UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
For the quarterly period ended March 31, 2007
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15789

STRATUS SERVICES GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware		22-3499261
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
500 Craig Road, Suite 201, Manalapan, New Jersey 07726
149 Avenue at the Common, Shrewsbury, New Jersey 07702
(Address of principal executive offices)
(732) 866-0300
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.04 par value
(Title of class)

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

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

~~Yes~~ Large Accelerated Filer o ~~No ý~~ Accelerated Filer o Non-Accelerated Filer T

~~The~~Indicate ~~number~~ by ofcheck ~~shares~~mark ofwhether ~~Common~~the ~~Stock,~~registrant ~~$.04~~is ~~par~~a ~~value,~~shell ~~outstanding~~company (as ofdefined ~~August~~in Rule ~~12, 2005~~ 12b-2 ~~was~~of ~~17,117,856~~the Exchange Act). Yes o No x

The number of shares of Common Stock, $.04 par value, outstanding as of May 9, 2007 was 67,568,617.

STRATUS SERVICES GROUP, INC.

Condensed Consolidated Balance Sheets

		June 30,		September 30,
Assets		2005		2004
(Unaudited)
Current assets
Cash	$	34,280	$	735,726
Accounts receivable-less allowance for doubtful accounts of $2,539,000
and $2,038,000		12,940,023		14,618,155
Unbilled receivables		1,847,559		2,119,836
Notes receivable (current portion)		42,852		32,683
Prepaid insurance		1,042,985		1,929,056
Prepaid expenses and other current assets		372,841		589,421
		16,280,540		20,024,877
Notes receivable (net of current portion)		52,916		74,269
Note receivable - related party		¾		122,849
Property and equipment, net of accumulated depreciation		497,870		597,416
Intangible assets, net of accumulated amortization		752,036		1,081,936
Goodwill		5,816,353		5,816,353
Other assets		153,381		189,475
	$	23,553,096	$	27,907,175
Liabilities and Stockholders’ Equity (Deficiency)
Current liabilities
Loans payable (current portion)	$	112,090	$	149,091
Loans payable - related parties (current portion)		111,489		196,646
Notes payable - acquisitions (current portion)		559,095		955,105
Line of credit		9,929,677		11,029,070
Cash overdraft		20,348		24,492
Insurance obligation payable		170,704		134,975
Accounts payable and accrued expenses		4,827,453		5,574,852
Accounts payable - related parties		2,917,133		3,512,073
Accrued payroll and taxes		295,913		1,155,426
Payroll taxes payable		3,573,399		5,153,146
Series A redemption payable		300,000		250,000
Put options liability		650,000		673,000
Series I convertible preferred stock (including unpaid dividends of
$235,468 and $40,806)		2,412,968		2,218,306
		25,880,269		31,026,182
Loans payable - related parties (net of current portion)		¾		42,929
Notes payable - acquisitions (net of current portion)		1,220,770		1,305,285
Payroll taxes payable		661,546		¾
Convertible debt		40,000		40,000
		27,802,585		32,414,396
Commitments and contingencies
Stockholders’ equity (deficiency)
Preferred stock, $.01 par value, 5,000,000 shares authorized
Series E non-voting convertible preferred stock, $.01 par value,
247 and 572 shares issued and outstanding, liquidation preference
of $24,700 (including unpaid dividends of $-0- and $1,500)		24,700		58,700

(Unaudited)

	March 31,		September 30,
Assets	2007		2006

Current assets
Cash	$	16,412	$	84,881
Accounts receivable-less allowance for doubtful accounts of $75,000
and $75,000		958,365		815,463
Unbilled receivables		126,552		126,191
Notes receivable		-		80,000
Due from related party		121,764		499,264
Prepaid insurance		35,427		12,244
Prepaid expenses and other current assets		275,852		244,662
		1,534,372		1,862,705

Property and equipment, net of accumulated depreciation		190,099		145,727
Other assets		6,350		6,350
	$	1,730,821	$	2,014,782

Liabilities and Stockholders’ Equity (Deficiency)
Current liabilities
Loans payable (current portion)	$	73,464	$	72,477
Loans payable - related parties		106,721		87,721
Notes payable - acquisitions (current portion)		237,335		203,663
Note payable - related party (current portion)		423,271		265,308
Line of credit		740,817		596,950
Insurance obligation payable		16,797		7,348
Accounts payable and accrued expenses		3,723,155		3,737,712
Accrued payroll and taxes		155,720		107,204
Payroll taxes payable		3,377,316		3,823,710
Series A redemption payable		300,000		300,000
		9,154,596		9,202,093

Loans payable (net of current portion)		44,124		-
Notes payable - acquisitions (net of current portion)		366,366		476,017
Note payable - related party (net of current portion)		193,579		351,542
Convertible debt		40,000		40,000
		9,798,665		10,069,652
Commitments and contingencies

Stockholders’ equity (deficiency)
Preferred stock, $.01 par value, 5,000,000 shares authorized

See notes to condensed consolidated financial statements

Series F voting convertible preferred stock, $.01 par value, 6,000
shares issued and outstanding, liquidation preference of $600,000
(including unpaid dividends of $83,500 and $72,000)		683,500			672,000
(including unpaid dividends of $112,000 and $91,000)		712,000			691,000
Common stock, $.04 par value, 100,000,000 shares authorized; 17,117,854
Common stock, $.04 par value, 500,000,000 shares authorized; 67,568,617
and 16,822,854 shares issued and outstanding		684,714			672,914
and 65,479,756 shares issued and outstanding		2,702,745			2,619,190
Additional paid-in capital		169,~~946~~343,~~031~~215			169,~~930~~407,~~831~~238
Accumulated deficit		(2220,~~588~~825,~~434~~804	)		(2220,~~841~~772,~~666~~298	)
Total stockholders’ equity (deficiency)		(48,~~249~~067,~~489~~844	)		(48,~~507~~054,~~221~~870	)
	$	231,~~553~~730,~~096~~821		$	272,~~907~~014,~~175~~782

See notes to condensed consolidated financial statements

STRATUS SERVICES GROUP, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						~~Nine~~Six Months Ended
	June 30,						June 30,
	March 31,						March 31,
		2005			2004			2005			2004
		2007			2006			2007			2006
Revenues	$	271,~~257~~810,~~446~~705		$	271,~~637~~190,~~948~~086		$	833,~~270~~673,~~261~~559		$	722,~~063~~423,~~722~~944
Cost of revenues		23,519,638			25,269,607			71,676,550			63,724,575
Cost of revenues ($-0-, $90,138, $-0-and $90,138 to related parties)		1,251,101			871,568			2,524,904			1,693,824
Gross Profit		3,737,808			2,368,341			11,593,711			8,339,147
Gross profit		559,604			318,518			1,148,655			730,120
Selling, general and administrative expenses		4726,~~177,662~~358			3761,~~579,331~~471			121,~~231~~374,~~687~~561			92,~~484~~007,~~996~~504
Other charges		243,084			¾			416,345			¾
Operating (loss) from continuing operations		(166,754	)		(442,953	)		(225,906	)		(1,277,384	)
Operating loss from continuing operations		(682,938	)		(1,210,990	)		(1,054,321	)		(1,145,849	)
Interest expense		(56,249	)		(84,457	)		(118,672	)		(383,808	)
Interest expense		(404,469	)		(1,160,740	)		(1,262,503	)		(2,153,622	)
Other income (expense)		36,386			38,572			14,578			(18,737	)
Other income (expense) (net)		(23,983	)		30,849			(46,810	)		19,265
(Loss) from continuing operations		(186,617	)		(488,838	)		(330,000	)		(1,679,929	)
Loss from continuing operations		(1,111,390	)		(2,340,881	)		(2,363,634	)		(3,280,206	)
Discontinued operations - (loss) from discontinued operations		-			(200,000	)		-			(307,044	)
Discontinued operations - earnings from
Gain on sale of discontinued operations (net)		100,635			220,284			276,494			3,376,726
discontinued operations		81,170			25,883			377,758			60,117
Net earnings (loss)		(85,982	)		(468,554	)		(53,506	)		1,389,753
Gain on sale of discontinued operations to related party		2,239,108			¾			2,239,108			¾
Dividends on preferred stock		(10,500	)		(10,500	)		(21,000	)		(21,000	)
Net earnings (loss)		1,208,888			(2,314,998	)		253,232			(3,220,089	)
Net earnings (loss) attributable to common stockholders	$	(96,482	)	$	(479,054	)	$	(74,506	)	$	1,368,753
Dividends on preferred stock		(10,500	)		(81,898	)		(31,500	)		(1,330,655	)
Net earnings (loss) per share attributable to common stockholders
Net earnings (loss) attributable to common stockholders	$	1,198,388		$	(2,396,896	)	$	221,732		$	(4,550,744	)
Net earnings (loss) per share attributable
to common stockholders
Basic:
(Loss) from continuing operations	$	~~(.07~~-	)	$	(.3901	)	$	~~(.14~~-	)	$	(.7906	)
Earnings from discontinued operations		.14			.01			.15			.01
Earnings (loss) from discontinued operations		-			-			-			.11
Net earnings (loss)	$	~~.07~~-		$	(.3801	)	$	~~.01~~-		$	(.7805	)
Diluted:
(Loss) from continuing operations	$	~~(.05~~-	)	$	(.3901	)	$	~~(.13~~-	)	$	(.7906	)
Earnings from discontinued operations		.11			.01			.14			.01
Earnings (loss) from discontinued operations		-			-			-			.11
Net earnings (loss)	$	~~.06~~-		$	(.3801	)	$	~~.01~~-		$	(.7805	)
Weighted average shares outstanding per common share
Basic		1765,~~062~~573,~~909~~033			636,~~237~~055,~~144~~682			1665,~~905~~526,~~693~~870			528,~~845~~158,~~026~~364
Diluted		2065,~~874~~573,~~831~~033			636,~~237~~055,~~144~~682			1865,~~287~~526,~~060~~870			528,~~845~~689,~~026~~714

See notes to condensed consolidated financial statements

STRATUS SERVICES GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	Six Months Ended
		June 30, 2005			June 30, 2004
	March 31,
		2007			2006
Cash flows from (used in) operating activities
Net (loss) from continuing operations	$	(2,363,634	)	$	(3,280,206	)
Net earnings (loss)	$	(53,506	)	$	1,389,753
Net earnings from discontinued operations		2,616,866			60,117
Adjustments to reconcile net earnings to net cash used by operating activities
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation		38,799			73,340
Depreciation		251,399			300,222
Amortization		-			41,902
Amortization		319,988			317,021
Stock compensation		-			92,000
Provision for doubtful accounts		500,000			525,000
Gain on sale of discontinued operations		(276,494	)		(3,376,726	)
Deferred financing costs amortization		1,748			804
Imputed interest		21,654			15,254
Gain on sale of discontinued operations		(2,239,108	)		¾
Dividends on preferred stock		-			163,625
Restricted stock award expense		42,000			¾
Intrinsic value of beneficial conversion feature of convertible preferred stock		-			1,674
Accrued interest		(36,695	)		839,615
Imputed interest		55,920			62,411
Dividends on preferred stock		194,662			396,789
Changes in operating assets and liabilities
Accounts receivable		1(143,~~400,409~~263	)		(210,~~645~~262,~~085~~020	)
Prepaid insurance		~~886~~(23,~~071~~183	)		12185,~~272~~639
Prepaid expenses and other current assets		82,~~035~~303			76238,~~109~~930
Other assets		~~34,346~~-			~~(43~~23,~~295~~825	)
Insurance obligation payable		359,~~729~~449			~~136~~(99,~~384~~903	)
Accrued payroll and taxes		~~(859~~48,~~513~~516	)		~~264~~(194,~~545~~962	)
Payroll taxes payable		(~~918~~446,~~201~~394	)		~~372~~(437,~~263~~725	)
Accounts payable and accrued expenses		2(46,~~057,675~~499	)		2(1,~~591~~508,~~722~~853	)
Total adjustments		1,734,465			3,206,777
Accrued interest		22,099			20,578
		1,987,697			(13,312	)
Total adjustments		(793,013	)		5,300,618
Cash flows from (used in) investing activities
		(846,519	)		6,890,371
Purchase of property and equipment		(182,706	)		(52,954	)
Cash flows from investing activities
Payments for business acquisitions		(136,000	)		¾
Purchase of property and equipment		(29,689	)		(27,582	)
Collection of notes receivable		11,184			16,748
Cash received in connection with sale of discontinued operations
Payments in connection with sale of discontinued operations		(322,952	)		¾
(including $377,500 and $460,736 from a related party) (net of $10,000
		(630,474	)		(36,206	)
in costs in 2006)		650,901			702,581
Cash flows from financing activities
Collection of notes receivable		-			6,609
Payments of registration costs		¾			(479,189	)
		621,212			681,608
Proceeds from loans payable		¾			12,337
Cash flows from (used in) financing activities
Payments of loans payable		(76,600	)		(223,357	)
Net proceeds from (repayments of) line of credit		143,867			(6,071,490	)
Proceeds from loans payable - related parties		650,000			¾
Payments of loans payable		(8,371	)		-
Payments of loans payable - related parties		(778,087	)		(202,583	)
Proceeds from loans payable - related parties		120,000			-
Payments of notes payable - acquisitions		(696,445	)		(465,844	)
Payments of loans payable - related parties		(101,000	)		(9,002	)
Net proceeds from (repayment of) line of credit		(1,099,393	)		2,154,806
Payments of note payable - related party		-			(1,425,000	)
Redemption of preferred stock		(34,000	)		¾
Payments of notes payable - acquisitions		(7,033	)		(38,999	)
Cash overdraft		(4,144	)		(683,078	)
Proceeds from exercise of warrants		9,375			-
Dividends paid		(20,000	)		¾
Cash overdraft		-			(14,731	)
		(2,058,669	)		113,092
		156,838			(7,559,222	)
Net change in cash		(~~701~~68,~~446~~469	)		6312,~~574~~757
Cash - beginning		~~735~~84,~~726~~881			5340,~~753~~784
Cash - ending	$	3416,~~280~~412		$	~~117~~53,~~327~~541

See notes to condensed consolidated financial statements


Supplemental disclosure of cash paid
Interest	$	96,573		$	342,987
Schedule of noncash investing and financing activities
Sale of discontinued operations:
Gain on sale	$	276,494		$	3,156,442
Net assets sold		-			1,683,783
Cancellation of accounts payable - related parties (net)		-			(3,541,364	)
Due from related party		377,500			(1,250,000	)
Accrued earn-out		(3,093	)		-
Accrued expenses		-			50,000
Net cash received	$	650,901		$	98,861

Issuance of common stock upon conversion of convertible preferred stock	$	-		$	24,366
Cumulative dividends on preferred stock	$	21,000		$	21,000

Assignment of note receivable in exchange for notes payable - acquisitions	$	80,000		$	-

See notes to condensed consolidated financial statements

STRATUS SERVICES GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
		June 30, 2005			June 30, 2004
Supplemental disclosure of cash paid:
Interest	$	1,014,536		$	958,893
Schedule of noncash investing and financing activities:
Business acquired:
Fair value of net assets acquired	$	358,500		$	¾
Less: cash paid		(136,000	)		¾
Less: common stock issued		(16,500	)		¾
Liabilities assumed	$	206,000		$	¾
Sale of discontinued operations:
Gain on sale	$	(2,239,108	)	$	¾
Net assets sold		(377,265	)		¾
Cancellation of accounts payable - related parties		3,315,719			¾
Cancellation of amounts due from related party		(376,394	)		¾
Cash paid	$	322,952		$	¾
Issuance of common stock upon conversion of convertible preferred stock	$	¾		$	572,500
Issuance of common stock to a related party in exchange for accounts payable
and accrued expenses	$	¾		$	57,000
Cumulative dividends on preferred stock	$	31,500		$	1,330,665
Accrued interest converted to loan payable	$	21,600		$	¾
Put option liability converted to loan payable	$	18,000		$	¾

See notes to condensed consolidated financial statements

STRATUS SERVICES GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

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

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

~~The~~Until ~~following~~ December ~~summarizes~~2005, ~~revenues:~~Stratus Services Group, Inc. together with its 51%-owned consolidated joint venture, (the “Company”) was a national provider of staffing and productivity consulting services. Prior to December 2005, the Company operated a network of 29 offices in 7 states. In December 2005, the Company completed a series of asset sales transactions pursuant to which it sold substantially all of the assets that it used to conduct its staffing services business (see Note 5). Since such time, the Company has been focused on expanding its information technology staffing solutions business, which is conducted through its 51% owned consolidated joint venture, Stratus Technology Services, LLC (“STS”) through offices located in New Jersey and Florida (see Note 10).

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
		2005		2004		2005		2004
Staffing	$	27,244,903	$	27,610,858	$	83,235,754	$	71,998,098
Payrolling		12,543		27,090		34,507		65,624
	$	27,257,446	$	27,637,948	$	83,270,261	$	72,063,722

Unlike traditional staffing services, under a payrolling arrangement, the Company’s customer recruits and identifies individuals for the Company (or a third party to the extent that the Company outsources its payroll functions) to hire to provide services to the customer. The Company (or a third party to the extent that the Company outsources its payroll functions) 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.

