proceeds from
the sale of receivables was $10,204,208. There were no gains or losses in connection with the sale or repurchase of receivables under the factoring agreement.

On
December 12, 2000, the Company terminated its agreement with the factor. As part of the termination agreement, the Company repurchased all accounts receivable from the factor
with proceeds from a new line of credit (See Note 6).

Note 6Line of Credit

The Company has a loan and security agreement (the "Loan Agreement") with a lending institution whereby the Company can borrow up to 85% of eligible accounts
receivable, as defined, not to exceed the lesser of $12 million or six times the Company's tangible net worth (as defined). Until December 2002, borrowings under the Agreement bore
interest at 11/2% above the prime rate (see below) and are collateralized by substantially all of the Company's assets. The Loan Agreement expires on June 12, 2004.

At
September 30, 2003, the Company was in violation of the following covenants under the Loan Agreement:



The
Company has received a waiver from the lender on the above violations and, in December 2002, entered into a modification of the Loan Agreement. The modification provided that
borrowings under the Loan Agreement bore interest at 13/4% above the prime rate, as long as the Company was in violation of any of the covenants under the Loan Agreement.

Effective
April 10, 2003, the Company entered into another modification of the Loan Agreement which provides that borrowings under the Loan Agreement bear interest at 3% above the
prime rate. The prime rate at September 30, 2003 was 4%.

Note 7Property and Equipment

Property and equipment consist of the following as of September 30:

2003

2002Furniture and fixtures

$
709,372

$
666,941Office equipment


118,604


119,719Computer equipment


1,168,148


1,163,135Computer software


217,463


193,028Vans


196,179


216,3192,409,766


2,359,142Accumulated depreciation


(1,472,048
)

(1,077,325
)Net property and equipment

$
937,718

$
1,281,817


F-28

---

Note 8Goodwill and other Intangible Assets

Effective October 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and other
Intangible Assets". The provisions of SFAS No. 142 require that intangible assets not subject to amortization and goodwill be tested for impairment annually or more frequently if events or
changes in circumstances indicate that the carrying value may not be recoverable. Amortization of goodwill and intangible assets with indefinite lives, including such assets recorded in past business
combinations, ceased upon adoption. Thus no amortization for such goodwill was recognized in the accompanying statement of operations for the year ended September 30, 2003, compared to $289,177
and $332,636 for the years ended September 30, 2002 and 2001, respectively.

In
order to assess the fair value of our goodwill as of the adoption date, we engaged an independent valuation firm to assist in determining the fair value. The valuation process
appraised our assets and liabilities using a combination of present value and multiple of earnings valuation techniques. Based upon the results of the valuation, it was determined that there was no
impairment of goodwill.

The
following table provides a reconciliation of net (loss) attributable to common stockholders for exclusion of goodwill amortization:

Years Ended September 30,2003

2002

2001Reported net (loss) attributable to common stockholders

$
(7,406,993
)
$
(7,428,395
)
$
(5,910,457
)Add: Goodwill amortization





289,177


332,636Adjusted net (loss) attributable to common stockholders

$
(7,406,993
)
$
(7,139,218
)
$
(5,577,821
)Basic earnings (loss) per share:Reported net earnings (loss) attributable to common stockholders

$
(.42
)
$
(.70
)
$
(.99
)Add: Goodwill amortization





.03


.06Adjusted net earnings (loss) attributable to common stockholders

$
(.42
)
$
(.67
)
$
(.93
)Diluted earnings (loss) per share:Reported net earnings (loss) attributable to common stockholders

$
(.42
)
$
(.70
)
$
(.99
)Add: Goodwill amortization





.03


.06Adjusted net earnings (loss) attributable to common stockholders

$
(.42
)
$
(.67
)
$
(.93
)


F-29

---

The
changes in the carrying amount of goodwill for the years ended September 30 were as follows:

Balance as of September 30, 2000

$
3,716,538Additions


3,784,726Amortization


(332,636
)Impairment


(700,000
)Balance as of September 30, 2001


6,468,628Additions


1,306,131Amortization


(289,177
)Impairment


(400,000
)Balance as of September 30, 2002


7,085,582Disposal of certain branches (see Note 3)


(1,269,229
)Balance as of September 30, 2003

$
5,816,353


Intangible
assets consist of the following as of September 30:

2003

2002Covenant-not-to-compete

$
230,480


213,180Customer list


1,957,709


891,7162,188,189


1,104,896Less: accumulated amortization


(686,610
)

(302,751
)$
1,501,579

$
802,145


Estimated
amortization expense for each of the next five years is as follows:

For the Years Ending September 30,2004

$
422,0002005


371,0002006


179,0002007


156,0002008


153,000


Amortization
expense of amortizable intangible assets for the years ended September 30, 2003, 2002 and 2001 was $393,982, $276,251 and $26,500, respectively.

