Form 8-K (Capital Temp Funds Amended Forbearance Agreement)

Exhibit 10.38

WRITER'S DIRECT DIAL:

(813) 227-8473

WRITER'S E-MAIL:

mbrundage@hwhlaw.com

August 25, 2005

Michael A. Maltzman, CFO

Stratus Services Group, Inc.

500 Craig Road

Suite 201

Manalapan, New Jersey 07726

Re:

Continued forbearance regarding default under outsourcing agreement dated August 13, 2004, by and between ALS, LLC and Stratus Services Group, Inc., as amended (the “Agreement”)

Dear Mr. Maltzman:

This law firm represents ALS, LLC (“Advantage”) in connection with the Agreement and Advantage’s business relationships with Stratus Services Group, Inc. (“Stratus”). Capital TempFunds (“CTF”) is Stratus’ secured lender under the terms and conditions of a loan and security agreement dated as of December 8, 2000 as amended and modified (the “Secured Loan”). As you know, by letters dated July 29, 2005, and August 5, 2005, Advantage has provided Stratus with written notices of its defaults and material breaches of payment obligations due under the Agreement. Stratus has failed to cure the material breaches of payment obligations within two business days of notice and therefore, pursuant to paragraph 3 of the Agreement, Advantage currently has the right to terminate the Agreement. Additionally, as a result of the defaults, Stratus owes to Advantage $1,000.00 per day of payment obligation breach or 24% annual interest on the outstanding amount, compounded daily, or a maximum allowed by law, whichever is higher. We understand that CTF has declared defaults under the Secured Loan, but has entered into a forbearance agreement with Stratus through at least September 2, 2005.

This letter sets forth the terms by which the parties agree to a forbearance of enforcement of existing defaults that have been declared by Advantage as to the Agreement and CTF as to the Secured Loan. Due to the time urgency in getting this letter agreement prepared and executed, the parties agree to enter a more formal agreement if reasonably necessary.

Advantage will forbear from enforcing current defaults under the Agreement, unless a default occurs hereunder, on the following terms and conditions:

On Stratus’ direction which is given hereby, CTF shall wire transfer to Advantage by 5:00 p.m. Eastern on August 25, 2005 the sum of $1.1 million dollars presently owed by Stratus to Advantage pursuant to the terms of the Agreement (which excludes the $600,000 subordinated receivable, which will remain due and owing)

2.	Conditioned upon timely receipt of the payment required in paragraph 1 above, Advantage will release and fund the current payroll associated with the Agreement.

3.	Provided that Stratus complies with all the terms of this forbearance agreement, Advantage will continue to perform under the Agreement and forbear from enforcing the existing defaults through September 1, 2005.

Advantage shall invoice to Stratus as to the payroll paid under paragraph 2 above consistent with the Agreement except that such invoices shall have two components: (a) invoices totaling the amount of $1,100,000 shall be due and payable on or before September 1, 2005 (the “Deferred Amount”); and (b) the remaining amount due under invoices after deducting $1,100,000 shall be due and payable immediately (the “Immediately Payable Amount”).

5.	Stratus shall repay the Immediately Due Amount by directing CTF, on a daily basis starting Friday August 25, 2005, to advance and wire transfer to Advantage from available funds under the Secured Loan. Stratus shall provide Advantage with an exact copy of the loan status provided by CTF.

6.	Stratus shall be in default hereunder unless the Immediately Due Amount is paid in full by August 31, 2005. The Deferred Amount shall be due in full without further notice or demand at 12:00 p.m. Eastern on September 1, 2005.

Any further default under the Agreement or the Secured Loan shall be a default hereunder, unless specifically stated other wise herein. A default hereunder or under the Agreement shall entitle Advantage to immediately terminate the Agreement and immediately seek all available remedies. For the term hereof, CTF agrees to give Advantage and Stratus immediate and simultaneous notice of any default by Stratus hereunder or under the Secured Loan. For the term hereof, Advantage agrees to give CTF and Stratus immediate and simultaneous notice of any default by Stratus hereunder or under the Agreement.

CTF has agreed to extend the term of the forbearance agreement through September 2, 2005, pursuant to and subject to such forbearance agreement, an executed copy of which will be immediately provided to Advantage. Stratus shall provide Advantage with copies of the executed forbearance agreement with CTF. Advantage’s obligation to forbear hereunder shall cease if CTF ceases to forbear under its forbearance agreement and Advantage’s right to cease forbearing hereunder shall constitute Advantages sole remedy against CTF.

HILL, WARD & HENDERSON, P.A.

Michael P. Brundage

ALS, LLC By: s/ Jay Wolin Its: CFO	Stratus Service Group, Inc. By: s/ Joseph J. Raymond Its: CEO
Acknowledged and consented to by Capital TempFunds, Inc. By: s/ James Rothman Its: President

New Jersey (State or other jurisdiction of incorporation)	001-15789 (Commission File Number)	22-3499261 (IRS Employer Identification Number)
500 Craig Road, Suite 201 Manalapan, New Jersey 07726 (Address of principal executive offices, including zip code)

r	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
r	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
r	Pre-commencement communications pursuant to Rule 14d-2 (b) under the Exchange Act (17 CFR 240.14d-2(b))
r	Pre-commencement communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR 240.13e-4 (c))

Section 1 -	Registrant’s Business and Operations
Item 1.01	Entry into a Material Definitive Agreement

	Stratus Services Group, Inc.
	(Registrant)

Dated: August 30, 2005	By: /s/ Joseph J. Raymond
	Joseph J. Raymond
	President and Chief Executive Officer