NOTE 2 - LIQUIDITY

At ~~June~~ March 30 31, ~~2005~~2007, the Company had limited liquid resources. Current liabilities were $259,~~880~~154,~~269~~596 and current assets were $161,~~380~~534,~~540~~372. The difference of $97,~~499~~620,~~729~~224 is a a working capital deficit, which is primarily the result of losses incurred ~~from~~ during the ~~year~~last ~~ended~~several ~~September~~years. ~~30,~~These ~~2002 through March 31~~factors, ~~2005.~~among ~~The Company entered into an Amended and Restated Forbearance Agreement with its lender on August 11~~others, ~~2005~~ ~~(see~~indicate ~~Note~~that ~~9). If~~ the Company ~~cannot obtain an alternate source of funding~~ ~~by the expiration of the forbearance period, i.e. by August 26, 2005, if not further extended, it~~ may ~~adversely affect the Company’s cash flow and there can~~ be no assurance that the Company’s lender will not pursue all remedies available to it, which could include the imposition of insolvency proceedings. Additionally, if the Company cannot obtain an extension of the forbearance agreement for payment defaults under its outsourcing agreement with a related party (see Notes 10 and 14), or is unable to cure the payment defaults under the outsourcing agreement, going forward, there can be no assurance that the Company will be able to obtain an alternative outsourcing provider. These conditions raise substantial doubts about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to ~~reflect~~ the ~~possible~~ ~~future effect on the~~ recoverability and classification of ~~assets or~~ ~~the amounts~~ liabilities ~~and~~that ~~classification~~might ofbe ~~liabilities~~necessary ~~that~~should ~~may~~the ~~result~~Company ~~from~~be ~~the~~unable ~~outcome~~to continue of as ~~this~~ a ~~uncertainty~~going concern.

~~The~~Management recognizes that the Company’s continuation ofas ~~existence~~a going concern is dependent upon ~~the continued cooperation~~ of its ~~creditors, its~~ ability to generate sufficient cash flow to ~~meet~~allow it to satisfy its ~~continuing~~ obligations on a timely basis, to fund the ~~operating~~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~~included closing ~~and selling~~ branches that were ~~are~~ not profitable, consolidating branches and reductions in staffing and other selling, ~~cost~~general ofand ~~revenues~~administrative expense, and ~~other~~most ~~selling~~significantly, the asset sales transactions that were completed in December 2005 (see Note 5).

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

NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS

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

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, or the Company’s fiscal year ending September 30, 2009. The Company does not expect the adoption of this new standard to have a material impact on its consolidated financial position, results of operations or cash flow.

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

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

NOTE 4 - EARNINGS/LOSS PER SHARE

Basic “Earnings Per Share” (“EPS”) excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS assumes conversion of dilutive options and warrants, and the issuance of common stock for all other potentially dilutive equivalent shares outstanding. There were no dilutive shares for the three months ended March 31, 2007 and 2006. There were -0- and 531,350 dilutive shares for the six months ended March 31, 2007 and 2006, respectively. Outstanding common stock options and warrants not included in the computation of earnings per share for the three and six months ended March 31, 2007 and 2006, totaled 17,221,153 and 18,611,403, respectively. These options and warrants were excluded because their inclusion would have an anti-dilutive effect on earnings per share.

NOTE 5 - DISCONTINUED OPERATIONS

In December 2005, the Company completed the following series of transactions pursuant to which it sold substantially all of the assets used to conduct its staffing services business, other then the IT staffing solutions business that is conducted through the Company’s 51% owned joint venture, STS.

(i)

On December 2, 2005, the Company completed the sale, effective as of November 21, 2005, of substantially all of the tangible and intangible assets, excluding accounts receivable, of several of its offices located in the Western half of the United States (the “ALS Purchased Assets”) to ALS, LLC (“ALS”), a related party (see Note 11). The offices sold were the following: Chino, California; Colton, California; Los Nietos, California; Ontario, California; Santa Fe Springs, California and the Phoenix, Arizona branches and the Dallas Morning News Account (the “Western Offices”). Pursuant to the terms of an Asset Purchase Agreement between the Company and ALS dated December 2, 2005 (the “ALS Asset Purchase Agreement”), the purchase price for the ALS Purchased Assets is payable as follows:

•

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

•

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

•

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

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

~~general~~(ii) On December 5, 2005, the Company completed the sale, effective as of November 28, 2005 (the “AI Effective Date”), of substantially all of the tangible and intangible ~~administrative~~assets, ~~expenses~~excluding accounts receivable and other certain items, as described below, of three of its California offices (the “AI Purchased Assets”) to Accountabilities, Inc. (AI”). The ~~Company~~offices ~~also~~sold ~~entered~~were ~~into~~the afollowing: ~~Second~~Culver City, ~~Addendum~~California; Lawndale, California and Orange, California (the “Other California Offices”). Pursuant to ~~Outsourcing~~ the terms of an Asset Purchase Agreement between ~~with~~the aCompany ~~related~~and ~~party~~AI dated December 5, 2005 (~~see~~the ~~Note~~“AI 13Asset Purchase Agreement”), ~~which~~AI ~~reduced~~has ~~certain rates~~agreed ~~charged~~to bypay to the ~~related~~Company ~~party~~an earnout amount equal to two percent of the sales of the Other California Offices for the first twelve month period after the AI Effective Date; one percent of the sales of the Other California Offices for the second twelve month period after the AI Effective Date; and one percent of the sales of the Other California Offices for the third twelve month period from the AI Effective Date. In addition, a Demand Subordinated Promissory Note between the Company and AI dated September 15, 2005, which had an outstanding principal balance of $125,000 at the time of closing was deemed paid and marked canceled.

~~The~~Certain ~~Company~~ assets ~~continues~~held toby ~~pursue~~the other ~~sources~~California ofOffices ~~equity~~were orexcluded ~~long-term~~from ~~debt~~the sale, ~~financings.~~ including ~~The~~cash ~~Company~~and ~~also~~cash ~~continues~~equivalents, toaccounts ~~negotiate~~receivable ~~payment plans~~ and ~~other~~the Company’s ~~accommodations~~ rights ~~with~~to ~~its~~receive ~~creditors.~~payments ~~There~~from ~~can~~any ~~be no assurance that these plans will be successfully consummated~~source.

~~The~~ (iii) On December 7, 2005, the Company ~~entered~~completed ~~into~~the asale, ~~Letter~~effective as of ~~Intent~~November ~~with~~28, ~~Humana~~2005 ~~Trans~~(the ~~Services~~“SOP ~~Holding Corp~~Effective Date”), of substantially all of the tangible and intangible assets, excluding accounts receivable and other assets as described below, of several of its Northeastern offices (the “SOP Purchased Assets”) to Source One Personnel, Inc. (“~~Humana~~SOP”). The offices sold were the following: Cherry Hill, New Jersey; New Brunswick, New Jersey; Mount Royal/Paulsboro, New Jersey (~~see~~soon ~~Notes~~to 14be ~~and~~Woodbury 15Heights, New Jersey); Pennsauken, ~~which~~New ~~contemplates~~Jersey; Norristown, ~~among~~Pennsylvania; ~~other~~Fairless ~~things~~Hills, ~~that Humana~~Pennsylvania; ~~will~~New ~~provide~~Castle, aDelaware ~~$500~~and the former Freehold,~~000~~ ~~bridge~~New ~~loan~~Jersey toprofit center (the ~~Company~~“NJ/PA/DE Offices”). The assets of Deer Park, New York, Leominster, Massachusetts, Lowell, Massachusetts and ~~provide~~Athol, ~~new receivable~~Massachusetts ~~financing~~(the or“Earn ~~arrange~~Out aOffices”) ~~line~~were ofalso ~~credit~~purchased (collectively the “NJ/PA/DE Offices” and the “Earn Out Offices” shall be referred to ~~replace~~as the “Purchased Offices”). In addition to the foregoing, the SOP Purchased Assets also included substantially all of the tangible and intangible assets, excluding accounts receivable and other assets as described below, used by the Company’s ~~line~~ in the operation of ~~credit~~its ~~with~~business ~~Capital.~~at Nocertain ~~assurance~~facilities ~~can~~of becertain ~~given~~customers ~~that~~including ~~any~~the following: the Setco facility in Cranbury, New Jersey, the Record facility in Hackensack, New Jersey, the UPS-MI (formerly RMX) facility in Long Island, New York, the UPS-MI (formerly RMX) facility in the State of ~~such~~Connecticut, ~~financing will~~the UPS-MI (formerly RMX) facility in the State of Ohio, the APX facility in Clifton, New Jersey (the “Earn Out On-Site Business”) and the Burlington Coat Factory in Burlington, New Jersey, the Burlington Coat Factory facility in Edgewater Park, New Jersey and the UPS-MI (formerly RMX) facility in Paulsboro, New Jersey (the foregoing business and the “Earn Out On-Site Businesses” shall be ~~obtained~~referred to herein collectively as the “On-Site Businesses”). Pursuant to the SOP Asset Purchase Agreement between the Company and SOP dated December 7, 2005 (the “SOP Asset Purchase Agreement:), the purchase price for the SOP Purchased Assets was payable as follows (the “SOP Purchase Price”):

~~NOTE 3~~• -An ~~REVERSE~~aggregate ~~STOCK~~of ~~SPLIT~~$974,031 of indebtedness owed by the Company to SOP (i) under certain promissory notes previously issued by the Company to SOP and (ii) in connection with a put right previously exercised by SOP with respect to 400,000 shares of our common stock was cancelled.

~~On July 14,~~• ~~2004,~~SOP ~~the~~is ~~Company~~required ~~effected~~to amake ~~one-for-four reverse stock split of~~ the ~~Company’s~~ ~~common~~following ~~stock.~~earn ~~All~~out ~~references~~payments to ~~per~~the ~~share~~Company ~~information~~during ~~and~~ the ~~number of~~three ~~shares~~year ~~issued~~period ~~and~~commencing ~~outstanding~~on ~~for~~the ~~prior~~SOP ~~periods~~Effective ~~have~~Date ~~been adjusted to reflect~~ (the ~~reverse~~“Earn ~~stock~~Out ~~split on a retroactive basis.~~Period”):

~~NOTE 4~~• Two percent of sales (excluding taxes on sales) from the Earn Out Offices and the Earn Out On-Site ~~NEW~~Businesses ~~ACCOUNTING~~for ~~PRONOUNCEMENT~~the initial twelve months of the Earn Out Period.

~~In December~~• ~~2004,~~One ~~the~~percent ~~Financial Accounting Standards Board (“FASB”) issued Statement~~ of ~~Financial~~sales ~~Accounting Standards No. 123~~ (~~revised~~excluding ~~2004),~~taxes ~~“Share-Based Payment”~~on ~~(“SFAS 123R”~~sales). ~~SFAS~~from ~~123R~~the ~~replaces~~Earn ~~SFAS~~Out ~~123~~Offices ~~“Accounting for Stock-Based Compensation”,~~ and ~~supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). SFAS 123R requires that~~ the ~~cost~~Earn ofOut ~~all forms of equity~~On-~~based~~Site ~~compensation~~Businesses granted to employees, excluding employee stock ownership plans, be recognized in a company’s income statement and that such cost be measured at the fair value of the stock options. This statement is effective for financial statements relating to fiscal years beginning after June 15, 2005. The Company expects to adopt SFAS 123R on October 1, 2005, on a prospective basis, which will require recognition of compensation expense for all stock option or other equity - based awards that vest or become exercisable after the ~~effective~~second ~~date.~~twelve ~~The~~months ~~Company does not expect that the adoption~~ of ~~SFAS 123R will have a material impact on~~ the ~~Company’s~~Earn ~~financial position~~Out ~~and results of operations as it relates to employee stock options granted at June 30, 2005~~Period.

~~In May 2005,~~• ~~FASB~~One ~~issued~~percent ~~Statement~~ of ~~Financial~~sales ~~Accounting~~(excluding ~~Standards~~taxes ~~No.~~on ~~154, “Accounting Changes and Error Corrections” (SFAS 154”~~sales). ~~SFAS~~from ~~154~~the ~~requires retroactive~~Earn ~~application~~Out ofOffices aand ~~voluntary~~the ~~change~~Earn inOut accounting principle to prior period financial statements unless it is impracticable. SFAS 154 also requires that a change in method of depreciation, amortization, or depletion for longOn-~~lived,~~Site ~~non-financial~~Businesses ~~assets be accounted~~ for asthe athird ~~change~~twelve inmonths accounting estimate that is affected by a change in accounting principle. SFAS 154 replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements”. The Company believes that adoption of the ~~provisions~~ ofEarn ~~SFAS~~Out ~~154 will not have a material impact on the Company’s consolidated financial statements~~Period.

~~NOTE~~Certain 5 assets -held ~~EARNINGS/LOSS~~by ~~PER~~the ~~SHARE~~Purchased Businesses were excluded from the sale, including cash and cash equivalents, accounts receivable, and the Company’s rights to receive payments from any source.

~~Basic “Earnings Per Share”~~ (~~“EPS”~~iv) ~~excludes~~On ~~dilution~~December ~~and~~7, is2005 ~~computed~~(the by“Closing ~~dividing earnings~~Date”), ~~available~~the toCompany ~~common~~completed ~~stockholders by~~ the ~~weighted-average~~sale ~~number~~ of ~~common~~ ~~shares~~substantially ~~outstanding~~all ~~during~~of the ~~period.~~tangible ~~Diluted~~and ~~EPS~~intangible ~~assumes~~assets, ~~conversion of dilutive~~excluding ~~options~~cash and ~~warrants~~cash equivalents, ~~and~~of ~~the~~two ~~issuance~~ of ~~common~~its ~~stock~~California ~~for~~branch ~~all~~offices ~~other potentially dilutive equivalent shares outstanding. There were 3,811,922 and 1,381,367 dilutive shares for~~ (the ~~three~~“TES ~~and~~Purchased ~~nine~~Assets”) ~~months~~to ~~ended~~Tri-State ~~June~~Employment 30Service, ~~2005, respectively~~Inc. ~~There~~(“TES”). ~~were~~The nooffices ~~dilutive~~sold ~~shares~~were ~~for~~ the ~~three~~following: ~~and~~Bellflower, ~~nine~~California ~~months~~and ~~ended June~~West 30Covina, ~~2004.~~California ~~Outstanding~~(the ~~common~~“California ~~stock~~Branch ~~options~~Offices”). ~~and~~Pursuant ~~warrants~~to ~~not included in~~ the ~~computation~~ terms of ~~earnings~~an ~~per~~Asset ~~share~~Purchase ~~for~~Agreement between the ~~three~~Company and ~~nine~~TES ~~months~~dated ~~ended~~December ~~June 30~~7, 2005 ~~totaled~~(the ~~18,611,403.~~“TES ~~These~~Asset ~~options~~Purchase ~~and~~Agreement”), ~~warrants~~TES ~~were~~has ~~excluded~~agreed ~~because~~to ~~their inclusion~~pay ~~would~~to ~~have~~the Company an ~~anti~~earnout ~~dilutive~~amount ~~effect~~as ~~on earnings per share.~~follows:

NOTE 6 - INCOME TAXES

Based upon management’s estimate of the operating results for the year ended September 30, 2005, no provision for income taxes was provided for the three and nine months ended June 30, 2005.

NOTE 7 - DISCONTINUED OPERATIONS

Effective as of June 5, 2005 (the “Effective Date”), the Company sold substantially all of the assets, excluding accounts receivable of its six Northern California offices to ALS, LLC (“ALS”), a related party (see Note 14).

~~The purchase~~• ~~price~~two ~~was~~percent ~~$3,315,719, which represented the balance due by the Company to ALS as~~ of ~~the~~sales ~~close~~ of ~~business on May 3, 2005, less $600,000. Accordingly, on~~ the ~~Effective~~California ~~Date,~~Branch ~~$3,315,719~~Offices ~~due~~ to ~~ALS~~existing ~~was~~clients deemed paid and cancelled. In addition, all amounts due to the Company from ALS as of the Effective Date were deemed paid in full. Such amounts aggregating $376,394 were comprised of a note receivable ($122,849) (see Note 14), accounts receivable ($50,000) and other receivables ($203,545). ALS and the Company’s lender (see Note 10) also entered into a transaction pursuant to which ALS contributed $600,000 in exchange for ~~a junior~~ ~~participation interest (see Note 9) in amounts borrowed under~~ the ~~line of credit.~~first ~~ALS~~twelve ~~will~~month ~~pay~~period toafter the ~~Company~~Closing $600,000 as contingent purchase price, which will be paid to the Company or offset against balances due by the Company to ALS, when ALS has been repaid the junior participation interest and all other amounts due by the Company to ALS are current and paid in full.Date;

~~In connection~~• ~~with~~one ~~the~~percent ~~transaction, the Company and ALS entered into a non-compete and non-solicitation agreement pursuant to which the Company agreed not to compete with ALS with the customers~~ of ~~and~~sales ~~in the geographic area~~ of the ~~Northern~~ California ~~offices,~~Branch ~~and~~Offices ~~ALS agreed not~~ to ~~compete~~existing ~~with~~clients for the ~~Company with respect~~second totwelve ~~certain~~month ~~customers~~period ~~and~~after ~~accounts, including, accounts serviced by~~ the ~~Company’s~~ ~~remaining~~Closing ~~offices,~~Date; ~~for a period of two years.~~and

~~The sale resulted~~• inone apercent ~~gain~~of sales of ~~$2,239,108,~~the ~~computed~~California asBranch ~~follows:~~Offices to existing clients for the third twelve month period after the Closing Date.