F-30

---

Note 9Loans Payable

Loans payable consist of the following as of September 30:

2003

2002Notes, secured by vans with a book value of $78,740 as of September 30, 2003

(i
)
$
76,223

$
104,97118% promissory note

(ii
)

80,000


80,000Stock repurchase note

(iii
)

76,246


168,121Demand note

(iv
)

52,975


204,703Demand notes

(v
)

420,500


125,000Short-term loan

(vi
)

69,460


775,404


682,795Less current portion




(737,514
)

(464,830
)Non-current portion



$
37,890

$
217,965


---

The
maturities on loans payable are as follows:

Year Ending September 30,2004

$
737,5142005


37,890$
775,404


Note 10Related Party Transactions



The son of the Chief Executive Officer of the Company (the "CEO") provides consulting services to the Company. Consulting expense was $53,000, $125,000 and
$281,000 for the years ended September 30, 2003, 2002 and 2001, respectively.

The
Company has paid consulting fees to an entity whose stockholder is another son of the Chief Executive Officer of the Company. Consulting fees amounted to $86,000, $141,000 and
$119,000 for the years ended September 30, 2003, 2002 and 2001, respectively.

F-31

---



During the year ended September 30, 2002, the Company sold 177,722 shares of its common stock in private placements to a relative of the CEO of the Company
at prices approximating the then current market of $.87 to $.93 per share, for total gross proceeds of $156,833.

During
the year ended September 30, 2001, the Company sold 382,999 shares of its common stock in private placements to relatives of the CEO of the Company at prices approximating
the then current market of $.93 to $1.43 per share, for total gross proceeds of $410,000, less expenses of $5,958.



During the year ended September 30, 2002, the CEO loaned $75,000 to the Company which was repaid during the year ended September 30, 2003. During
the year ended September 30, 2003, the CEO made various loans to the Company aggregating $215,000 of which $175,000 was repaid by September 30, 2003.

During
the year ended September 30, 2002, a son of the CEO loaned $41,000 to the Company, which is still outstanding at September 30, 2003. During the year ended
September 30, 2003, this son of the CEO, another son of the CEO and the brother of the CEO loaned the Company $100,000, $6,000 and $100,000, respectively. All of these amounts are outstanding
at September 30, 2003.

During
the year ended September 30, 2003, a member of the Board of Directors of the Company and a trust formed for the benefit of the family of another member of the Board of
Directors loaned $100,000 and $116,337, respectively, to the Company. Both of these amounts are outstanding at September 30, 2003.

All
of the aforementioned loans are unsecured, due on demand and bear interest at various rates.



In March 2002, a $160,000 note payable by the Company to a company owned by the CEO was exchanged for 32,000 shares of Series B Convertible
Preferred Stock (see Note 14).

In
July 2002, the CEO invested $1,000,000 in the Company in exchange for 10,000 shares of newly created Series F Convertible Preferred Stock (see Note 14).



The Company provides information technology staffing services through a joint venture, Stratus Technology Services, LLC ("STS"), 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. STS commenced operations during the year ended September 30, 2001. The Company's gain (loss) from
operations of STS of $30,473, $46,312
and $(36,344) for the years ended September 30, 2003, 2002 and 2001, respectively, is included in other income (expense) in the statements of operations.

Summarized
financial information of STS is not provided because the investment is not material.



The $128,000 "Note Receivablerelated party" as of September 30, 2003, is the amount due from ALS in connection with the sale of the Company's
Miami Springs, Florida office (see Note 3). ALS is the holding company for Advantage Services Group, LLC ("Advantage").

F-32

---



During the year ended September 30, 2003, Advantage, a company in which a son of the CEO holds a 50% interest, provided payrolling services to certain of
the Company's customers under an arrangement pursuant to which the Company paid Advantage a fee equal to the cost of providing such services plus a specified percentage above Advantage's cost. The
total amount paid to Advantage under this arrangement in fiscal 2003 was $1,224,131 (see Note 23).

Note 11Accounts Payable and Accrued Expenses

Accounts payable consist of the following as of September 30:

2003

2002Accounts payable

$
2,743,971

$
2,144,573Accrued compensation


105,480


383,545Accrued workers' compensation expense


786,773


768,739Workers' compensation claims reserve


495,794


365,131Accrued interest


241,883


161,547Contingent portion of acquisition purchase price (see Note 2)


244,000


Accrued other


169,503


117,812$
4,787,404

$
3,941,347


Note 12Income Taxes

Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities follow:

2003

2002Current assets and liabilitiesAllowance for doubtful accounts

$
693,000

$
697,000Valuation allowance


(693,000
)

(697,000
)Net current deferred tax asset

$


$
Non-current assets and liabilitiesNet operating loss carryforward

$
7,327,000

$
4,572,000Intangibles


394,000


Valuation allowance


(7,327,000
)

(4,572,000
)Net non-current deferred tax asset

$


$



The
change in valuation allowance was an increase of $2,751,000, $2,355,000 and $2,316,000 for the years ended September 30, 2003, 2002, and 2001, respectively.

2003

2002

2001Income taxes (benefit) is comprised of:Current

$


$


$
Deferred


(2,751,000
)

(2,355,000
)

(1,976,000
)Change in valuation allowance


2,751,000


2,355,000


2,316,000$


$


$
340,000


F-33

---

At
September 30, 2003, the Company has available the following federal net operating loss carryforwards for tax purposes:

Expiration Date Year Ending September 30,2012

$
122,0002018


1,491,0002019


392,0002021


4,860,0002022


4,407,0002023


6,060,000


The
utilization of the net operating loss carryforwards may be limited due to changes in control.