Sales price - cancellation of accounts payable - related parties	$	3,315,719
Less costs of sale:
Cancellation of amounts due from ALS		(376,394	)
Other costs (including $75,000 to a related party (see Note 14))		(322,952	)
Balance		2,616,373
Net assets sold		377,265
Gain	$	2,239,108

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

~~Revenues~~On ~~from~~ the Closing ~~sold~~Date, ~~branches~~TES ~~were~~made a payment of $101,~~087~~972,~~390~~521 to the Company’s lender (see Note 6) and ~~$5,209,445~~acquired ~~for~~the lender’s rights to certain of the ~~nine~~Company’s ~~months~~accounts ~~ended June~~ receivable ~~30,~~that ~~2005~~collateralize ~~and~~its ~~2004~~obligation to the lender. As a result of this transaction, ~~respectively~~the Company’s obligations to the lender were reduced by $1,972,521.

~~Assets~~The operating results of ~~the~~ discontinued operations are ~~not~~summarized ~~shown separately on the balance sheet~~ as ~~of September 30, 2004, since they are not material.~~ follows:

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

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2007		2006			2007		2006

Revenues	$	-	$			$	-	$	18,265,587
Cost of revenues		-					-		16,215,630
Gross profit		-					-		2,046,957
Selling, general and administrative expenses		-					-		1,950,622
Operating income		-					-		96,335
Interest expense		-					-		(205,056	)
Other income (expense)		-		(200,000	)		-		(198,323	)
Net income (loss)	$	-	$	(200,000	)	$	-	$	(307,044	)

~~NOTE~~The 8 gain on -sale ~~ACQUISITION~~of discontinued operations is summarized as follows:

Effective as of March 7, 2005, the Company purchased substantially all of the tangible and intangible assets excluding accounts receivable, of Team One Personnel Solutions, LLC (“Team One”), which is comprised of three branch offices in Northern California. These offices provide temporary light industrial and clerical staffing and had strengthened the Company’s presence in the Northern California region. The purchase price was $242,500 of which $20,000 was paid in cash. The balance was comprised of a promissory note for $160,000, payable $7,091 a month, including interest at 6% a year, over 24 months, 50,000 shares of the Company’s Common Stock, and a net liability for unpaid workers’ compensation premium of $46,000. In addition, there was $116,000 of costs to a related party (see Note 14) in connection with the acquisition.

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2007		2006		2007		2006
Sold to:
ALS	$	-	$	-	$	-	$	4,340,459
AI		36,041		92,836		112,614		(204,601	)
SOP		32,967		46,681		72,313		(284,584	)
TES		31,627		80,767		91,567		(414,548	)
		100,635		220,284		276,494		3,436,726

Other costs of sales		-		-		-		(60,000	)
Gain on sale of discontinued operations	$	100,635	$	220,284	$	276,494	$	3,376,726

The ~~aggregate~~ above gain ~~cost~~is comprised of ~~$358,500~~earnout ~~was~~payments ~~allocated~~in ~~$338,500~~the tothree ~~intangible~~and ~~assets~~six ~~and~~months ended March ~~$20~~ 31,~~000~~ to2007 ~~property~~ and ~~equipment.~~three ~~The~~months ~~results~~ended ofMarch ~~operations of the acquisition~~31, ~~which~~ ~~are immaterial to the consolidated operations~~2006, ~~are~~and ~~included~~includes ~~with~~earnout ~~that~~payments of $294,145 in the ~~Company~~six ~~from~~months ~~the~~ended ~~effective~~March ~~date~~31, 2006.

~~These~~NOTE ~~branches~~ 6 ~~were~~- ~~included~~LINE inOF ~~the branches sold June 5, 2005 (see Note 7).~~CREDIT

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

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

~~NOTE~~The 9 Forbearance -Agreement ~~INTANGIBLE~~amended ~~ASSETS~~the Loan Agreement to reduce the maximum credit line to $12,000,000, which, after March 1, 2005 was further reduced by $250,000 per month.

AsOn of August ~~June 30~~ 11, 2005, the Company and ~~September~~the ~~30,~~Lender ~~2004~~entered into an Amended and Restated Forbearance Agreement (the “Amended Forbearance Agreement”) whereby the Lender had again agreed to forbear from accelerating obligations and/or enforcing existing defaults until the earlier to occur of (a) August 26, ~~intangible~~2005 ~~assets~~or ~~consisted~~(b) the date of any Forbearance Default, as defined (the “Forbearance ~~following:~~ Period”).

		June 30, 2005			September 30, 2004
Covenant-not-to-compete	$	17,300		$	144,600
Customer list		1,426,709			1,957,709
		1,444,009			2,102,309
Less: accumulated amortization		(691,973	)		(1,020,393	)
	$	752,036		$	1,081,936

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

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

For the Twelve Months Ending June 30,
2006	$	202,000
2007		156,000
2008		154,000
2009		153,000
2010		88,000

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

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

~~The~~On January 3, 2006, the Company’s ~~has~~consolidated 50% owned joint venture, STS (see Notes 1 and 10), entered into a ~~loan~~factoring and security agreement (the “~~Loan~~ Factoring Agreement”) with aAction ~~lending~~Capital Corporation (“Action”). The Factoring Agreement ~~institution~~ provides ~~whereby~~for the ~~Company~~sale ~~can~~of ~~borrow~~ up to ~~85%~~$1,500,000 of ~~eligible~~acceptable accounts receivable, of STS asto ~~defined,~~Action. ~~not~~Action toreserves ~~exceed~~and ~~the~~withholds ~~lesser~~an ofamount ~~$12~~in ~~million~~a orreserve ~~six times~~account equal to 10% of the ~~Company’s~~ ~~tangible~~face ~~net~~amount ~~worth~~of ~~(as~~accounts ~~defined).~~receivable ~~Borrowings~~purchased under the Factoring ~~Loan~~ Agreement ~~bear~~. ~~interest~~Action athas 3%full ~~above~~recourse against STS including, without limitation, the ~~prime~~right ~~rate~~to ~~and~~charge-back ~~are~~or ~~collateralized~~sell byback ~~substantially~~any accounts receivable, ~~all~~ if not paid within 90 days of the ~~Company’s~~date ~~assets~~of purchase. The ~~prime~~Factoring ~~rate~~Agreement provides atfor ~~June~~STS ~~30,~~to ~~2005~~pay ~~was~~interest ~~6.25~~of prime plus 1%. ~~The~~plus ~~Loan Agreement~~a ~~expires~~monthly fee of .6% on the ~~August~~daily ~~12,~~average ~~2005~~of unpaid advances.

AtThe ~~June~~ prime ~~30,~~ rate ~~2005,~~at ~~the~~March ~~Company~~31, 2007 was ~~in violation of the following covenants under the Loan Agreement:~~8.25%.

~~(i)~~NOTE 7 ~~Failing~~- toPAYROLL ~~meet~~TAX ~~the tangible net worth requirement, (ii) The Company’s Common Stock being delisted from the Nasdaq SmallCap Market, and; (iii) The Company having delinquent state, local or federal taxes.~~LIABILITIES

OnDuring ~~January~~ fiscal 152003, ~~2005,~~ the Company ~~entered~~was ~~into~~notified aby ~~Forbearance~~both ~~Agreement (~~the New Jersey Department of ~~“Forbearance~~ Labor and ~~Agreement”)~~the ~~with~~California ~~its~~Employment ~~lender~~Development Department (the “~~Lender~~EDD”) that, ~~whereby~~if certain payroll delinquencies were not cured, judgment would be entered against the ~~Lender~~Company. As of March 31, 2007, there was still an aggregate of $3.4 million in delinquent payroll taxes outstanding which are included in “Payroll taxes payable” on the balance sheet. Judgment has not been entered against the Company ~~agreed~~ in toCalifornia. ~~forebear~~While ~~from~~judgment ~~accelerating~~has ~~obligations~~been ~~and/or~~entered ~~enforcing~~against ~~existing~~the Company in New ~~defaults~~ Jersey, no actions have been taken to enforce same.

~~The~~On ~~Forbearance~~ January ~~Agreement~~7, ~~amended~~2005, the ~~Loan~~Company ~~Agreement~~entered tointo ~~reduce~~a payment plan agreement with the EDD with ~~maximum~~regard ~~credit~~to the Company’s past due and unpaid unemployment taxes. The Company ~~line~~ is to continue to pay $12,~~000,000,~~500 ~~which~~per ~~was~~week ~~further~~to ~~reduced~~be byfirst ~~$250,000~~applied ~~per~~to ~~month~~its ~~commencing~~unpaid ~~March~~ employment 1,tax ~~2005;~~liability ~~provided~~of $284,046 ~~however~~(as of December 31, ~~that~~2006) infor periods prior to the ~~event~~second ~~that~~quarter ~~the~~2004; ~~amounts~~then ofto ~~the~~second quarter 2004 and third quarter ~~obligation~~ 2004 employment ~~owing~~taxes to the ~~Lender~~extent ~~were~~not ~~reduced~~already ~~below~~paid, then to interest and then to penalties. The weekly payment of $712,500~~,000,~~ ~~then~~is to increase for a three month period following any quarter in which the ~~monthly~~Company’s reported income is above $200,000 ~~reduction~~ based ~~would~~on bea ~~suspended~~percentage ~~unless~~increase ~~and~~tied ~~until~~to the ~~obligations~~amount ~~again~~in ~~exceed~~ excess of $7200,~~500,~~000. The Company believes that consistent with the parties’ intentions when entering into the Plan, inthe gain on sale of discontinued operations, which ~~case~~resulted ~~the~~in no ~~monthly~~cash to ~~reduction~~the Company, would be ~~subject~~excluded tofrom ~~certain further~~reported ~~adjustments~~income.

~~Provided~~NOTE ~~the~~ 8 ~~Company~~- ~~was~~INCOME in compliance with all of the terms and conditions of the Forbearance Agreement, the Lender agreed that it would refrain from exercising its rights and remedies under the Loan Agreement and applicable law until August 12, 2005.TAXES

OnNo ~~August~~ income ~~11,~~ tax ~~2005,~~expense ~~the~~was ~~Company~~recorded ~~and~~in the ~~Lender~~six ~~entered~~months ~~into~~ended anMarch ~~Amended~~31, ~~and~~2006, ~~Restated~~because ~~Forbearance~~ the Company ~~Agreement~~recognized ~~(the~~a ~~“Amended~~deferred ~~Forbearance~~tax ~~Agreement”)~~benefit ~~whereby~~resulting from the ~~Lender~~utilization ~~has~~ of ~~again~~the Company’s ~~agreed~~net tooperating ~~forbear~~loss ~~from accelerating obligations and/or enforcing existing defaults~~carryforwards.

~~The~~NOTE ~~Amended~~ 9 ~~Forbearance~~- ~~Agreement~~PREFERRED ~~provides for the following:~~STOCK

1. The Lender will forbear from exercising its rights and remedies under the Loan Documents, solely with respect to certain Designated Defaults during the period commencing on August 11, 2005, or such other date as may be mutually agreed upon in writing by the Parties, and ending on the earlier to occur of (a~~) August 26, 2005 or (b) the date of any Forbearance Default (the “Forbearance Period”)~~. 2. During the Forbearance Period, the maximum credit line shall continue at $10,500,000. 3. In consideration for the Lender’s extension of forbearance, Lender will charge the Company a forbearance fee in the amount of $300,000 (the “Forbearance Fee”). However, if the Forbearance Fee is paid in full within 60 days from August 11, 2005, the Lender will rebate $50,000 to the Company. Additionally, provided there are no additional events of default under the Loan Agreement, there will be no additional Forbearance Fee due through October 31, 2005. 4. During the Forbearance Period, the Lender shall maintain a representative at the Company’s premises, at the Company’s cost, to monitor collateral performance and the adherence by the Company to the terms and provisions of the Loan Documents. 5. No later than August 31, 2005, the Company shall have received at least $500,000 in capital or subordinated loans from a third party. 6. Failure of the Company or ALS, after the Forbearance Period, to comply in any material respect with any of the terms and conditions of the Outsourcing Agreement or modification of the Outsourcing Agreement without the Lender’s consent, shall constitute a Forbearance Default. 7. Failure of the Company to comply with the Forbearance Agreement between the Company and ALS (the “ALS Forbearance”), shall constitute a Forbearance Default. Series F

Thus, provided the Company is in compliance with all of the terms and conditions of the Amended Forbearance Agreement, the Lender agrees that it will refrain from exercising its rights and remedies under the Loan Agreement and applicable law until no earlier than August 26, 2005.

In connection with the Company and the Lender entering into the Amended Forbearance Agreement, the Company, the Lender and ALS also entered into the ALS Forbearance, whereby ALS agreed to forbear, through August 25, 2005, from enforcing payment defaults under the Outsourcing Agreement subject to certain conditions.

Pursuant to the ALS Forbearance, the Company paid to ALS, on August 11, 2005, the sum of $1,112,000 to cure defaults under the Outsourcing Agreement through that date. During the term of the ALS Forbearance:

5.	Any further default under the ALS Forbearance or the Amended Forbearance Agreement shall be a default. A default under the Amended Forbearance Agreement or the ALS Forbearance shall entitle ALS to immediately terminate the ALS Forbearance and immediately seek all available remedies.
6.	The Lender will forbear from exercising its rights under the Loan Agreement during the Forbearance Period pursuant to the Amended Forbearance Agreement. ALS’ obligation to forbear shall cease if the Lender ceases to forbear under the Amended Forbearance Agreement and such ALS right to cease forbearance shall constitute ALS’ sole remedy against Lender.

In consideration for the ALS Forbearance, ALS shall receive a $50,000 Forbearance Fee (net of any other default penalties or interest), payable on the earlier of the termination of the agreement or an additional default.

ALS and the Lender also entered into a transaction, on June 10, 2005, pursuant to which ALS contributed $600,000 in exchange for a junior participation interest in the Lender’s loan to the Company. ALS is required to pay to the Company $600,000 as contingent purchase price for the sale of the Company’s Northern California Offices (see Note 7), which shall be paid to the Company, or offset against the balance remaining of the $600,000 receivable due from the Company to ALS, when ALS has been repaid the junior participation interest and all other monies due from the Company to ALS are current and paid in full.

While the Company has identified and is currently aggressively exploring other funding alternatives, the Company can provide no guarantee that it will be able to obtain such alternate sources of funding. If the Company cannot obtain an alternate source of funding before the expiration of the Forbearance Period, i.e. August 26, 2005, if not further extended with respect to both Capital and ALS, it may adversely affect the Company’s cash flow and there can be no assurance that the Company’s existing lender will not pursue all remedies available to it, which could include the imposition of insolvency proceedings.

NOTE 11 - PAYROLL TAX LIABILITIES

During fiscal 2003, the Company was notified by both the New Jersey Department of Labor and the California Employment Development Department (the “EDD”) that, if certain payroll delinquencies were not cured, judgment would be entered against the Company. As of June 30, 2005, there was still an aggregate of $4.3 million in delinquent payroll taxes outstanding, which are included in “Payroll taxes payable” on the balance sheet. Judgment has not been entered against the Company in California. While Judgment has been entered against the Company in New Jersey, no actions have been taken to enforce same.

On January 7, 2005, the Company entered into a payment plan agreement (the “Plan”) with the EDD with regard to the Company’s past due and unpaid unemployment taxes.

The Company is to continue to pay $12,500 per week to be first applied to its unpaid employment tax liability of $1,291,546 (as of June 30, 2005) for periods prior to the second quarter 2004; then to second quarter 2004 and third quarter 2004 employment taxes to the extent not already paid, then to interest and then to penalties.

The weekly payment of $12,500 is to increase for a three month period following any quarter in which the Company’s reported income is above $200,000 based on a percentage increase tied to the amount in excess of $200,000. The Company believes that consistent with the parties’ intentions when entering into the Plan, the gain on sale of discontinued operations, which resulted in no cash to the Company, would be excluded from reported income.

The Company is to pay the remaining tax liability for its second quarter 2004, and third quarter 2004 of $110,736 at the rate of $20,000 a month with the balance due in full by no later than November 30, 2005.

NOTE 12 - PREFERRED STOCK

a. Series E

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.