The
effective tax rate on net earnings (loss) varies from the statutory federal income tax rate for periods ended September 30, 2003, 2002 and 2001.

2003

2002

2001Statutory rate

(34.0
)%
(34.0
)%
(34.0
)%State taxes net

(6.0
)
(6.0
)
(6.0
)Other differences, net





(0.4
)Valuation allowance

40.0

40.0

40.4Benefit from net operating loss carryforwards






%

%

%


Note 13Convertible Debt

At various times during the years ended September 30, 2002 and 2001, the Company issued, through private placements, a total of $508,050 and $3,643,402,
respectively, of convertible debentures. The debentures bore interest at 6% a year, payable quarterly and had a maturity date of five years from issuance. Each debenture was convertible after
120 days from issuance into the number of shares of the
Company's common stock determined by dividing the principal amount of the debenture by the lesser of (a) 120% of the closing bid price of the common stock on the trading day immediately
preceding the issuance date or (b) 75% of the average closing bid price of the common stock for the five trading days immediately preceding the date of the conversion. The Company had the right
to prepay any of the debentures at any time at a prepayment rate that varied from 115% to 125% of the amount of the debenture depending on when the prepayment was made.

The
discount arising from the 75% beneficial conversion feature aggregated $136,000 and $1,213,747 in the years ended September 30, 2002 and 2001, respectively, and was being
charged to interest expense during the period from the issuance of the debenture to the earliest time at which the debenture became convertible.

Deferred
finance costs incurred in connection with the issuance of the debentures aggregated approximately $100,000 and $738,000 in the years ended September 30, 2002 and 2001,
respectively, and was being amortized over the five year term of the debentures. Included in the $738,000 is $88,000 for 50,000 five-year, $5.00 warrants and 100,000 five-year,
$7.50 warrants issued as finders' fees. In addition, the Company paid approximately $80,000 and $280,000 in the years ended September 30, 2002 and 2001, respectively, in exchange for extending
the earliest conversion date and the maturity date by an additional 120 days on approximately $592,000 and $1,048,500 of debentures, respectively. These amounts were charged to deferred finance
costs and were being amortized over 120 days. Included in interest expense for the years ended September 30, 2002 and 2001 is approximately

F-34

---

$290,000
and $146,000, respectively, for amortization of deferred finance costs in connection with the debentures.

During
the years ended September 30, 2002 and 2001, the Company redeemed $270,180 and $1,897,220 of debentures, respectively, resulting in a gain (loss) of approximately $3,000 an
($71,000), respectively, which is included in "Other income (expense)" in the statements of operations. The gain (loss) is comprised of the following:

2002

2001Beneficial conversion feature

$
90,000

$
632,000Forgiveness of debt


12,000


Prepayment premiums


(44,000
)

(326,000
)Deferred finance costs


(54,000
)

(377,000
)Other costs


(1,000
)

$
3,000

$
(71,000
)


During
the year ended September 30, 2002, $970,593 of debentures were converted into 2,537,479 shares of common stock at prices ranging from $.30 to $.60 per share. During the
year ended September 30, 2001, $542,500 of debentures were converted into 628,060 shares of common stock at prices ranging from $.85 to $.90 per share. The Company issued 108,666 shares of
treasury stock to a debenture holder in connection with a conversion during the year ended September 30, 2001.

In
March 2002, the Company entered into an agreement with the holder (the "Debenture Holder") of all but $40,000 of the outstanding debentures pursuant to which it issued to the
Debenture Holder 231,300 shares of Series B Convertible Preferred Stock (see Note 14) in exchange for (i) $456,499 aggregate principal amount of debentures, (ii) the
cancellation of a $400,000 promissory note issued by the Company to the Debenture Holder in January 2002, and (iii) $300,000 in cash. As a result, only $40,000 of Debentures remains
outstanding at September 30, 2002 and 2003.

Note 14Preferred Stock



In August 2001, the Company issued 1,458,933 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") in connection
with transactions with Artisan (see Note 4).

The
shares of Series A Preferred Stock have a stated value of $3.00 per share. The difference between the carrying value and redemption value of the Series A Preferred
Stock is being accreted through a charge to additional paid-in-capital through the June 30, 2008 redemption date.

The
Series A Preferred Stock entitles the holders thereof to cumulative dividends at $.21 per share per year, payable semi-annually, commencing on December 31,
2001, when and if declared by the Board of Directors. The shares of Series A Preferred Stock are convertible at the option of the holder into shares of the Company's Common Stock on a
one-for-one basis. On June 30, 2008, the Company will be required to redeem any shares of Series A Preferred Stock outstanding at a redemption price of $3.00 per
share together with accrued and unpaid dividends, payable at the Company's option, either in cash or in shares of common stock. For purposes of determining the number of shares which the Company will
be required to issue if it chooses to pay the redemption price in shares of Common Stock, the Common Stock will have a value equal to the average closing price of the Common Stock during the five
trading days immediately preceding the date of redemption.

At
the Company's Annual Meeting of Stockholders held on March 28, 2002, the stockholders approved the issuance by the Company of the full number of shares of Common Stock, which
may be

F-35

---

issued
by the Company in connection with the conversion of the Series A Preferred Stock. Accordingly, the Company's obligation to redeem a portion of the outstanding shares of Series A
Preferred Stock, if such approval was not obtained, was terminated and the Series A Preferred Stock was reclassified to permanent equity and is included in Stockholders' equity at
September 30, 2002. Pursuant to SFAS No. 150, the current value of the Series A Preferred Stock, including accrued dividends, is classified as a liability at September 30,
2003.

In
July 2003, the Company entered into an agreement with Artisan pursuant to which the Company has agreed to redeem the aggregate 1,458,933 shares of its Series A Preferred
Stock owned by Artisan.com and Cater Barnard (USA) plc, an affiliate of Artisan. These shares represent all of the shares of Series A Preferred Stock currently outstanding. The obligation to
redeem the Series A Preferred Stock is contingent upon the Company's sale of not less than $4,000,000 of units consisting of one share of common stock and one common stock warrant ("Units") in
a proposed "best-efforts" public offering of securities (the "Offering"). If the Company sells at least $4,000,000 of Units in the
Offering, it will be obligated to pay $500,000 to Artisan within 15 days after the $4,000,000 of Units are sold. In addition, the Company will be obligated to pay Artisan an additional $250,000
by January 31, 2005 or, at the Company's option, issue to Artisan shares of the Company's common stock having an aggregate market value of $250,000, based upon the average closing bid prices of
the common stock for the 30 trading days preceding January 31, 2005. If the Company fails to make the $250,000 payment in cash or stock, it will be required to pay Artisan $300,000 in cash,
plus interest calculated on a daily basis at a rate of 18% from the date of the default to the date the default is cured. The Company has also agreed to issue to Artisan a number of shares of the
Company's common stock which will represent 5.5% of its outstanding common stock, subject to certain adjustments, upon completion of the sale of $4,000,000 million of units of common stock so
that the total number of shares of common stock issued to Artisan will equal 5.5% of the Company's common stock after giving effect to the assumed exercise of all warrants and options that then have
exercise prices equal to or less than the then current market price of the Company's common stock and the conversion of all convertible securities that then have conversion prices equal to or less
than the then current market price of the Company's common stock.



In March 2002, the Company issued 32,000 shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") in exchange for a
$160,000 note due to a company owned by the Chief Executive of the Company (see Note 10). An additional 231,300 shares were issued to the Debenture Holder (see Note 14) in exchange for
(i) 456,499 aggregate principal amount of debentures, (ii) cancellation of a $400,000 promissory note due to the Debenture Holder and (iii) $300,000 in cash.

The
shares of Series B Convertible Preferred Stock have a stated value of $5 per share. Holders of the Series B Preferred Stock are entitled to cumulative dividends at a
rate of 6% of the stated value per year, payable when and as declared by the Board of Directors. Dividends may be paid in cash or, at the option of the Company, in shares of Common Stock, under
certain circumstances. Holders of Series B Preferred Stock are entitled to a liquidation preference of $5.00 per share plus accrued dividends. The Series B Preferred Stock is convertible
into shares of Common Stock at the option of the holder at any time. The number of shares of Common Stock into which each share of Series B Preferred Stock is convertible is determined by
dividing the aggregate liquidation preference of the shares being converted by the lesser of (i) $4.65 or (ii) 75% of the closing bid price of the Common Stock on the trading day
preceding the date of conversion. The discount arising from the beneficial conversion feature was treated as a dividend from the date of issuance to the earliest conversion date.

In
June 2002, the Company redeemed for cash, 91,000 shares of Series B Preferred Stock at $5.00 per share, totaling $455,000.

F-36

---

At
a Special Meeting of Stockholders held on July 26, 2002, the Company received approval from its stockholders of a proposal to approve the issuance of shares of Common Stock
upon conversion of the Series B Preferred Stock in excess of the limits imposed by the rules of the Nasdaq Stock Market, in the event that the Company's Common Stock is reinstated for trading
on the Nasdaq Stock Market.

In
July 2002, the remaining 172,300 shares of Series B Preferred Stock (including the 32,000 shares held by a company owned by the Chief Executive Officer of the Company)
were exchanged for 8,615 shares of Series E Convertible Preferred Stock (the "Series E Preferred Stock").



In July 2002, the Company sold 7,650 shares of newly created Series E Preferred Stock in a private placement for $765,000 in cash and issued an
additional 8,615 shares of Series E Preferred Stock in exchange for all of the outstanding shares of Series B Preferred Stock, which had an aggregate stated value of $861,500. In
addition, $41,790 of dividends and penalties, which had accrued on the Series B Preferred Stock prior to the exchange were exchanged for 418 shares of Series E Preferred Stock.