During the nine months ended June 30, 2005, the Company redeemed 325 shares of Series E Preferred Stock, plus accrued dividends for an aggregate of $34,000.

During the nine months ended June 30, 2004, holders of Series E Preferred Stock converted 3,275 shares into 713,384 shares of common stock at conversion prices between $.464 and $.63 per share.

During the nine months ended June 30, 2004, the Company issued 11,196 shares of Series E Preferred Stock to the Series E shareholders in respect of penalties arising out of the Company’s failure to timely register the shares issuable upon conversion of the Series E Preferred Stock for public re-sale.

b. Series F

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

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

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

Except as otherwise required by law, holders of Series F Preferred Stock and holders of Common Stock shall vote together as a single class on each matter submitted to a vote of stockholders. Each outstanding share of Series F Preferred Stock shall be entitled to the number of votes equal to the number of full shares of Common Stock into which each such share of Series F Preferred Stock is then convertible on the date for determination of stockholders entitled to vote at the meeting. Holders of the Series F Preferred Stock are entitled to vote ~~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 nine months ended June 30, 2004, the Company’s Chief Executive Officer converted 2,000 shares of the~~ b. Series ~~F Preferred Stock into 500,000 shares~~ ~~of common stock.~~ I

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

~~The~~Pinnacle ~~holders~~ Investment ofPartners, ~~the~~LP ~~Series~~(“Pinnacle”), Ithe ~~Preferred~~holder ~~Stock are entitled to dividends at a rate~~ of ~~12%~~ of the ~~stated~~shares ~~value per year. The Company is required to redeem each share~~ of the Company’s Series I Preferred Stock ~~for~~(see anNote ~~amount~~11) ~~equal~~notified to the ~~stated~~Company ~~value~~that ofthe Company ~~$100~~ was ~~per~~ in ~~share~~default ~~plus~~of ~~all~~its ~~accrued~~obligations ~~and~~to ~~unpaid~~pay ~~dividends~~$30,000 onof ~~August~~the 5$174,200 ~~2005,~~cash toportion of the ~~extent~~ ~~permitted~~ advisory byfee ~~applicable~~which ~~law;~~was ~~provided,~~required ~~however,~~to ~~that~~be ~~the~~paid ~~Company~~in ~~has~~connection with the ~~right~~Company’s election to extend the ~~required redemption~~ date ~~for~~by ~~an additional one year, in~~ which ~~case the~~ ~~Company~~it ~~will~~was be required to ~~pay~~redeem ~~all dividends accrued through~~ the ~~first~~Series ~~year~~ I of Preferred ~~issuance~~Stock into ~~cash~~August ~~and~~5, ~~issue~~2006. toThe ~~each~~Company ~~holder~~was ofalso ~~Series~~in Idefault ~~Preferred Stock a~~for ~~number~~ non-payment of ~~shares~~$40,091 of ~~its~~dividends ~~common~~on ~~stock which then have a value equal to 10% of~~ the ~~stated~~ ~~value of the~~ Series I Preferred Stock ~~held (see Note 15). In addition,~~that if were ~~the~~ due ~~Company~~on ~~extends~~September ~~the redemption date~~30, it 2005.

13The Company permitted Pinnacle to convert 41 shares of Series I Preferred Stock into 840,000 shares of common stock in October 2005 as a result of the payment defaults.

~~will~~In ~~be required~~ December to2005, ~~pay~~the ~~dividends~~Company ~~quarterly~~permitted ~~and~~Pinnacle ~~pay an advisory fee~~ to anconvert ~~advisor designated by the holders of the Series I Preferred Stock in~~ an ~~amount equal to 10% of the~~ aggregate ~~stated value~~ of ~~the outstanding~~ 203 shares of Series I Preferred Stock, ~~80%~~into of3,000,000 ~~which~~shares ~~will be payable in cash and 20%~~ of ~~which~~Common ~~will~~Stock be and ~~paid~~ agreed into ~~shares~~pay ofto ~~the~~Pinnacle ~~Company’s~~a ~~common~~default ~~stock,~~fee ~~valued~~of ~~at the then current market value~~$100,000.

If the Company does not redeem the Series I Preferred Stock by the extended redemption date, the dividend rate of the Series I Preferred Stock will increase to 24% per year and the Series I Preferred Stock will be convertible, at the option of the holder, into either common stock at a conversion price equal to 80% of the average closing bid price of the common stock during the five trading days preceding the conversion or common stock and warrants at a rate of 125 shares of common stock and 250 warrants for each $100 of stated value and accrued and unpaid dividends represented by the Series I Preferred Stock. 11

~~The~~On ~~Company~~ January ~~has~~13, 2006, the ~~right~~Company atentered ~~any~~into ~~time~~an ~~through~~agreement ~~August~~with 5Pinnacle, ~~2005,~~ pursuant to ~~cause~~which ~~all of~~ the ~~outstanding~~ ~~shares~~Company ofissued ~~the Series I Preferred Stock~~ to ~~be converted into~~Pinnacle, ~~at the election~~effective ofDecember ~~the~~28, ~~holder~~2005, ~~either~~a ~~common~~secured convertible ~~stock~~promissory atnote a(the ~~conversion~~“Convertible ~~price~~Note”) ~~equal~~in ~~to 80% of~~ the ~~average~~aggregate ~~closing~~principal amount ~~bid price~~ of ~~the~~$2,356,850 ~~common~~in ~~stock~~exchange ~~during~~for ~~the~~21,531 ~~five~~shares ~~trading days~~of ~~preceding~~ the ~~conversion,~~Company’s orSeries ~~common~~I Preferred ~~stock~~Stock ~~and~~held ~~warrants~~by atPinnacle. As a ~~rate~~result of ~~125 shares~~the ofexchange, ~~common~~there ~~stock~~are no longer ~~and~~any ~~250~~shares ~~warrants~~of ~~for~~Series ~~each~~I ~~$100~~Preferred ofStock ~~stated~~outstanding, ~~value~~ and ~~accrued~~ ~~and~~the ~~unpaid~~Company no longer ~~dividends~~has ~~represented~~any byobligation ~~the~~to ~~Series~~pay Ito ~~Preferred~~Pinnacle ~~Stock.~~any ~~The discount~~amounts ~~associated~~owed ~~with~~to it under the terms ~~conversion feature~~ of the Series I Preferred Stock ~~could~~, ~~result~~including in$103,716 ~~charges~~of tounpaid ~~the~~dividends which ~~Company’s~~had ~~earnings~~accrued inthrough ~~future~~December ~~periods~~28, 2005. ~~Holders~~The ofConvertible Note, which ~~Series~~ is secured Iby ~~Preferred~~substantially ~~Stock~~all ~~have~~of nothe ~~voting~~Company’s ~~rights~~assets, ~~except~~was asor ~~provided~~becomes bydue ~~law and~~as ~~with respect to certain limited matters.~~ follows:

~~Pinnacle~~• $1,800,000 ~~Investment~~ was ~~Partners~~due and payable in cash upon the earlier of the Company’s receipt of $1,800,000 LPof accounts receivable or March 15, a2006. ~~related~~During ~~party~~the ~~(see~~year ~~Note~~ended September ~~14)~~30, is2006, athe ~~majority~~Company ~~holder~~issued 5,000,000 shares of its common stock, valued at the then market value, to Pinnacle as payment of $45,000 against this portion of the ~~Series~~Convertible INote. ~~Preferred~~At ~~Stock~~March 31, 2007, $210,000 remains unpaid.

~~NOTE~~• $331,850 13 and -accrued ~~STOCK~~interest -at ~~BASED~~a ~~COMPENSATION~~rate of 12% per annum is payable in 24 equal installments of principal and interest during the period commencing June 28, 2007 and ending on May 28, 2009.

~~The~~• $225,000 ~~Company~~ and ~~accounts~~accrued ~~for~~interest ~~its~~thereon ~~stock-based~~at ~~compensation plans using~~ the ~~intrinsic value~~rate ~~method~~of in6% ~~accordance~~per ~~with~~annum ~~APB~~becomes ~~No.~~due ~~25. Accordingly, no stock-based employee~~and ~~compensation cost has been recognized in the financial statements as all options~~ payable ~~granted~~ on ~~under~~December ~~the~~28, ~~Company’s~~2007; ~~stock~~provided, ~~option plan~~however, ~~had~~that ~~an exercise price at least equal to~~ the ~~market~~Company ~~value~~has of the ~~underlying~~right ~~common stock on the date of grant.~~to ~~The~~ pay such ~~pro~~amount ~~forma~~in ~~information~~cash ~~below~~or isshares ~~based on provisions~~ of ~~SFAS~~its ~~No.~~common ~~123,~~stock ~~as amended~~(valued byat ~~SFAS No~~$0.0072 ~~148, “Accounting for Stock-Based Compensation-Transition and~~per ~~Disclosure”, issued in December 2002~~ share).

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
		2005			2004			2005			2004
Net loss from continuing operations
attributable to common stockholders,
as reported	$	(1,121,890	)	$	(2,422,779	)	$	(2,395,134	)	$	(4,610,861	)
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects		(242,400	)		(213,300	)		(617,288	)		(630,700	)
Proforma net loss from continuing
operations attributable to common
stockholders	$	(1,364,290	)	$	(2,636,079	)	$	(3,012,422	)	$	(5,241,561	)
Net loss from continuing operations
per common share attributable
to common stockholders:
Basic - as reported	$	(.07	)	$	(.39	)	$	(.14	)	$	(.79	)
Basic - pro forma	$	(.08	)	$	(.42	)	$	(.18	)	$	(.90	)
Diluted - as reported	$	(.05	)	$	(.39	)	$	(.13	)	$	(.79	)
Diluted - pro forma	$	(.07	)	$	(.42	)	$	(.16	)	$	(.90	)

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

14• $331,850 of the principal amount and unpaid interest accrued thereon is convertible into the Company’s common stock at a conversion price of $.06 per share.

~~NOTE~~• $225,000 14 of -the ~~RELATED~~principal ~~PARTY~~amount ~~TRANSACTIONS~~and unpaid accrued interest thereon is convertible into the Company’s common stock at a conversion price of $0.0072. During the year ended September 30, 2006, $150,000 was converted into 20,833,331 shares of the Company’s Common Stock.

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

NOTE 10 - RELATED PARTY TRANSACTIONS

Consulting Fees

An entity which employs the son of the Chief Executive Officer of the Company (the “CEO”) ~~provides~~ provided consulting services to the Company. Consulting expense was $~~139,151~~-0- and $4644,~~500~~000 for the ~~nine~~six months ended ~~June~~March 3031, ~~2005~~2007 and ~~2004~~2006, respectively. ~~The~~Included ~~Company~~ in ~~has~~the ~~paid~~$44,000 ~~consulting fees to an entity whose stockholder~~ is ~~another son of~~a ~~the~~charge ~~CEO~~ of ~~the~~$16,000 ~~Company.~~in ~~Consulting~~connection ~~fees~~with ~~amounted~~the toissuance ~~$50~~of 2,000 ~~and $76~~,000 ~~for the~~ ~~nine~~shares ~~months~~of ~~ended~~the ~~June~~Company’s ~~30,~~common ~~2005~~stock ~~and~~to ~~2004,~~the ~~respectively~~entity.

Joint Venture

The Company provides information technology staffing services through a joint venture, ~~Stratus~~STS ~~Technology~~(see ~~Services,~~Note ~~LLC (“STS”~~1), in which the Company has a 51% interest. Prior to February 13, 2007, the Company had a 50% interest. AOn ~~son~~February 13, 2007, the Company acquired from Fusion Business Services, LLC (“Fusion”) an additional 1% interest in STS in exchange for the issuance to the members of Fusion of 70,111 shares of the ~~CEO~~Company’s common stock. As a result of the transfer, which was effective as of January 1, 2007, the Company ~~has~~owns a ~~majority~~51% interest in ~~the~~STS and ~~other~~ Fusion 50owns 49% ~~venturer~~interest. ~~The~~Fusion has a right to re-acquire the 1% interest transferred to the Company’s ~~(loss)~~upon ~~from~~the ~~operations~~occurrence of ~~STS~~certain events, including the institution of ~~$(19~~bankruptcy or insolvency proceedings against the Company,~~280)~~ a ~~for~~sale ~~the~~ of ~~six~~all ~~months~~or ~~ended~~substantially ~~March~~all 31of the Company’s assets, ~~2004~~a merger or consolidation of the Company with another entity, isor ~~included~~the inliquidation ~~other~~or ~~income~~dissolution ~~(expense)~~of the Company. The purchase price payable by Fusion in connection with any such ~~the~~ re-acquisition ~~consolidated~~shall ~~statements~~be ofa ~~operations~~return ~~and~~of isthe ~~not~~shares ~~material~~issued to it for the ~~overall~~1% interest ~~operations~~ or a cash payment of $1,262. A son of the CEO of the Company has a majority interest in Fusion.

Effective March 31, 2004, the Company adopted the provisions of FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). As a result of adopting FIN 46R, the Company consolidates the accounts of STS.

Note Receivable

The “Note Receivable - related party” as of September 30, 2004, was the amount due from ALS in connection with the sale of the Company’s Miami Springs, Florida office in August, 2003. ALS is the holding company for Advantage Services Group, LLC (“Advantage”). The son of the Company’s CEO is a 50% member in ALS. The amount due under the note was deemed paid in connection with the sale of the Company’s Northern California offices to ALS, effective June 5, 2005 (see Note 6).

Payroll Outsourcing

The Company iswas a party to an Outsourcing Agreement with ALS pursuant to which ALS and its affiliate, Advantage ~~are~~Services Group, LLC (“Advantage”), were to provide payroll outsourcing services for all of the Company’s in-house staff, except for its corporate employees, and customer staffing requirements ~~(see Note 10)~~. As a result of this arrangement, all of the Company’s field personnel ~~are~~were employees of ALS. The Company ~~pays~~paid agreed upon pay rates, plus burden (payroll taxes and workers’ compensation insurance) plus a fee ranging between 2% and 3% (0% - 1 ½% effective June 10, 2005) of pay rates. On June 10, ~~2006~~2005, the Company entered into a Second Addendum to Outsourcing Agreement with ALS, which, among other things, reduced certain rates charged by ALS to the Company. The total amount charged by ALS under this agreement and similar agreements previously in effect between the parties was $7617,~~265~~326,000 and $848,~~062~~245,000 in the ~~nine~~six months ended ~~June~~March 3031, ~~2005 and 2004, respectively~~2006. ~~Accounts payable - related parties in the attached condensed consolidated balance sheets at June 30, 2005 and September 30, 2004, represents amounts due to ALS and Advantage.~~

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

Due from Related Party

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

Loans Payable

During the ~~nine~~six months ended ~~June~~March 3031, ~~2005~~2007, the CEO ~~of the Company~~ loaned ~~an aggregate of~~ $~~650~~100,000 to the Company~~, all of~~ which was repaid in January 2007. In addition, during the ~~nine~~six months ended ~~June~~ March 31, 302007, ~~2005.~~a Ofsignificant ~~this~~shareholder ~~amount~~loaned $~~250~~20,000 ~~bore~~to ~~interest~~the atCompany, ~~12%~~which is still aoutstanding ~~year~~at ~~and~~March ~~the balance~~31, ~~was non-interest bearing~~2007.

Other

~~The~~An ~~Company incurred fees to an~~ entity through ~~with~~which ~~whom~~ the son of the CEO is ~~affiliated. Such~~employed ~~amounts~~is ina ~~the~~consultant ~~nine~~to ~~months~~AI ~~ended June 30, 2005, aggregated $75,000 in connection with the sale of the Company’s Northern California offices~~ (see Note 7 5) ~~and $116,000 in connection with an acquisition (see Note 8)~~. During the nine months ended June 30, 2004, the Company repaid $151,583 against loans previously made by the entity to the Company. Also, during the nine months ended June 30, 2004, the Company issued 300,000 shares of its common stock to the entity in exchange for $57,000 owed to the entity in connection with a prior year’s transaction.

AnThe ~~entity through~~ nephew ~~which~~of the ~~son~~CEO of the ~~CEO~~Company is ~~employed~~affiliated iswith aPinnacle ~~consultant~~Investment Partners, toLP, ~~Humana~~the ~~Trans~~holder of the shares of the convertible note issued in ~~Services~~ exchange ~~Holding~~for ~~Corp~~shares of the Company’s Series I Preferred Stock (see Note 9). The Company believes that PIP Management Inc., which has been designated as the advisor to the Series I holders (see Note 159), is also affiliated with Pinnacle Investment Partners, LP.

~~The~~NOTE ~~nephew~~ 11 of- ~~the~~DERIVATIVE CEO of the Company is affiliated with Pinnacle Investment Partners, LP, the holder of a majority of the shares of the Company’s Series I Preferred Stock (see Notes 12 and 15). The Company believes that PIP Management Inc., which has been designated as the advisor to the Series I holders (see Note 15), is also affiliated with Pinnacle Investment Partners, LP.INSTRUMENTS

15The Company evaluated the application of SFAS No. 133 and EITF 00-19 for its financial instruments and determined that certain warrants to purchase the Company’s Common Stock are derivatives that are required to be accounted for as free-standing liability instruments in the Company’s financial statement. As a result, the Company reports the value of those warrants as current liabilities on its balance sheet and reports changes in the value of these warrants as non-operating gains or losses on its statements of operations. The value of the warrants is required to be remeasured on a quarterly basis, and is based on the Black Scholes Pricing Model.

~~NOTE~~Variables 15 used in the Black Scholes option pricing model include (1) 4% risk-free ~~SUBSEQUENT~~interest rate, ~~EVENTS~~(2) expected warrant life is the actual remaining life of the warrants as of each period end, (3) expected volatility is 100%, and (4) zero expected dividends.

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

In connection with the Company’s election to extend the redemption date of its Series I Preferred Stock by one year (see Note 12), on August 5, 2005, the Company paid $261,239 representing all accrued dividends on the Series I Preferred Stock as of that date. The Company is also required to issue $217,750 worth of Common Stock to the holders of the Series I Preferred Stock by September 4, 2005. In addition, the Company is required to pay, by September 4, 2005, an advisory fee to an advisor, PIP Management Inc. (see Note 14), in the amount of $217,750, $174,200 of which is to be paid in cash and the balance of $43,550 in shares of the Company’s Common Stock. The Company will be required to issue an aggregate of 2,488,569 shares of Common Stock as a result of the extension.13

Letter of Intent

On August 15, 2005, the Company entered into a Letter of Intent (the “LOI”) with Humana Trans Service Holding Corp. (“Humana”)(see Note 14) relative to Humana and the Company entering into a Management Agreement whereby Humana will provide certain management, financial, strategic and marketing advisory services to the Company, along with, inter alia, a bridge financing of $500,000, and the Company will employ Ron Shapss as CEO and Jim Zimbler as Executive Vice President for Business Development (the “Management Transaction”).

The entering into of the Management Transaction is subject to the following conditions:

Humana will provide a Bridge Loan in the amount of $500,000 to the Company, prior to September 2, 2005;

Humana will, by August 26, 2005, provide new receivable financing or some other line of credit for the Company to replace the Company’s current line of credit, or work out satisfactory forbearance or other accommodation with the Company’s current lender, Capital Temp Funds, Inc. until such time as Humana completes the receivables financing, for which Humana will have received a binding commitment.

No assurance can be given that the transactions with Humana will be completed.

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

AND RESULTS OF OPERATIONS

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

Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2004~~2006.

Introduction

WeThrough ~~provide~~ December 2005, we provided a wide range of staffing services and productivity consulting services associated with such staffing services nationally ~~through~~ through a network of offices located throughout the United States. Regardless of ~~the~~ the type of temporary service offering we ~~provide~~provided, we ~~recognize~~recognized revenues based on on hours worked by assigned personnel. Generally, we ~~bill~~billed our customers a pre-negotiated, fixed rate per hour for the hours worked by ~~the~~our temporary employees ~~placed by us~~. Therefore, we dodid not separate our various service offerings into separate offering segments. We dodid not routinely provide discrete ~~financial~~ financial information about any particular service offering. We also did not conduct any regular reviews of, nor make decisions about, allocating any particular resources to a particular service offering to assess its performance. As set forth below, certain of our service offerings ~~target~~ targeted specific markets, but we did do not necessarily conduct separate marketing campaigns for such services. Pursuant to the ~~outsourcing~~Outsourcing ~~agreement~~Agreement ~~currently~~that was in place with ALS, LLC (“"ALS”"), ALS iswas responsible for paying wages, workers’ compensation, unemployment compensation insurance, Medicare and Social Security taxes and other general payroll related expenses for all of the temporary employees we ~~place~~ placed, and we ~~are~~were billed for such expenses plus a fee ~~from~~by ALS. These expenses are included in the cost of revenue. Because we ~~pay~~paid ~~the~~our temporary employees ~~that we place~~ only for the hours they actually ~~work~~worked, wages for our temporary personnel ~~are~~ were a variable cost that ~~increases~~increased or ~~decreases~~decreased in proportion to revenues. Gross profit margin ~~varies~~varied depending on the type of services offered. In some instances, temporary employees placed by us may ~~decide~~have decided to accept an offer of of permanent employment from the customer and thereby “convert” the temporary position to a permanent position. Fees received from such conversions ~~are~~were included in our revenues. Selling, general and administrative expenses include payroll for management and administrative employees, office occupancy costs, sales and marketing expenses and other general and administrative costs.

17In December 2005, we completed a series of asset sale transactions pursuant to which we sold our staffing operations. As a result of such sales, we no longer actively conduct any staffing services business, other than IT staffing solutions services conducted through our 51% owned joint venture, STS.

Results of Operations

Discontinued Operations/Acquisition on Disposition of Assets

~~Effective~~In as December ~~of June 5~~2005, ~~2005~~we (completed the ~~“Effective~~following ~~Date”),~~series of transactions pursuant to which we sold substantially all of ~~the tangible~~our ~~and intangible~~ assets, ~~excluding~~used ~~accounts~~to ~~receivable~~conduct of our ~~six~~staffing ~~Northern~~ services ~~California~~business, ~~offices~~other tothan ~~ALS,~~the aIT ~~related~~staffing ~~party~~solutions ~~(see~~business ~~Note~~that 14is conducted tothrough ~~the Condensed~~our ~~Consolidated~~50% ~~Financial~~owned ~~Statements).~~joint venture, Stratus Technology Services, LLC:

~~The purchase~~(a) ~~price~~On ~~was~~December $32,~~315~~ 2005,~~719,~~ ~~which~~we ~~represented~~completed the ~~balance~~sale, ~~due~~effective ~~by us to ALS~~ as of ~~the close~~ of ~~business~~November ~~on May 3~~21, 2005, ~~less~~of ~~$600,000.~~substantially ~~Accordingly,~~all onof the ~~Effective~~ ~~Date,~~tangible ~~$3,315,719 due to ALS was deemed paid~~ and ~~cancelled.~~intangible ~~In addition~~assets, ~~all~~excluding ~~amounts~~accounts ~~due~~receivable, toof usseveral ~~from ALS as~~ of ~~the~~our ~~Effective~~offices ~~Date~~located ~~were deemed paid~~ in ~~full.~~the ~~Such~~Western ~~amounts~~half ~~aggregating~~of ~~$376,394~~the ~~were~~United ~~comprised~~States of(the a“ALS ~~note receivable~~Purchased ~~($122,849~~Assets”), ~~accounts~~to ~~receivable ($50~~ALS,~~000)~~ ~~and~~LLC ~~other receivables~~ (~~$203,545~~“ALS”). ~~ALS~~The ~~and~~offices ~~our~~sold ~~lender~~were ~~also~~the ~~entered~~following: ~~into~~Chino, aCalifornia; ~~transaction~~Colton, ~~pursuant~~California; ~~to which ALS~~Los ~~contributed $600~~Angeles,~~000~~ inCalifornia; ~~exchange~~Los ~~for~~Nietos, aCalifornia; ~~junior~~Ontario, ~~participation~~California; ~~interest~~Santa ~~in amounts~~Fe ~~borrowed~~Springs, ~~under~~California ~~our~~and ~~line~~the ofPhoenix, ~~credit.~~Arizona ~~ALS~~branches ~~will~~and ~~pay~~the toDallas usMorning ~~$600,000~~News ~~as contingent~~Account ~~purchase~~(the ~~price,~~“Western ~~which~~Offices”). ~~will~~Pursuant beto ~~paid~~the toterms usof oran ~~offset~~Asset ~~against~~Purchase ~~balances due~~Agreement bybetween us toand ALS, ~~when~~dated ~~ALS~~December ~~has~~2, ~~been~~2005 ~~repaid~~ (the ~~junior~~“ALS ~~participation~~Asset ~~interest and all~~Purchase ~~other~~Agreement”), ~~amounts~~the ~~due~~purchase byprice usfor tothe ALS ~~are~~Purchased ~~current~~Assets ~~and~~was paid inor ~~full.~~is payable as follows:

In• $250,000 ~~connection~~ was ~~with~~paid over the ~~transaction,~~60 wedays ~~and~~following ~~ALS~~December ~~entered~~2, ~~into~~2005, afor ~~non-compete~~our ~~and~~documented ~~non-solicitation agreement pursuant to which we agreed not to compete with~~ cash ~~ALS with~~ flow ~~the~~requirements, ~~customers~~all of ~~and~~which inis ~~the~~payable ~~geographic~~at ~~area~~a ofrate ~~the~~no ~~Northern~~faster ~~California offices,~~than ~~and ALS agreed not to compete with us with respect to certain customers and accounts~~$125, ~~including, accounts serviced by our remaining offices, for a~~000 ~~period~~ per 30 ~~of two years.~~days;

~~The~~• $1,000,000 ~~sale resulted~~ payable inby aALS ~~gain~~will ofbe ~~$2,239,108,~~paid ~~computed~~directly asto ~~follows:~~certain taxing authorities to reduce our tax obligations; and

Sales price - cancellation of accounts payable - related parties	$	3,315,719
Less costs of sale:
Write-off of amounts due from ALS		(376,394	)
Other costs (including $75,000 to a related party)		(322,952	)
Balance		2,616,373
Net assets sold		377,265
Gain	$	2,239,108

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

~~Revenues from~~In addition to the ~~sold~~foregoing ~~branches~~amounts, ~~were~~ALS also assumed our obligation to pay $10798,~~087,390~~626 ~~and~~due $5under a certain promissory note issued by us to Provisional Employment Solutions,~~209,445~~ ~~for~~Inc. As a result of the ~~nine~~sale ~~months ended June~~of 30the ALS Purchased Assets to ALS, ~~2005~~all sums due and ~~2004,~~owing ~~respectively~~to ALS by Stratus were deemed paid in full and no further obligations remain.

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

(b)

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

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

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

(c)

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

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

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

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

•

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

•

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

•

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

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

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

(d)

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

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

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

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

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

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

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

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

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2007		2006		2007		2006
Sold to:
ALS	$	-	$	-	$	-	$	4,340,459
AI		36,041		92,836		112,614		(204,601	)
SOP		32,967		46,681		72,313		(284,584	)
TES		31,627		80,767		91,567		(414,548	)
		100,635		220,284		276,494		3,436,726

Other costs of sales		-		-		-		(60,000	)
Gain on sale of discontinued operations	$	100,635	$	220,284	$	276,494	$	3,376,726

The above gain is comprised of earnout payments in the three and six months ended March 31, 2007 and three months ended March 31, 2006, and includes earnout payments of $294,145 in the six months ended March 31, 2006.

Continuing Operations

Three Months Ended ~~June~~March 3031, ~~2005~~2007 Compared to Three Months Ended ~~June~~March 3031, ~~2004~~ 2006

Revenues. Revenues ~~decreased~~ increased 134.43% to $271,~~257~~810,~~446~~705 for the three months ended ~~June~~March 3031, ~~2005~~2007 from $271,~~637~~190,~~948~~086 for the three months ended ~~June~~March 3031, ~~2004~~2006. ~~The~~This ~~significant~~increase ~~revenue~~was ~~increases~~ primarily wea ~~had~~result ~~realized~~of inan ~~the~~increase ~~first~~in ~~two~~billable ~~quarters~~hours ofand ~~fiscal~~permanent ~~2005 leveled~~placements ~~off~~ and ~~during~~ expansion ~~the three months ended June 30, 2005. This, along with the loss~~ of ~~a large~~our customer ~~accounted for the decrease in revenues~~base.

Gross Profit. Gross profit increased 3675.67% to $3559,~~737,808~~604 for the three months ended ~~June~~March 3031, ~~2005~~2007 from $2318,~~368,341~~518 for the three months ended ~~June~~March 3031, ~~2004~~2006, primarily as a result of increased revenues. Gross profit as a percentage of revenues increased to 13 30.89% for the three months ended ~~June~~March 3031, ~~2005~~ 2007 from 826.68% for the three months ended ~~June~~March 3031, ~~2004~~2006. ~~Effective May 2004, the California State Compensation Insurance Fund increased our effective workers’ compensation rates by approximately 238%.~~ This increase reduced our gross profit by approximately $800,000 or 2.9% of revenues during the three months ended June 30, 2004. The increase in gross profit and gross profit as a percentage of revenues was a result of ~~outsourcing~~increased ~~our payroll under various agreements with~~permanent ~~related parties, which enabled us to significantly reduce our workers’ compensation costs (see Note 14 to the Condensed Consolidated Financial Statements)~~ placements.

Selling, General and Administrative Expenses. Selling, general and administrative expenses (“SG&A”) ~~increased~~decreased 134.96% to $4726,~~077,662 for~~358 for the three months ended ~~June~~March 3031, ~~2005~~2007 from $3761,~~579,331~~471 for the three months ended March ~~June 30~~31, ~~2004~~2006. ~~SG&A~~Selling, general and administrative expenses as a percentage of revenues ~~increased~~decreased to 15 40.01% for the three months ended ~~June~~March 3031, ~~2005~~2007 from 13 64.0% for the three months ~~ended~~ ~~June 30, 2004. The Company incurred fees of $380,985 (1.4% of revenues) and $5,665 in the three months~~ ended ~~June~~March 3031, ~~2005 and 2004, respectively, in connection with its Outsourcing Agreement with a related party (see~~ 2006.

18Interest Expense. Interest expense decreased 33.4% to $56,249 for the three months ended March 31, 2007 from $84,457 for the three months ended March 31, 2006. Interest expense as a percentage of revenues decreased to 3.1% for the three months ended March 31, 2007 from 7.1% for the three months ended March 31. 2006.

~~Note~~Net 13 Loss Attributable to Common Stockholders. As a result of the ~~Condensed~~foregoing, ~~Consolidated~~we ~~Financial~~had ~~Statements).~~a Wenet ~~increased~~loss ~~our~~attributable ~~allowance for~~to ~~doubtful~~common ~~accounts~~stockholders of in$197,117, for the three months ended ~~June~~March 3031, ~~2005~~2007 ~~and~~compared ~~2004~~to ~~and~~a net ~~took~~ loss a attributable ~~charge~~to ~~against~~common ~~operations~~stockholders of $~~200~~699,~~000~~338 ~~and~~for ~~$450~~the three months ended March 31,~~000,~~ ~~respectively~~2006.

~~Other~~Six ~~Charges. Other charges~~ Months inEnded ~~the~~March ~~three months ended June 30~~31, ~~2005,~~2007 ~~represent~~Compared ~~adjustments~~ to ~~reserves~~ ~~and~~Six ~~premiums~~Months inEnded ~~connection~~March ~~with prior years’ workers’ compensation~~31, ~~insurance policies.~~ 2006

~~Interest Expense~~Revenues. ~~Interest~~ Revenues ~~expense~~ increased ~~decreased 65~~51.26% to $~~404~~3,~~469~~673,559 for the ~~three~~six months ended ~~June~~March 3031, ~~2005~~ 2007 from $12,~~160~~423,~~740~~ 944 for the ~~three~~six months ended ~~June~~March 3031, ~~2004~~2006. ~~Included~~This inincrease ~~the~~was ~~three months ended~~primarily ~~June~~ a ~~30,~~result ~~2004,~~of ~~were~~an ~~dividends~~increase ~~and~~in ~~accretion~~billable ~~relating~~hours toand ~~the~~permanent ~~Series~~placements Aand ~~Preferred~~expansion ~~Stock~~ of ~~and~~our ~~additional~~customer ~~interest on unpaid taxes~~base.

~~Net~~Gross ~~(Loss) Attributable to Common Stockholders~~ Profit. As a Gross ~~result~~ profit ofincreased ~~the~~57.3% ~~foregoing~~to $1,148,655 wefor ~~had~~the asix ~~net~~months ~~(loss)~~ended ~~and~~March ~~net~~31, ~~(loss) attributable to~~2007 ~~common~~ from ~~stockholders of~~ $(1730,~~011,390)~~120 ~~and $(1,021,890), respectively,~~ for the ~~three~~ six months ended ~~June~~March 3031, ~~2005~~2006, ~~compared~~primarily toas a ~~net~~result of increased ~~(loss)~~revenues. ~~and~~Gross ~~net~~profit ~~(loss) attributable~~as a percentage of revenues increased to 31.3% for ~~common~~the ~~stockholders~~six ofmonths ~~$(2,340,881)~~ended ~~and~~March ~~$(2~~31,~~422,779)~~ 2007 from 30.1% for the ~~three~~ six months ended March ~~June 30~~31, ~~2004,~~2006. ~~respectively~~This increase was a result of increased permanent placements.