In
July 2003, the Company sold 14,362 shares of Series E Preferred Stock in private placements for $1,436,250 in cash. Also, in July 2003, the Company entered into
an agreement with the holder of the Series H Convertible Preferred Stock (the "Series H Preferred Stock") pursuant to which the 5,000 shares of Series H Preferred Stock plus
accrued dividends of $8,750 were exchanged for 5,087 shares of Series E Preferred Stock.

On
July 30, 2003, the Company and the Series E holders entered into a letter agreement (the "Compromise Agreement") to compromise certain disputed penalties arising out the
of Company's alleged failure to timely cause the suspension of the effectiveness of the Company's Form S-1 Registration Statement, filed with the SEC on behalf of the
Series E holders to terminate at the earliest possible date. Pursuant to the terms of the Compromise Agreement, while the Company does not admit that it failed to fulfill its contractual
obligations to the Series E shareholders, in the interest of amicably resolving this matter, the Company issued an additional 4,477 shares of Series E Preferred Stock to the
Series E shareholders.

The
shares of Series E Preferred Stock have a stated value of $100 per share. The holders of the Series E Preferred stock are entitled to cumulative dividends at a rate of
6% of the stated value per year, payable every 120 days, in preference and priority to any payment of any dividend on the Company's Common Stock. Dividends may be paid, at the Company's option,
either in cash or in shares of Common Stock, valued at the Series E Conversion Price (as defined below). Holders of Series E Preferred Stock are entitled to a liquidation preference of
$100 per share, plus accrued and unpaid dividends.

The
Series E Preferred Stock is convertible into Common Stock at a conversion price equal to 75% of the average of the closing bid prices, for the five trading days preceding the
conversion date, for the Common Stock. The number of shares issuable upon conversion is determined by multiplying the number of shares of Series E Preferred Stock to be converted by $100, and
dividing the result by the Series E Conversion Price then in effect.

Holders
of Series E Preferred Stock do not have any voting rights, except as required by law.

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

The
discount arising from the beneficial conversion feature is being treated as a dividend from the date of issuance to the earliest conversion date.

F-37

---

During
the year ended September 30, 2003, holders of Series E Preferred Stock converted 7,352 shares into 5,922,471 shares of Common Stock at conversion prices between
$.075 and $.2475.



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

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

The
Series F Preferred Stock is convertible into Common Stock at a conversion price (the "Series F Conversion Price") equal to $.10 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
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.

During
the year ended September 30, 2003, the Company's Chief Executive Officer converted 2,000 shares of the Series F Preferred Stock into 2,000,000 shares of Common
Stock.



In September 2002, the Company sold 5,000 shares of the newly created Series H Preferred Stock in a private placement for $500,000 in cash.

The
Series H Preferred Stock was convertible into Common Stock at a conversion price (the "Series H Conversion Price") equal to the lower of $.20 per share or the average
market price of the Common Stock for the five trading days immediately preceding the conversion date. The number of shares issuable upon conversion was determinable by multiplying the number of shares
of Series H Preferred Stock to be converted by $100 and dividing the result by the Series H Conversion Price then in effect.

Holders
of Series H Preferred Stock did not have any voting rights, except as required by law.

In
July 2003, the 5,000 shares of the Series H Preferred Stock, plus accrued dividends of $8,750 were exchanged for 5,087 shares of Series E Preferred Stock.

F-38

---

Note 15Other Charges



During the period May 1, 2001 through May 20, 2002, the Company maintained workers' compensation insurance with an insurance company, with a
deductible of $150,000 per incident. The Company had established reserves based upon its evaluation of the status of claims still open in conjunction with claims reserve information provided to the
Company by the insurance company. The Company believes that the insurance company has paid and reserved claims in excess of what should have been paid or reserved. Although the Company believes it can
recover some of the amounts already paid, this can only be pursued through litigation against the insurance company. Since there is no assurance the Company will prevail, the Company recorded
$1,186,000 of additional payments made and reserves in the year ended September 30, 2003. $433,000 of such amount is included in discontinued operations.



Included in "Other Charges" are costs incurred in connection with financing not obtained ($75,066), penalties associated with the Series B Preferred Stock
($28,160), and the fair value of shares issued to Source One in connection with a forbearance agreement ($37,500) (see Note 2).



During the year ended September 30, 2001, the Company discontinued negotiations to sell the Engineering Division and discontinued efforts to make certain
acquisitions. In this connection, costs associated with these activities were charged to operations. The Company also charged operations for costs incurred in connection with various financing not
obtained and costs associated with closed offices. The total charged to operations for the foregoing was $460,800.

In
September 2001, the Company placed 1,500,000 of unregistered shares of its common stock into an escrow account in anticipation of receiving a loan, which was to be
collateralized by the shares of common stock. The loan transaction was never consummated, but in October 2001 the shares were illegally transferred out of the escrow account by a third party to
a foreign jurisdiction. Subsequent thereto, all but 89,600 shares were returned to the Company and cancelled. The Company, which made several attempts to recover the shares, recorded a $59,000 charge
to operations in the year ended September 30, 2001, representing the market value of the shares not returned. The 89,600 shares were recorded as issued shares in the year ended
September 30, 2002 and $59,000 was credited to stockholders' equity. The Company has not pursued litigation to attempt to recover the remaining 89,600 shares, due to the prohibitive costs of
retaining counsel and instituting an action in a foreign jurisdiction.