~~Nine~~Selling, ~~Months~~ General ~~Ended~~and ~~June~~Administrative 30Expenses. SG&A decreased 31.5% to $1,374,561 ~~2005~~for ~~Compared~~the tosix ~~Nine~~months ~~Months~~ended ~~Ended~~March ~~June~~31, 302007 from $2,007,504 for the six months ended March 31, 2006. Selling, general and ~~2004~~ administrative expenses as a

Revenues. Revenues increased 15.6% to $83,270,261 for the nine months ended June 30, 2005 from $72,063,722 for the nine months ended June 30, 2004. This increase was a result of a net increase in billable hours. The net increase in billable hours is primarily from (i) expanding into other departments of existing customers, (ii) successful implementation of “Vendor on Premise” accounts, (iii) becoming the primary provider on accounts in which we were not the sole vendor, and (iv) new customers.17

~~Gross Profit. Gross profit increased 39.0% to $11,593,711 for the nine months ended June 30, 2005 from $8,339,147 for the nine months ended June 30, 2004. Gross profit as a~~ percentage of revenues ~~increased~~decreased to 1337.94% for the ~~nine~~six months ended ~~June~~March 3031, ~~2005~~ ~~from~~2007 11from 82.68% for the ~~nine~~six months ended ~~June~~March 3031, ~~2004~~2006. The increase in gross profit and gross profit as a percentage of revenues was a result of increased revenues and the outsourcing of our payroll under various agreements with related parties (see Note 14 to the Condensed Consolidated Financial Statements).

~~Selling,~~As General and Administrative Expenses. SG&A increased 27.9% to $12,131,687 for the nine months ended June 30, 2005 from $9,484,996 for the nine months ended June 30, 2004. SG&A expenses as a ~~percentage~~ result of ~~revenues~~the ~~increased~~asset tosales ~~14.6%~~transactions ~~for~~completed ~~the~~in ~~nine~~December ~~months ended June 30,~~ 2005, ~~from 13.2% for~~ the ~~nine months ended June 30, 2004. The~~ Company ~~incurred~~ ~~fees~~ began ofreducing ~~$1,247,738 (1.5% of revenues) and $5,665 in the nine months ended June 30, 2005 and 2004, respectively, in connection with~~ its ~~Outsourcing~~corporate ~~Agreement with~~overhead astructure ~~related party (see Note 13~~ to ~~the~~be ~~Condensed~~more ~~Consolidated Financial Statements). Included~~ in ~~SG&A~~line inwith the ~~nine months ended June 30, 2005 is~~ ~~$499,000~~ remaining ~~from our 50% - owned joint venture which, prior to March 31, 2004, was not consolidated (see Note 13 to the Condensed Consolidated Financial Statements)~~revenues. WeThese ~~increased~~reductions ~~our~~were ~~allowance~~completed ~~for doubtful accounts~~ in ~~the~~February ~~nine months ended June 30, 2005 and 2004 and took a charge against operations of $500,000 and $525,000, respectively~~2006. ~~We also incurred approximately $110,000 of~~ nonrecurring legal fees in connection with negotiating our payment plan agreement with the California Employment Development Department and collections of certain of our accounts receivable.

Interest Expense. Interest expense decreased 4169.41% to $1118,~~262,503~~672 for the ~~nine~~six months ended ~~June~~March 3031, ~~2005~~2007 from $2383,~~153,622~~ 808 for the ~~nine~~six months ended ~~June~~March 3031, ~~2004~~2006. ~~Included~~Interest inexpense as a percentage of revenues decreased to 3.2% for the ~~nine~~six months ended March 31, 2007 from 15.8% for the six months ended ~~June~~March 3031, ~~2004~~2006. The decrease was a result of the decrease in outstanding debt. Interest expense in the six months ended March 31, 2006 ~~were~~includes ~~dividends~~$100,000 ~~and~~of ~~accretion~~the ~~related~~principal toamount of the ~~Series~~Convertible Note issued A in exchange for our Series I Preferred Stock that was attributable to the settlement of our obligation to pay certain advisory fees and ~~additional~~dividend ~~interest~~payments under onthe ~~unpaid~~terms ~~taxes~~of the Series I Preferred Stock. (see Note 9 to the Condensed Consolidated Financial Statements).

~~Other~~Net ~~Charges~~ Loss Attributable to Common Stockholders. As ~~Other~~ a ~~charges~~ result inof the ~~nine~~foregoing, we had a net loss attributable to common stockholders of $351,000 for the six months ended ~~June~~March 3031, ~~2005~~2007 ~~represent~~compared ~~adjustments~~ to ~~reserves~~a net loss ~~and~~ attributable ~~premiums~~to incommon ~~connection~~stockholders ~~with~~of ~~prior~~$1,700,929 ~~years’~~for ~~workers’~~the ~~compensation~~six ~~insurance~~months ended ~~policies~~ March 31, 2006.

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 $(2,263,634) and $(2,295,134), respectively, for the nine months ended June 30, 2005 compared to a net (loss) and (loss) attributable to common stockholders of $(3,280,206) and $(4,610,861) for the nine months ended June 30, 2004, respectively.

Liquidity and Capital Resources

AtCash ~~June 30,~~ flows ~~2005,~~have wenot ~~had~~been ~~limited~~segregated ~~liquid~~between ~~resources.~~continuing ~~Current~~operations ~~liabilities were $25,880,269~~ and ~~current assets were $16,380,540. The difference of $9,499,729 is a working~~discontinued ~~capital~~ operations ~~deficit,~~in ~~which~~the isaccompanying ~~primarily~~condensed ~~the~~consolidated ~~result~~statements of ~~losses incurred from the~~cash ~~year ended September 30, 2002 through March 31, 2005~~ flows. ~~We have entered into an Amended~~ ~~and~~ Cash ~~Restated~~provided ~~Forbearance~~to ~~Agreement~~us ~~with~~from ~~our~~discontinued ~~lender~~operations on(included ~~August~~in ~~11,~~the ~~2005, (see~~consolidated ~~Part II~~ cash -flow ~~Other~~discussions ~~Information, Item 5, Other Information~~below). Ifduring ~~we cannot obtain an alternate source of funding by~~ the ~~expiration~~six ofmonths ~~the~~ended ~~Forbearance~~March ~~Period~~31, ~~i.e. August~~2007 ~~26, 2005, if not further extended, it may adversely affect our cash~~and ~~flows~~ 2006 ~~and~~ was ~~there~~comprised ~~can~~of bethe ~~no assurance that our lender will not pursue all remedies~~ following:

	Six Months Ended
	March 31,
	2007			2006

Cash provided by (used in) operating activities	$	(498,184	)	$	8,280,378
Cash provided by investing activities		650,901			689,535
Cash used in financing activities		-			(7,865,389	)
Net	$	157,217		$	1,104,524

Although there is no assurance we will continue to receive earnout payments in connection with discontinued operations, we estimate that we will receive approximately $35,000 per month, through November 2008.

At March 31, 2007, we had limited liquid resources. Current liabilities were $9,154,596 and current assets were $1,534,372. The difference of $7,620,224 is a working capital deficit, which is primarily the result of losses incurred during the last several years. This condition raises substantial doubts about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

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

We have taken steps to revise and reduce our operating requirements, which we believe will be sufficient to assure continued operations and implementation of our plans. The steps included closing branches that are not profitable, reductions in staffing, and other selling, general and administrative expenses, and most significantly, the asset sales transactions that were completed in December 2005. We continue to pursue other sources of equity or long-term debt financings. We also continue to negotiate payments plans and other accommodations with our creditors. We believe that the collection of receivables that we retained after completion of the asset sale transactions and earnout payments to which we are entitled in connection with the Asset Sales will provide us with sufficient cash flow to support our operations in the next twelve months.

Net cash provided by (used in) operating activities was $(846,519) and $6,890,371 in the six months ended March 31, 2007 and 2006, respectively.

Net cash provided by investing activities was $621,212 and $681,608 in the six months ended March 31, 2007 and 2006, respectively. Net cash received in connection with the sale of discontinued operations was $650,901 (comprised of earnout payments) and $702,581 (including earnout payments of $294,145), in the six months ended March 31, 2007 and 2006, respectively. Cash used for capital expenditures was $29,689 and $27,582 in the six months ended March 31, 2007 and 2006, respectively.

Net cash provided by (used in) financing activities was $156,838 and $(7,559,222) in the six months ended March 31, 2007 and 2006, respectively. We had net borrowings (repayments) of $143,867 and $(6,071,490) under our line of credit in the six months ended March 31, 2007 and 2006, respectively. Net short-term borrowings (repayments) were $10,629 and $(9,002) in the six months ended March 31, 2007 and 2006, respectively. Net short-term borrowings in the six months ended March 31, 2007, includes $100,000 loaned to us by our Chief Executive Officer, which was repaid in January 2007 and $20,000 which was loaned to us by a significant shareholder. Payments of notes payable - acquisitions was $7,033 and $38,999 in the six months ended March 31, 2007 and 2006, respectively. We paid $1,425,000 in the six months ended March 31, 2006, against a note payable to Pinnacle Investment Partners, L.P., a related party.

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

Through December 2005, we had a loan and security agreement (the “Loan Agreement”) with Capital Temp Funds, Inc. (the “Lender”) which provided for a line of credit up to 85% of eligible accounts receivable, as defined, not to exceed $12,000,000. Until April 10, 2003, advances under the Loan Agreement bore interest at a rate of prime plus 1 1/2%. The Loan Agreement restricted our ability to incur other indebtedness, pay dividends and repurchase stock. Effective April 10, 2003, we entered into a modification of the Loan Agreement which provided that borrowings under the Loan Agreement would bear interest at 3% above the prime rate. Borrowings under the Loan Agreement were collateralized by substantially all of our assets. As of September 30, 2005, $8,931,689 was outstanding under the credit agreement.

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

(i)	Failing to meet the tangible net worth requirement;

(ii)	Our common stock being delisted from the Nasdaq SmallCap Market; and

(iii)	Our having delinquent state, local and federal taxes

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

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

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

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

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

~~available~~The to Lender ~~it.~~charged ~~Additionally~~us $412,500 weof ~~have~~fees ~~entered~~in ~~into~~connection ~~a forbearance agreement~~ with ~~ALS as~~the ~~a result~~Forbearance ~~of certain defaults under our Outsourcing~~ Agreement~~. If we cannot obtain~~, ~~an extension of~~ the ~~ALS~~Amended ~~forbearance,~~Forbearance orAgreement ~~are~~and ~~unable to cure defaults under~~ the ~~ALS~~ ~~Outsourcing~~various ~~Agreement,~~extensions asthereof ~~amended, going forward, there can be no assurance~~during that we will be able to obtain an alternative outsourcing provider. 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~~ fiscal ~~future~~year ~~effect~~ended onSeptember ~~the~~30, ~~recoverability~~2005 and ~~classification~~$350,000 ofduring ~~assets or~~ the ~~amounts~~ ~~and~~three ~~classification of liabilities that may result from the outcome~~months of ended ~~this~~ December ~~uncertainty~~31, 2005.

~~Our~~In ~~continuation~~ connection ofwith ~~existence~~us isand ~~dependent~~the ~~upon~~Lender ~~the~~entering ~~continued~~into ~~cooperation~~the ofAmended ~~our~~Forbearance ~~creditors~~ Agreement, ~~our~~we, ~~ability~~the toLender ~~generate~~and ~~sufficient~~ALS ~~cash~~also ~~flow~~entered tointo ~~meet~~the ~~our~~ALS ~~continuing~~Forbearance, ~~obligations~~ whereby ALS onagreed ato ~~timely basis~~forbear, tothrough ~~fund~~August ~~the~~25, ~~operating~~2005, ~~and~~from ~~capital~~enforcing ~~needs,~~payment ~~and~~defaults under our Outsourcing Agreement with ALS subject to certain conditions. All ~~obtain~~ of our ~~additional~~obligations ~~financing,~~under ~~including~~our aOutsourcing ~~new~~Agreement ~~line~~with ALS were satisfied in connection with the sale of ~~credit,~~assets asto ~~may~~ALS bewhich occurred in December ~~necessary~~ 2005.

WeIn ~~have taken~~ January ~~steps~~2006, toSTS ~~revise~~entered ~~and~~into ~~reduce~~a ~~our~~Factoring ~~operating~~and ~~requirements,~~Security ~~which~~Agreement ~~we believe~~(the ~~will~~“Factoring beAgreement”) ~~sufficient~~with toAction ~~assure~~Capital ~~continued~~Corporation ~~operations~~(“Action”) ~~and~~which ~~implementation~~provides for ofthe ~~our plans.~~sale ~~The~~of ~~steps~~up ~~include~~to ~~closing~~$1,500,000 ~~and~~of ~~selling~~accounts ~~branches~~receivable ~~that~~of ~~are~~STS ~~not~~to ~~profitable,~~Action. ~~consolidating~~ Action reserves ~~branches~~ and ~~reductions~~withholds in ~~staffing,~~a ~~cost~~reserve ~~of revenues~~account, ~~and~~an ~~other selling,~~amount ~~general~~equal ~~and~~to ~~administrative~~10% ~~expenses.~~of Wethe face amount ~~also~~of ~~entered~~accounts ~~into~~receivable apurchased ~~Second Addendum~~under tothe ~~Outsourcing~~Factoring Agreement. ~~with~~Action has afull ~~related~~recourse ~~party~~against STS, ~~which~~including ~~reduced~~the ~~certain~~right to charge-back or sell ~~rates~~ back any ~~charged~~accounts byreceivable ~~the~~if ~~related~~not ~~party~~paid towithin ~~us.~~90 Wedays ~~continue~~of tothe ~~pursue~~date ~~other~~of ~~sources~~purchase. of The ~~equity~~ Factoring orAgreement ~~long-term~~provides ~~debt~~for ~~financings.~~interest Weat ~~also~~an ~~continue~~annual torate ~~negotiate~~of ~~payments~~prime plus ~~plans~~ 1% plus ~~and~~a ~~other~~monthly ~~accommodations~~fee ~~with~~of ~~our~~.6% ~~creditors~~on the daily average of unpaid balances.

~~Net~~During ~~cash provided~~ fiscal 2003, we were notified by both the New Jersey Department of Labor and the California Employment Development Department (~~used~~the in“EDD”) ~~operating~~that, ~~activities~~if certain payroll delinquencies were not cured, judgment would be entered against us. As of March 31, 2007, there was still an aggregate of $13.4 million in delinquent payroll taxes outstanding,~~987,697~~ including interest and ~~$(13~~penalties,~~312)~~ inwhich are included in “Payroll taxes payable” on the balance sheet as of March 31, 2007. Judgment ~~nine~~ has ~~months~~not ~~ended~~been ~~June~~entered 30against us in California. While judgment has been entered against us in New Jersey, no actions have been taken to enforce same. On January 7, 2005, ~~and~~we ~~2004~~entered into a payment plan agreement with the EDD, ~~respectively~~which requires us to pay $12,500 per week to the EDD. The $12,500 weekly payment is subject to increase for a three month period following any quarter in which our reported income exceeds $200,000, based upon a percentage related to the amount of increase above $200,000.

~~Net~~In ~~cash~~ July ~~used~~ 2003, inwe ~~investing~~entered ~~activities~~into ~~was~~an ~~$630~~agreement with the holder of our Series A Preferred Stock pursuant to which we agreed to redeem the aggregate 1,~~474~~458,933 ~~and~~shares of Series ~~$36~~A Preferred Stock then outstanding. The agreement,~~206~~ as amended in March 2004, provided that our obligation to redeem the ~~nine~~Series ~~months~~A ~~ended~~Preferred Stock ~~June~~ was contingent 30upon the sale of not less than $1,000,000 ~~2005~~units ~~and~~in our “best efforts” public offering of units. This condition was satisfied in July 2004. As a result, ~~respectively~~we paid $500,000 and issued 1,750,000 shares of common stock to the Series A holder and redeemed all of the Series A Preferred Stock following the initial closing of the offering. We ~~used~~were obliged to pay the Series A holder an additional $~~136~~250,000 inby ~~connection~~January ~~with~~31, 2005, at our option, issue to the Series A holder shares of common stock having an aggregate market value of $250,000, ~~acquisition~~ based inupon ~~March~~the average closing bid prices of the common stock for the 30 days preceding January 31, 2005. ~~Payments~~We infailed ~~connection~~to ~~with~~make the ~~sale~~$250,000 ofpayment ~~discontinued~~in cash ~~operations~~ or stock. ~~aggregated~~Accordingly, we are required to pay $~~322~~300,~~952~~000 in cash, plus accrued interest at the ~~nine~~rate ~~months~~of ~~ended~~18% ~~June~~per 30year from the date of default until the date the default is cured, ~~2005~~to the former holder of the Series A Preferred Stock. The ~~balance~~ former holder of ~~cash~~the ~~used~~Series A Preferred Stock has threatened to institute litigation against us related to this matter and the Asset Sales. We are currently in ~~both~~discussions ~~periods~~with ~~was~~the ~~primarily~~former ~~for~~holder ~~capital~~of the Series A Preferred ~~expenditures~~ Stock to try to resolve all issues.