Note 16Commitments and Contingencies



The Company leases offices and equipment under various leases expiring through 2007. Monthly payments under these leases are $52,000.

F-39

---

The
following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year, as of September 30, 2003.

For the Years Ending September 30,2004

$
547,0002005


295,0002006


185,0002007


169,000


Rent
expense was $910,000, $801,000 and $697,000 for the years ended September 30, 2003, 2002 and 2001, respectively.



From time to time, the Company is involved in litigation incidental to its business including employment practices claims. There is currently no litigation that
management believes will have a material impact on the Company's financial position.

Note 17Temporary Equity (Put Options Liability)

Temporary equity-put options consist of the following as of September 30, 2003 and 2002:

Put options on 400,000 shares of the Company's Common Stock issued in connection with the acquisition of Source One (see Note 2)

$
800,000Put options on 20,000 shares of the Company's Common Stock issued in connection with a loan payable (see Note 9)


23,000$
823,000


Pursuant
to SFAS No. 150, the put options are classified as a liability at September 30, 2003. Prior thereto, they were presented between liabilities and stockholders'
equity.

On
July 29, 2003, the Company received written notification from Source One that it was exercising its option which requires the Company to buy back 400,000 shares of its Common
Stock at $2 per share. The Company had thirty days from the receipt of the notification, unless otherwise agreed to in writing, to pay the $800,000. The Company is attempting to negotiate an
arrangement, which would permit the Company to pay this amount over an extended period of time or upon receipt of financing. No assurance can be given that Source One will agree to such an agreement.

Note 18Stock Options and Warrants

The Company currently has in place four stock option plans, the 1999 Equity Incentive Plan ("1999 Plan"), the 2000 Equity Incentive Plan ("2000 Plan"), the 2001
Equity Incentive Plan ("2001 Plan"), and the 2002 Equity Incentive Plan ("2002 Plan") (collectively the "Equity Incentive Plans" or the "Plans"). The terms of these Plans are substantially similar.
The aggregate number of shares reserved for issuance under each of the Plans and the shares issued and vested as September 30, 2003 are, respectively, as follows:

500,000 shares authorized, 190,478 issued, 159,228 vested



1999 Plan500,000 shares authorized, 270,000 issued, 210,000 vested



2000 Plan1,000,000 shares authorized, 800,000 issued, 800,000 vested



2001 Plan5,000,000 shares authorized, 4,234,000 issued, 4,202,000 vested



2002 Plan


F-40

---

In
addition, in 2000, the Company issued to the Chief Executive Officer of the Company, options to acquire 1,000,000 shares at $6.00 per share. These options have a ten-year
term and are exercisable at the earlier of five years or when the Company achieves earnings of $1.00 per share in a fiscal year. These options will be forfeited if the Chief Executive Officer leaves
the employment of the Company.

The
Company has also issued 1,270,000 under option agreements with officers of the Company.

A
summary of the Company's stock option activity and related information for the years ended September 30 follows:

Options

Weighted Average
Exercise PriceOutstanding at September 30, 2000

1,987,205

$
5.01Granted

1,900,000


2.05Canceled

(279,464
)

4.08Exercised




Outstanding at September 30, 2001

3,607,741


3.52Granted

3,659,000


.66Canceled

(1,010,392
)

2.49Exercised




Outstanding at September 30, 2002

6,256,349

$
2.01Granted

1,788,460


.23Canceled

(280,331
)

1.30Exercised




Outstanding at September 30, 2003

7,764,478

$
1.63Exercisable at September 30, 2003

6,641,228

$
.92


The
exercise prices range from $.23 to $6.00 per share.

The
weighted-average fair value of options granted was $.19, $.37 and $1.40 in the years ended September 30, 2003, 2002 and 2001, respectively.

Following
is a summary of the status of stock options outstanding at September 30, 2003:

|Outstanding Options |       | Exercisable Options
|------------------- | ----- | -------------------
|
|$                   | .23   |                    
|                    | .65   |                    
|                    | .75   |                    
|                    | 1.00  |                    
|                    | 1.10  |                    
|                    | 3.00  |                    
|                    | 5.625 |                    
|                    | 6.00  |                    
|                    |       |                    
|                    |       |                    

F-41

---

The
Company has issued the following warrants:

Number of Warrants

Price Per Share

Expiring In130,000

$
8.70

200466,667


7.50

200465,000


4.00

200510,000


5.00

200520,000


6.00

200526,667


0.75

200650,000


5.00

2006100,000


7.50

2006200,000


1.00

200730,000


5.00

200775,000


0.3510

2006


The
Company issued 130,000 of the warrants to its underwriters in connection with the Company's Initial Public Offering and 485,000 warrants to investors and consultants in connection
with private placements. The balance of the warrants has been issued in exchange for services rendered to the Company.