~~Net~~In ~~cash provided~~ January by2006 ~~(used~~we ~~in)~~entered ~~used~~into inan ~~financing~~agreement ~~activities~~with ~~was~~the ~~$(2,058,669)~~holder ~~and~~of ~~$113,092 in~~all of the outstanding ~~nine~~shares ~~months~~of ~~ended~~our ~~June~~Series ~~30,~~I ~~2005~~Preferred ~~and~~Stock ~~2004,~~pursuant ~~respectively.~~to Wewhich ~~had~~we ~~net~~issued ~~borrowings~~ to ~~(repayments)~~the ~~of $(1~~holder,~~099,393)~~ ~~and~~effective ~~$2,154,806~~as ~~under our line~~ of ~~credit in~~December ~~the nine months ended June 30~~28, 2005 ~~and 2004~~, ~~respectively.~~a ~~Net~~secured ~~short-term~~convertible ~~loan~~ promissory ~~repayments~~note ~~were $204,687 and $413,603~~ in the ~~nine~~aggregate ~~months~~principal ~~ended~~amount ~~June~~of 30$2, ~~2005 and 2004~~356,750 ~~respectively. During~~ (the ~~nine months ended June 30, 2005, our~~ ~~Chief~~“Convertible ~~Executive~~Note”) ~~Officer~~in ~~loaned~~exchange anfor ~~aggregate~~all of ~~$650,000~~such toshares ~~us, all~~ of ~~which was repaid~~Series ~~during~~I ~~the nine months ended June 30, 2005~~Preferred Stock. ~~Payments~~(See ofNote ~~notes~~9 ~~payable - acquisitions~~to ~~was $696,445 and $465,844 in~~ the ~~nine~~Condensed ~~months~~Consolidated ~~ended June 30, 2005~~Financial ~~and 2004, respectively~~ Statements).

~~Our~~As ~~principal uses~~ of ~~cash are to fund temporary employee payroll expense and~~ ~~employer~~ March ~~related~~31, ~~payroll taxes or the similar costs charged to us under our payroll outsourcing agreement~~2007,, ~~investment~~there inwere ~~capital~~no ~~equipment, start~~off-~~up expenses~~balance ofsheet ~~new offices~~arrangements, ~~expansion of services offered~~unconsolidated subsidiaries, ~~workers’~~commitments ~~compensation, general~~or ~~liability~~guarantees ~~and~~of other ~~insurance coverages~~parties, ~~debt~~except ~~service~~as ~~and~~disclosed in the ~~costs~~notes ~~relating~~ to ~~other~~financial ~~transactions such as acquisitions~~statements. ~~Temporary~~Stockholders’ ~~employees are paid weekly, as are payments under our payroll outsourcing agreements with related parties~~ (~~see~~deficiency) ~~Note~~at 13that todate ~~Condensed Consolidated Financial Statements)~~was $8,037,444.

We ~~have~~ engaged ~~a loan~~in ~~and~~various ~~security~~transactions ~~agreement (the “Loan Agreement”)~~ with ~~Capital~~related ~~Temp~~parties ~~Funds,~~during ~~Inc. (“Capital” or~~ the ~~“Lender”),~~six ~~which provides for a line of credit up to 85% of~~months ~~eligible accounts receivable, as defined, not to exceed $12,000,000. The Loan~~ ended ~~Agreement~~ March ~~restricts our ability to incur other indebtedness~~31, ~~pay~~2007 ~~dividends and repurchase~~including ~~stock. Borrowings under~~ the Loan Agreement bear interest at 3% above the prime rate and are collateralized by substantially all of our assets. As of June 30, 2005, $9,929,677 was outstanding under the credit agreement.following:

At June 30, 2005, we were in violation of the following covenants under the Loan Agreement:

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

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

~~The Forbearance~~• ~~Agreement~~At ~~amended~~March ~~the~~31, ~~Loan~~2007, ~~Agreement~~we owed: $41,000 under a demand note bearing interest at 10% per annum to ~~reduce~~a corporation owned by the ~~maximum~~son ~~credit line~~of Joseph J. Raymond, our Chairman, President and CEO; $4,123 to a trust formed for the benefit of a family member of a former member of our Board of Directors under a promissory note bearing interest at 12% per annum which became due in full in August 2005; $41,598 to a former member of our Board of Directors under a promissory note bearing interest at 12% per annum which becomes due in full in May 2006. We borrowed $100,000 from Joseph J. Raymond in December 2006 and repaid it in January 2007. We also borrowed $20,000 from a significant shareholder in January 2007, which, ~~since~~is still outstanding at March 131, ~~2005~~2007. ~~has~~• ~~been~~The ~~further~~nephew ~~reduced~~of by our Chairman, President and CEO is affiliated with Pinnacle Investment Partners, LP (“Pinnacle”), which is the holder of the Convertible Note issued in exchange for our Series I Preferred Stock. As of March 31, 2007, $~~250~~616,~~000~~850 ~~per~~was ~~month~~outstanding ~~provided~~on the Convertible Note. • On February 13, ~~however~~2007, ~~that~~we acquired from Fusion Business Services, LLC (“Fusion”) an additional 1% interest in STS in exchange for the ~~event~~issuance ~~that~~to the ~~amounts~~members of Fusion of 70,111 shares of our common stock. As a result of the ~~obligation~~ ~~owing~~transfer, which was effective as of January 1, 2007, we own a 51% interest in STS and Fusion owns a 49% interest. Fusion has a right to ~~Capital~~re-acquire ~~were~~the ~~reduced~~1% ~~below~~interest $7transferred to the Company upon the occurrence of certain events,~~500~~ including the institution of bankruptcy or insolvency proceedings against us,~~000~~ a sale of all or substantially all of our assets, ~~then~~a merger or consolidation of us with another entity, or the ~~monthly reduction~~liquidation ~~would~~or dissolution of us. The purchase price payable by Fusion in connection with any such re-acquisition shall be ~~suspended~~a ~~unless~~return ~~and~~of ~~until~~the shares issued to it for the ~~obligations~~1% ~~again~~interest ~~exceed~~ or a cash payment of $71,~~500,000,~~262. ~~subject~~A toson ~~certain~~of ~~further~~our ~~adjustments~~CEO has a majority interest in Fusion.

Provided we were in compliance with all of the terms and conditions of the Forbearance Agreement, which was amended in April 2005, Capital agreed that it would refrain from exercising its rights and remedies under the Loan Agreement and applicable law until August 26, 2005.

On August 11, 2005, we and the Lender entered into an Amended and Restated Forbearance Agreement (the “Amended Forbearance Agreement”) whereby the Lender has again agreed to forbear from accelerating obligations and/or enforcing existing defaults.

The Amended Forbearance Agreement provides for the following:

1. The Lender will forbear from exercising its rights and remedies under the Loan Documents, solely with respect to certain Designated Defaults during the period commencing on August 11, 2005, or such other date as may be mutually agreed upon in writing by the Parties, and ending on the earlier to occur of (a) August 26, 2005 or (b) the date of any Forbearance Default (the “Forbearance Period”). 2. During the Forbearance Period, the maximum credit line shall continue at $10,500,000. 3. In consideration for the Lender’s extension of forbearance, Lender will charge us a forbearance fee in the amount of $300,000 (the “Forbearance Fee”). However, if the Forbearance Fee is paid in full within sixty (60) days from August 11, 2005, the Lender will rebate $50,000 to us. Additionally, provided there are no additional events of default under the Loan Agreement, there will be no additional Forbearance Fee due through October 31, 2005. 4. During the Forbearance Period, the Lender shall maintain a representative at our premises, at our cost, to monitor collateral performance and the adherence by us to the terms and provisions of the Loan Documents. 5. No later than August 31, 2005, we shall have received at least $500,000 in capital or subordinated loans from a third party. 6. Failure by us or ALS, after the Forbearance Period, to comply in any material respect with any of the terms and conditions of the Outsourcing Agreement or modification of the Outsourcing Agreement without the Lender’s consent, shall constitute a Forbearance Default. 7. Failure by us to comply with the Forbearance Agreement between ourselves and ALS (the “ALS Forbearance”), shall constitute a Forbearance Default.

Thus, provided we are in compliance with all of the terms and conditions of the Amended Forbearance Agreement, the Lender agrees that it will refrain from exercising its rights and remedies under the Loan Agreement and applicable law until no earlier than August 26, 2005.

In connection with us and the Lender entering into the Amended Forbearance Agreement, we, the Lender and ALS also entered into the ALS Forbearance, whereby ALS agreed to forbear, through August 25, 2005, from enforcing payment defaults under the Outsourcing Agreement subject to certain conditions.

Pursuant to the ALS Forbearance, we paid to ALS, on August 11, 2005, the sum of $1,112,000 to cure defaults under the Outsourcing Agreement through that date. During the term of the ALS Forbearance:

1. After the August 11, 2005 payment, invoices totaling the amount of $1,100,000 shall be due and payable on or before August 18, 2005 (the “Deferred Amount”), and the remaining amount due under invoices after deducting $1,100,000 shall be due and payable immediately (the “Immediately Payable Amount”). 2. We shall repay the Immediately Payable Amount by directing the Lender, on a daily basis starting Friday, August 12, 2005, to advance and wire transfer to ALS from available funds under the Loan Agreement with the Lender. We shall provide ALS with an exact copy of the loan status provided by the Lender. In the event that the Lender lowers the advance rate under the Loan Agreement, the Lender shall immediately notify ALS thereof and ALS may elect, prior to the Lender making any additional advances, to cease to forbear under the ALS Forbearance. 3. We shall be in default of the ALS Forbearance unless the Immediately Due Amount is paid in full by August 17, 2005. The Deferred Amount shall be due in full without further notice or demand at 12:00 p.m. Eastern Time on August 18, 2005. 4. If the Immediately Due Amount and the Deferred Amount are paid in full by noon on August 18, 2005, and no other defaults exist under the ALS Forbearance, ALS will forbear for one more week, but all terms of the Outsourcing Agreement, as amended, including, but not limited to, payment terms shall govern. 5. Any further default under the ALS Forbearance or the Amended Forbearance Agreement shall be a default. A default under the Amended Forbearance Agreement or the ALS Forbearance shall entitle ALS to immediately terminate the ALS Forbearance and immediately seek all available remedies. 6. The Lender will forbear from exercising its rights under the Loan Agreement during the Forbearance Period pursuant to the Amended Forbearance Agreement. ALS’ obligation to forbear shall cease if the Lender ceases to forbear under the Amended Forbearance Agreement and such ALS right to cease forbearance shall constitute ALS’ sole remedy against Lender.

In consideration for the ALS Forbearance, ALS shall receive a $50,000 Forbearance Fee, (net of any other default penalties or interest), payable on the earlier of the termination of the agreement or an additional default.

While we have identified and are currently aggressively exploring other funding alternatives, we can provide no guarantee that we will be able to obtain such alternate sources of funding before the expiration of the Forbearance Period, i.e. August 26, 2005, if not further extended. If we cannot obtain an alternate source of funding, it may adversely affect our cash flow and there can be no assurance that Capital will not pursue all remedies available to it, which could include the imposition of insolvency proceedings.

We have entered into a Letter of Intent with Humana Trans Services Holding Corp. (“Humana”) which contemplates, among other things, that Humana will provide a $500,000 bridge loan to us and provide new receivable financing or arrange a line of credit to replace our line of credit with Capital. No assurance can be given that any of such financing will be obtained. See Part II - Item 5 of this Report.

We may be required to make certain “earnout” payments to sellers of businesses that we have acquired in recent years. The amount of these payments, if any, will depend upon the results of the acquired businesses. There is $138,000 included in “Accounts payable and accrued expenses” on the balance sheet as of June 30, 2005 for earnout payments that we recorded as part of one of our acquisitions. The original amount recorded at the time of the acquisition was $244,000. The final computation of the earnout was based upon the operations of the acquired business through November 30, 2004. Accordingly, we reduced the earnout liability to $222,000 and reduced intangible assets by the $22,000 difference.

We have entered into an agreement with the Seller to pay $14,000 a month for twelve months beginning January 2005 and $9,000 a month for six months beginning January 2006.

Source One Personnel, Inc. (“Source One”) had the right to require us to repurchase 100,000 shares of our common stock at a price of $8.00 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 exercised this right on July 29, 2003. We are attempting to negotiate an arrangement, which would permit us 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 arrangement. During the year ended September 30, 2004, we paid $150,000 against this liability, which is reflected as “put options liability” on the condensed consolidated balance sheet.

During fiscal 2003, we were notified by both the New Jersey Department of Labor and the California Employment Development Department (the “EDD”) that, if certain payroll delinquencies were not cured, judgment would be entered against us. As of June 30, 2005, there was still an aggregate of $4.3 million in delinquent payroll taxes outstanding, which are included in “Payroll taxes payable” on the balance sheet as of June 30, 2005. Judgment has not been entered against us in California. While judgment has been entered against us in New Jersey, no actions have been taken to enforce same. On January 7, 2005, we entered into a payment plan agreement with the EDD, which requires us to pay $12,500 per week to the EDD. The $12,500 weekly payment is subject to increase for a three month period following any quarter in which our reported income exceeds $200,000, based upon a percentage related to the amount of increase above $200,000.

As of June 30, 2005, there were no off-balance sheet arrangements, unconsolidated subsidiaries, commitments or guarantees of other parties, except as disclosed in the notes to financial statements. Stockholders’ deficiency at that date was $4,249,489.

In July 2003, we entered into an agreement with Artisan (UK) plc (“Artisan”) pursuant to which we 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 represented all of the shares of Series A Preferred Stock then outstanding. The agreement, as amended in March 2004, provided that our obligation to redeem the Series A Preferred Stock was contingent upon our sale of not less than $1,000,000 of units in a proposed “best-efforts” public offering of the units (the “Offering”). This condition was satisfied in July 2004. As a result, we paid $500,000 and issued 1,750,000 shares of common stock to an assignee of Artisan and redeemed all of the Series A Preferred Stock following the initial closing of the Offering. We were obligated to pay the assignee an additional $250,000 by January 31, 2005, or at our option, issue to the assignee 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 30 days preceding January 31, 2005. As we failed to make the $250,000 payment in cash or stock, we will be required to pay the assignee $300,000 in cash, plus accrued interest at the rate of 18% per year from January 31, 2005, until the date the default is cured.

We engaged in various transactions with related parties during the nine months ended June 30, 2005 including the following:

• We paid $139,151 to an entity, which employs Jeffrey J. Raymond, the son of Joseph J. Raymond, our Chairman, President and Chief Executive Officer, for consulting services. We also paid $50,000 to an entity owned by Joseph J. Raymond, Jr., who also is the son of Joseph J. Raymond, for consulting services. These amounts were included in selling, general and administrative expense. The services provided included the identification of acquisition candidates, acquisition advisory services, due diligence, post-acquisition transition services, customer relations, accounts receivable collection and strategic planning advice. • We paid fees of $75,000 and $116,000 in connection with the sale of our Northern California offices and an acquisition, respectively, to an entity with whom Jeffrey J. Raymond is affiliated. • Jeffrey J. Raymond, is employed by an entity which serves as a consultant to Humana Trans Services Holding Corp. (see Note 15 to the condensed consolidated financial statements). • Joseph J. Raymond, Jr. is a 50% member in ALS, LLC, which is the holding company for Advantage Services Group, LLC (“Advantage”). We are a party to an Outsourcing Agreement with ALS and pursuant to which ALS provides payroll outsourcing services for all of the Company’s in-house staff, except for its corporate employees, and customer staffing requirements (see Part II - Other Information, Item 5. Other Information). As a result of this arrangement, all of our field personnel are employed by ALS. We pay agreed upon pay rates, plus burden (payroll taxes and workers’ compensation insurance) plus a fee ranging between 2% and 3% (0% - 1 ½% effective June 10, 2005) of pay rates. The total amount charged by ALS under this agreement was $76,265,000 during the nine months ended June 30, 2005. • At June 30, 2005, we owed: $41,000 under a demand note bearing interest at 10% a year to a corporation owned by the son of Joseph J. Raymond; $14,125 to a trust formed for the benefit of a family member of a former member of our Board of Directors under a promissory note bearing interest at 12% a year which will become due in full in August 2005 and $56,364 to a member of our Board of Directors under a promissory note bearing interest at 12% a year which becomes due in full in May 2006. • Accounts payable and accrued expenses - related parties in the attached condensed consolidated balance sheets at June 30, 2005 and September 30, 2004, represents amounts due to ALS and Advantage. • The nephew of the CEO of the Company is affiliated with Pinnacle Investment Partners, LP. The Company also believes that PIP Management Inc., which has been designated as the advisor to the Series I holders, is also affiliated with Pinnacle Investment Partners, LP. • During the nine months ended June 30, 2005, Joseph J. Raymond loaned an aggregate of $650,000 to us, all of which was repaid during the nine months ended June 30, 2005. Of this amount, $250,000 bore interest at 12% a year and the balance was non-interest bearing.