A
summary of the Company's warrant activity and related information for the years ended September 30 follows:

Warrants

Weighted Average
Exercise PriceOutstanding at September 30, 2000

291,667

$
7.07Granted

166,667


5.27Canceled




Exercised




Outstanding at September 30, 2001

458,334


6.50Granted

240,000


1.52Canceled




Exercised




Outstanding at September 30, 2002

698,334

$
4.91Granted

75,000


.35Canceled




Exercised




Outstanding at September 30, 2003

773,334

$
4.47


The
exercise prices range from $.35 to $8.70 per share.

The
weighted-average fair value of warrants granted was $.26, $.29 and $.59 in the years ended September 30, 2003, 2002 and 2000, respectively.

Note 19Major Customers

The Company had no customers who accounted for more than 10% of total revenues for the years ended September 30, 2003, 2002 and 2001. Major customers are
those who account for more than 10% of total revenues.

F-42

---

Note 20Retirement Plans

The Company maintains two 401(k) savings plans for its employees. The terms of the plan define qualified participants as those with at least three months of
service. Employee contributions are discretionary up to a maximum of 15% of compensation. The Company can match up to 20% of the employees' first 5% contributions. The Company's 401(k) expense for the
years ended September 30, 2003, 2002 and 2001 was $-0-, $8,000 and $50,000, respectively.

Note 21Private Placements

In June 2001, the Company entered into an agreement with an investment banker to raise $1,200,000 through the sale of the Company's stock through private
placements at a price per share calculated at a 30% discount to the 20-day average of the mean between the closing bid and asked prices. The agreement provided that the Company pays a
placement fee to the investment banker of 10% of the gross proceeds received from the private placements and also issues five-year warrants equal to 10% of the number of shares sold at an
exercise price equal to the price per share of the private placement. In addition, the Company was to pay the investment banker's expenses in connection with the agreement, not to exceed $50,000.
During the years ended September 30, 2002 and 2001, the Company sold 100,002 and 166,667 shares, respectively, at $.75 per share under this agreement. In connection therewith, the Company paid
$91,750 and $16,250 to the investment banker and issued warrants to purchase 10,000 and 16,667 shares of the Company's common stock in the years ended September 30, 2002 and 2001, respectively.

For
the years ended September 30, 2002 and 2001, private placements resulted in the issuance of 277,724 and 1,449,666 shares of common stock, respectively (see Notes 4, 10 and
14).

In
the year ended September 30, 2001, the Company issued 1,458,933 shares of Series A Preferred Stock. (see Note 4) Additionally, for the years ended
September 30, 2003 and September 30, 2002, private placements and exchanges resulted in the issuance of 263,300 and -0- shares of Series B Preferred Stock,
16,683 and 18,839 shares of Series E Preferred Stock, 10,000 and 0 shares of Series F Preferred Stock, and 5,000 and -0- shares of Series H Preferred
Stock, respectively (see Note 14).

Note 22Selected Quarterly Financial Data (unaudited)

|                               |                                                                        | First Quarter           |       | Second Quarter |      | Third Quarter |            | Fourth Quarter |  
|------------------------------ | ---------------------------------------------------------------------- | ----------------------- | ----- | -------------- | ---- | ------------- | ---------- | -------------- | -
|Year ended September 30, 2003: |                                                                        |                         |       |                |      |               |            |                |  
|                               | Revenues from continuing operations                                    |                         | $     | 14,611,085     |      | $             | 19,056,373 |                | $
|                               | Gross profit from continuing operations                                |                         |       | 2,486,814      |      |               | 2,706,150  |                |  
|                               | Net earnings (loss) from discontinued operations                       |                         |       | 40,809         |      |               | (459,026   | )              |  
|                               | Net (loss) from continuing operations                                  |                         |       | (1,097,308     | )    |               | (1,777,332 | )              |  
|                               | Net (loss) attributable to common stockholders                         |                         |       | (1,056,499     | )    |               | (2,236,358 | )              |  
|                               | Basic earnings (loss) per share attributable to common stockholders:   |                         |       |               |      |               | (.03       | )              |  
|                               |                                                                        | Continuing operations   |       |                | (.07 | )             |            | (.10           | )
|                               |                                                                        | Discontinued operations |       |                | (.07 | )             |            | (.13           | )
|                               |                                                                        |                         | Total |                |      |               |            |                |  
|                               | Diluted earnings (loss) per share attributable to common stockholders: |                         |       |               |      |               | (.03       | )              |  
|                               |                                                                        | Continuing operations   |       |                | (.07 | )             |            | (.10           | )
|                               |                                                                        | Discontinued operations |       |                | (.07 | )             |            | (.13           | )
|                               |                                                                        |                         | Total |                |      |               |            |                |  