Contractual Obligations

Our aggregate contractual obligations are as follows:

			Payments Due by Fiscal Period (in Thousands)
						2007 -		2009 -
					2009 -		2011 -
	Total	~~Total~~	2008	~~2006~~	2010	~~2008~~	2012	~~2010~~	Thereafter	~~Thereafter~~
Contractual Obligations:
Long-term debt obligations	$	~~2003~~1,445	$	~~783~~841	$	~~521~~445	$	~~490~~159	$	~~209~~-
Operating lease obligations		~~978~~219		~~496~~60		~~444~~119		3840		¾-
Put options liability		650		650		¾		¾		¾
Series A redemption payable		300		300		-		-		-
Series A redemption payable		300		300		¾		¾		¾
Payroll tax liability (a)		122		122		-		-		-
Series I Preferred Stock		2,178		¾		2,178		¾		¾
Workers’ compensation insurance liability (b)		287		41		144		102		-
Earnout liability		138		138		¾		¾		¾
TOTAL	$	2,373	$	1,364	$	708	$	301	$	-
Payroll tax liability (a)		1,402		741		661		¾		¾
TOTAL	$	7,649	$	3,108	$	3,804	$	528	$	209

(a) Exclusive of interest and penalties. Payments may be accelerated based upon future operating result benchmarks.

(a)

Exclusive of interest and penalties. Payments may be accelerated based upon future operating result benchmarks.

(b)

In December 2006, we entered into an agreement with the California Compensation Insurance Fund (“the Fund”) whereby the Fund agreed to reduce our then liability of $2,023,000 to $300,000 provided that we make certain monthly payments aggregating $300,000 over 56 months. At March 31, 2007, $2,005,000 is included in accounts payable and accrued expenses on the attached condensed consolidated balance sheet. The difference of $1,723,000 has not been recognized in earnings at this time since it is contingent upon our paying the $300,000 in accordance with the terms of the agreement.

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 ~~December 2004~~ July 2006, the Financial Accounting Standards Board issued ~~Statement~~FASB ofInterpretation ~~Financial Accounting Standards~~ No. ~~123~~ 48 (~~revised~~FIN ~~2004~~48), “~~Share-Based~~Accounting ~~Payment” (“SFAS~~for ~~NO.~~Uncertainty ~~123R”).~~in ~~SFAS~~Income ~~No.~~Taxes ~~123R~~- ~~replaces~~an ~~SFAS~~interpretation ~~No. 123 “Accounting for~~of ~~Stock-Based~~ FASB ~~Compensation”,~~Statement ~~and supercedes Accounting Principles Board Opinion~~ No. ~~25, “Accounting for Stock Issued to Employees~~109” ~~(APB No~~. ~~25).~~FIN ~~SFAS~~48 ~~No.~~provides ~~123R requires~~guidance ~~that~~for the ~~cost~~recognition, measurement, ofclassification ~~all~~and ~~forms~~disclosure of ~~equity-based~~the ~~compensation~~financial ~~granted~~statement toeffects ~~employees,~~ of a ~~excluding~~position ~~employee~~taken ~~stock~~or ~~ownership~~expected ~~plans,~~to be ~~recognized~~taken in a ~~company’s~~ ~~income~~tax ~~statement~~return ~~and~~(“tax ~~that~~position”). ~~such~~The financial ~~cost~~statement beeffects ~~measured~~of ata ~~the~~tax ~~fair~~position ~~value~~must ~~of the~~be ~~stock~~recognized ~~options.~~when ~~This statement~~ there is ~~effective for financial statements relating~~a to likelihood ~~fiscal~~of ~~periods~~more ~~beginning~~than ~~after~~50 ~~June~~percent ~~15,~~that ~~2005.~~based ~~We expect to adopt SFAS No. 123R~~ on ~~October~~the 1,technical ~~2005 on a prospective basis~~merits, ~~which~~the position will ~~require~~be ~~recognition of~~sustained ~~compensation~~upon ~~expense~~examination ~~for~~and ~~all~~resolution ~~stock~~of ~~option~~the ~~or other equity - based awards~~related ~~that vest~~ appeals or ~~become~~litigation ~~exercisable~~processes, ~~after~~if ~~the effective date~~any. WeA dotax ~~not~~position ~~expect~~ that meets the ~~adoption~~ recognition ofthreshold ~~SFAS~~must ~~No.~~be ~~123R~~measured ~~will~~initially ~~have~~and asubsequently ~~material~~as ~~impact on our financial position~~the ~~and~~ largest amount ~~results~~ of ~~operations~~tax asbenefit itthat ~~relates~~is togreater ~~employee~~than ~~stock~~50 ~~options~~percent ~~granted~~likely ~~at June~~of ~~30, 2005.~~being

In May 2005, FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections”) (SFAS 154”). SFAS 154 requires retroactive application of a voluntary change in accounting principle to prior period financial statements unless it is impracticable. SFAS 154 also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS 154 replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements”. We believe that adoption of the provisions of SFAS 154 will not have a material impact on our consolidated financial statements.21

realized upon ultimate settlement with a taxing authority. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not expect its adoption of FIN 48 to have a material impact on its consolidated financial portion, results of operations or cash flows.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (“SFAS”) No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, or the Company’s fiscal year ending September 30, 2009. The Company does not expect the adoption of this new standard to have a material impact on its consolidated financial position, results of operations or cash flow.

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

Sensitive Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Significant estimates include management’s estimate of the carrying value of accounts receivable, the impairment of goodwill and the establishment of valuation reserves offsetting deferred tax assets. Actual results could differ from those estimates. The Company’s critical accounting policies relating to these items are described in the Company’s Annual Report on Form 10-K for the year ended September 30, ~~2004~~2006. As of ~~June~~March 3031, ~~2005~~2007, there have been no material changes to any of the critical accounting policies contained therein.

23Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

~~Item~~We are subject 3to the risk of fluctuating interest rates in the ordinary course of business for borrowings under our Factoring Agreement, which provides for the sale of up to $1,500,000 of accounts receivable to Action Capital. ~~QUANTITATIVE~~Advances under ~~AND~~this ~~QUALITATIVE~~agreement ~~DISCLOSURE~~bear ~~ABOUT~~interest ~~MARKET~~at ~~RISKS~~an annual rate of prime plus 1%, plus a monthly management fee of.6% on the dail average of unpaid balances.

We are subject to the risk of fluctuating interest rates in the ordinary course of business for borrowings under our Loan and Security Agreement, as modified by the Forbearance 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%. A significant increase in the underlying interest rate could have a material adverse effect on our cash flow.

Further, the maximum credit line of $12,000,000 has been reduced by $250,000 per month since March 1, 2005. The continued reduction in our Maximum Credit Line has affected our ability to borrow against all of our eligible accounts receivable and thus has also adversely affected our cash flow.

If we cannot obtain an alternate source of funding by the expiration of the forbearance period, i.e. by August 26, 2005, if not further extended with respect to both Capital and ALS, it may adversely affect our cash flow and there can be no assurance that our Lender will not pursue all remedies available to it, which could include the imposition of insolvency proceedings. Additionally, if we cannot obtain an extension of the ALS Forbearance, or are unable to cure defaults under the ALS Outsourcing Agreement, as amended, going forward, there can be no assurance that we will be able to obtain an alternative outsourcing provider. These conditions raise substantial doubts about the Company’s ability to continue as a going concern.

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

Item 4. - CONTROLS AND PROCEDURES

AtUnder the ~~end~~ supervision ofand with the ~~period~~participation ~~covered~~of bymanagement, ~~this~~including ~~report,~~our weChief Executive ~~carried~~Officer ~~out~~and anour ~~evaluation~~Chief ofFinancial Officer, we have evaluated the effectiveness of the design and ~~operations~~operation of our disclosure controls and procedures. ~~This~~Disclosure ~~evaluation~~controls ~~was~~and ~~carried~~procedures ~~out~~are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the ~~supervision~~1934 ~~and~~Act ~~with~~is recorded, processed, summarized ~~the~~ and ~~participation~~ reported ofwithin ~~our~~the ~~management,~~time ~~including~~periods ~~our~~specified ~~Chairman~~in the SEC’s rules and ~~Chief~~forms. ~~Executive~~Based ~~Officer~~ on ~~along~~this ~~with~~evaluation, our Chief ~~Financial~~Executive Officer, ~~who~~and Chief Financial Officer have concluded that our internal control over financial reporting discussed below, our disclosure controls and procedures were ~~generally~~ effective as of the ~~date~~ end of the period ~~evaluation,~~covered ~~but~~by ~~there~~this ~~continue to be several material weaknesses that require further correction~~report.

As disclosed in Item 9A of our Form 10-K filed with the SEC on December 23, 2004, in connection with its audit of, and in the issuance of its report on our financial statements for the year ended September 30, 2004, our auditors delivered a letter that identified certain items that it considers to be material weaknesses in the effectiveness of our internal controls. These material weaknesses were: (1) limited resources and manpower in the finance department; (2) inadequacy of the financial review process as it pertains to various account analyses; and (3) inadequate documentation of financial procedures as it relates to certain accounting estimates and accruals.22

~~While~~In March 2006, the Securities and Exchange Commission requested that we amend our ~~believe~~ Annual Report ~~these~~on ~~weaknesses~~Form ~~continue~~10-K for the fiscal year ended September 30, 2005 to remove the audit report issued by Amper Politziner & Mattia, P.C., our predecessor auditor, on our financial statements as of and for the years ended September 30, 2004 and 2003, inasmuch as we ~~also~~had ~~are~~not ~~continuing~~obtained permission from the predecessor auditor to ~~implement~~include such report in the filing as contemplated by Public Company ~~additional~~ Accounting ~~procedures~~Oversight toBoard ~~alleviate~~Statements ~~these~~of ~~weaknesses~~Auditing Standards Section 508. Our Chief InExecutive ~~particular~~Officer and Chief Financial Officer have concluded that the inclusion of the predecessor auditor report in our Form 10-K for the fiscal year ended September 30, ~~there~~2005, ~~has~~represented a material weakness in our review of ~~been~~ applicable ~~improvement~~financial reporting regulatory requirements when preparing our financial statements for such period. A “material weakness” is a reportable condition in which the design or operation of one or more of the specific control components has a defect or defects that could have a material adverse effect on our ability to record, process, summarize and report financial data in the financial statements in a timely manner. We addressed the weakness in our review ~~process~~of the application of applicable financial reporting regulatory requirements by improving the training of our personnel and researching, identifying, analyzing, documenting and reviewing applicable regulatory requirements.

~~Except~~In ~~for~~ connection ~~our~~with ~~improvement~~its audit of, and in the issuance of its report on our financial statements ~~review~~for ~~process~~the year ended September 30, ~~there~~2004, ~~were~~Amper noPolitziner ~~significant~~& Mattia, ~~changes~~ P.C. delivered a letter to the Audit Committee of our Board of Directors and our management that identified three items that it considered to be material weaknesses in the effectiveness of our internal controls ~~during~~pursuant to standards established by the ~~quarter~~American ~~ended~~Institute ~~June~~of ~~30,~~Certified ~~2005~~Public Accountants. Those material weaknesses arose due to (1) limited resources and manpower in the finance department; (2) inadequacy of the financial review process; and (3) inadequate documentation of certain financial procedures. While we believe that we have ~~materially~~adequate ~~affected~~policies, orwe ~~are~~agreed ~~reasonably~~with ~~likely~~our toindependent ~~have~~auditors ~~materially~~that ~~affected,~~ our implementation ~~internal~~of ~~controls~~those ~~subsequent~~policies should be improved. As a result, although we were unable to expand the ~~date~~number of personnel in the accounting function due to financial constraints, we ~~carried~~did ~~out~~provide additional training to existing staff which allowed us to increase redundancies in our system and improve our ~~evaluation~~ segregation of duties.

24In addition, we identified deficiencies in our internal controls and disclosure controls related to the accounting for certain warrants, primarily with respect to accounting for derivative liabilities in accordance with EITF 00-19 and SFAS 133. We restated our consolidated financial statements for the years ended September 30, 2004 and 2005, in order to correct the accounting in such financial statements with respect to derivative liabilities in accordance with EITF 00-19 and SFAS 133. Since July 2006, we have undertaken improvements to our internal controls in an effort to remediate those deficiencies by training our accounting staff to understand and implement the requirements of EITF 00-19 and SFAS 133.

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

Other than the continued implementation of the improvements in our internal controls described above, there were no significant changes in our internal controls during the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to have materially affected, our internal controls subsequent to the date we carried out our evaluation.

Part II	Other Information
Item 1.	Legal Proceedings

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

Item 21A. ~~Unregistered~~Risk ~~Sales of Equity Securities and Use of Proceeds~~Factors

~~Not~~There ~~applicable~~ have been no material changes with respect to the risk factors disclosed in our Report on Form 10-K for the fiscal year ended September 30, 2006.

Item 3.

Defaults Upon Senior Securities

Dividends on our Series F Preferred Stock accrue at a rate of 7% per annum, payable monthly. As of the date of the filing of this report, $88116,~~500~~718 is in arrears on the Series F Preferred Stock.

Item 4.

Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of our security holders during the three months ended ~~June~~March 3031, ~~2005~~2006.

Item 5.

Other Information

aNot applicable. On June 29, 2005, we notified the holders of the Series I Preferred Stock, pursuant to Paragraph 4(a) of the Series I Certificate of Designation (the “Certificate”), of our election to extend (the “Extension”) the date by which we were required to redeem the Series I Preferred Stock to the 2 year anniversary date (i.e. August 5, 2006) of its original issuance (i.e. August 5, 2004).

In connection with the Extension, we paid all dividends accrued on the Series I through the one year anniversary of the date of issuance (the “Initial Redemption Date”), which equaled, in the aggregate, $261,239 as of August 5, 2005. As a result of the Extension, we will also be required to pay:

1. All dividends accruing on the Series I Preferred Stock after the Initial Redemption Date in cash on the last date of each calendar quarter (March 31, June 30, September 30 and December 31);

2. An additional $217,750 to the holders of the Series I Preferred Stock in the form of Common Stock, within 30 days after the Initial Redemption Date, i.e. by September 4, 2005; such shares to be valued at the Market Price (as defined in the Certificate) of our Common Stock on the Initial Redemption Date; and

3. An advisory fee to an advisor of the holders of the Series I Preferred Stock, PIP Management Inc., in an amount equal to $217,750, $174,200 of such amount to be paid in cash and the remaining $43,550 to be paid in shares of our Common Stock valued at the Market Price of the Common Stock on the Initial Redemption Date by no later than September 4, 2005. The nephew of the CEO of the Company is affiliated with Pinnacle Investment Partners, LP., the holder of a majority of the outstanding shares of Series I Preferred Stock. The Company also believes that PIP Management Inc., which has been designated as the advisor to the Series I holders, is also affiliated with Pinnacle Investment Partners, LP.

b. As reported in our Report on Form 10-Q for the quarter ended June 30, 2005, Essex & York, Inc., the Underwriter of our public offering of Common Stock and Warrants that was completed in August 2004, and Pinnacle Investment Partners, LP, a holder of our Common Stock and Series I Preferred Stock, expressed disappointment with our fundamental performance and management issues. While we have had continuing discussions with these parties over the last several months in an attempt to avoid any potential litigation, we have not yet been able to reach a final resolution of our differences, and there can be no assurance that we will be able to do so.

c. On August 15, 2005, the Company entered into a Letter of Intent (the “LOI”) with Humana Trans Service Holding Corp. (“Humana”) relative to Humana and the Company entering into a Management Agreement whereby Humana will provide certain management, financial, strategic and marketing advisory services to the Company, along with, inter alia, a bridge financing of $500,000, and the Company will employ Ron Shapss as CEO and Jim Zimbler as Executive Vice President for Business Development (the “Management Transaction”).

The entering into of the Management Transaction is subject to the following conditions:

Humana will provide a Bridge Loan in the amount of $500,000 to the Company, prior to September 2, 2005;

No assurance can be given that the transactions with Humana will be completed.

An entity through which Jeffrey J. Raymond, the son of the CEO, is employed is a consultant to Humana.

Item 6

Exhibits

Number	Description
10.35	Amended and Restated Forbearance Agreement between the Company and Capital Temp Funds, Inc. dated August 11, 2005
10.36	Forbearance Letter Agreement by and among the Company, ALS, LLC and Capital Temp Funds, Inc. dated August 11, 2005.
10.37	Letter of Intent between the Company and Humana Trans Services Holding Corp. dated August 15, 2005.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002

2624

SIGNATURES

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

	STRATUS SERVICES GROUP, INC.
Date: August 17, 2005	By: /s/ Joseph J. Raymond
Date: May 10, 2007	By:	/s/ Joseph J. Raymond
	---------------------------------------
		Chairman of the Board of Directors, President and Chief Executive Officer
	Joseph J. Raymond
	Chairman of the Board of Directors,
	President and Chief Executive Officer

Date: August 17, 2005	By: /s/ Michael A. Maltzman
Date: May 10, 2007	By:	/s/ Michael A. Maltzman
	------------------------------------------
		Vice President and Chief Financial Officer Principal Financial and Accounting Officer
	Michael A. Maltzman
	Vice President and Chief Financial Officer
	Principal Financial and Accounting Officer

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