F-43

---

|                               |                                                                        | First Quarter           |       | Second Quarter |      | Third Quarter |            | Fourth Quarter |    
|------------------------------ | ---------------------------------------------------------------------- | ----------------------- | ----- | -------------- | ---- | ------------- | ---------- | -------------- | ---
|Year ended September 30, 2002: |                                                                        |                         |       |                |      |               |            |                |    
|                               | Revenues from continuing operations                                    |                         | $     | 8,033,201      |      | $             | 11,814,283 |                | $  
|                               | Gross profit from continuing operations                                |                         |       | 1,768,993      |      |               | 1,989,244  |                |    
|                               | Net earnings (loss) from discontinued operations                       |                         |       | 149,958        |      |               | 1,341,988  |                |    
|                               | Net (loss) from continuing operations                                  |                         |       | (934,635       | )    |               | (1113,432  | )              |    
|                               | Net (loss) attributable to common stockholders                         |                         |       | (784,677       | )    |               | 228,556    |                |    
|                               | Basic earnings (loss) per share attributable to common stockholders:   |                         |       |                |      |               |            |                |    
|                               |                                                                        | Continuing operations   |       |                | (.10 | )             |            | (.11           | )  
|                               |                                                                        | Discontinued operations |       |                | .02  |               |            | .13            |    
|                               |                                                                        |                         | Total |                |      | (.08          | )          |                | .02
|                               | Diluted earnings (loss) per share attributable to common stockholders: |                         |       |                |      |               |            |                |    
|                               |                                                                        | Continuing operations   |       |                | (.10 | )             |            | (.11           | )  
|                               |                                                                        | Discontinued operations |       |                | .02  |               |            | .13            |    
|                               |                                                                        |                         | Total |                |      | (.08          | )          |                | .02

|                               |                                                                        | First Quarter           |       | Second Quarter |     | Third Quarter |            | Fourth Quarter |     
|------------------------------ | ---------------------------------------------------------------------- | ----------------------- | ----- | -------------- | --- | ------------- | ---------- | -------------- | ----
|Year ended September 30, 2001: |                                                                        |                         |       |                |     |               |            |                |     
|                               | Revenues from continuing operations                                    |                         | $     | 9,871,007      |     | $             | 6,349,223  |                | $   
|                               | Gross profit from continuing operations                                |                         |       | 2,811,290      |     |               | 1,522,197  |                |     
|                               | Net earnings (loss) from discontinued operations                       |                         |       | 160,570        |     |               | (107,470   | )              |     
|                               | Net earnings (loss) from continuing operations                         |                         |       | 152,929        |     |               | (2,045,178 | )              |     
|                               | Net earnings (loss) attributable to common stockholders                |                         |       | 313,499        |     |               | (2,152,648 | )              |     
|                               | Basic earnings (loss) per share attributable to common stockholders:   |                         |       |                |     |               |            |                |     
|                               |                                                                        | Continuing operations   |       |                | .02 |               |            | (.36           | )   
|                               |                                                                        | Discontinued operations |       |                | .03 |               |            | (.02           | )   
|                               |                                                                        |                         | Total |                |     | .05           |            |                | (.38
|                               | Diluted earnings (loss) per share attributable to common stockholders: |                         |       |                |     |               |            |                |     
|                               |                                                                        | Continuing operations   |       |                | .02 |               |            | (.36           | )   
|                               |                                                                        | Discontinued operations |       |                | .03 |               |            | (.02           | )   
|                               |                                                                        |                         | Total |                |     | .05           |            |                | (.38

Note 23Subsequent Events



F-44

---





Stratus Services Group, Inc.        Schedule IIValuation and Qualifying Accounts

|Allowance for Doubtful Accounts |      | Balance at
beginning of
period |   | Charged to
bad debt
expense(3) |  | Other(1) |           | Deductions
(Write-offs
of bad debts) |   | Balance at
end of period
|------------------------------- | ---- | ------------------------------ | - | ------------------------------ |  | -------- | --------- | ------------------------------------ | - | ------------------------
|September 30:                   |      |                                |   |                                |  |          |           |                                      |   |                         
|                                | 2003 |                                | $ | 1,742,000                      |  | $        | 875,000   |                                      | $ |                         
|                                | 2002 |                                |   | 551,000                        |  |          | 1,650,000 |                                      |   |                        
|                                | 2001 |                                |   | 255,000                        |  |          | 661,000   |                                      |   | 30,000                  
|
|September 30:                   |      |                                |   |                                |  |          |           |                                      |   |                         
|                                | 2003 |                                | $ |                               |  | $        |          |                                      | $ |                        
|                                | 2002 |                                |   |                               |  |          |          |                                      |   |                        
|                                | 2001 |                                |   | 30,000                         |  |          |          |                                      |   | (30,000                 
|
|September 30:                   |      |                                |   |                                |  |          |           |                                      |   |                         
|                                | 2003 |                                | $ |                               |  | $        |          |                                      | $ |                        
|                                | 2002 |                                |   |                               |  |          |          |                                      |   |                        
|                                | 2001 |                                |   | 663,000                        |  |          |          |                                      |   |                        
|
|September 30:                   |      |                                |   |                                |  |          |           |                                      |   |                         
|                                | 2003 |                                | $ | 5,269,000                      |  | $        | 2,353,000 |                                      | $ |                        
|                                | 2002 |                                |   | 2,914,000                      |  |          | 2,355,000 |                                      |   |                        
|                                | 2001 |                                |   | 598,000                        |  |          | 2,316,000 |                                      |   |                        

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F-45

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