UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-Q







ý
                  
                  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended March 29, 2009ORo
                  
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934for
      the transition period from ________________ to
      ________________





Commission
file number:  1-6081





COMFORCE
Corporation


(Exact
name of registrant as specified in its charter)





Delaware
              36-2262248(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)415
      Crossways Park Drive, P.O. Box 9006, Woodbury, NY
              11797(Address
      of principal executive offices)
              (Zip
      Code)






516.437.3300


(Registrant’s
telephone number, including area code)







Not
applicable


(Former
name, former address and former fiscal year, if changed since last
report)






Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes ý     No  o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes ý     No  o




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




Large
      accelerated filer   o
            Accelerated
      filer   oNon-accelerated
      filer   o  (Do
      not check if a smaller reporting company)
            Smaller
      reporting company   ý







Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o     No  ý




Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.




Class
            
            Outstanding
      at May 4, 2009Common
      Stock, $0.01 par value per share
            
            17,387,630
      shares








COMFORCE
Corporation





INDEX











PageNumberPART
      I
              FINANCIAL
      INFORMATION
              3Item
      1.
              Financial
      Statements (unaudited)
              3Condensed
      Consolidated Balance Sheets at March 29, 2009 and December 28,
      2008
              3Condensed
      Consolidated Statements of Income for the three months ended March 29,
      2009 and March 30, 2008
              4Condensed
      Consolidated Statements of Cash Flows for the three months ended March 29,
      2009 and March 30, 2008
              5Notes
      to Unaudited Condensed Consolidated Financial Statements
              6Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              13Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              19Item
      4T.
              Controls
      and Procedures
              20PART
      II
              OTHER
      INFORMATION
              20Item
      1.
              Legal
      Proceedings
              20Item
      1A.
              Risk
      Factors
              20Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              20Item
      3.
              Defaults
      Upon Senior Securities
              20Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              20Item
      5.
              Other
      Information
              20Item
      6.
              Exhibits
              21SIGNATURES
              22





2


PART
I - FINANCIAL INFORMATION





ITEM
1.   FINANCIAL STATEMENTS







COMFORCE
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share and per share amounts)


(unaudited)







Assets
                                                
                                                March
      29,2009
                                                
                                                
                                                December
      28, 2008Current
      assets:Cash
      and cash equivalents
                                                
                                                $
                                                4,945
                                                
                                                
                                                
                                                6,137Accounts
      receivable, less allowance of $121 in 2009 and $92 in 2008
                                                
                                                
                                                131,044
                                                
                                                
                                                
                                                140,763Funding
      and service fees receivable, less allowance of $16 in 2009 and $20 in
      2008
                                                
                                                
                                                7,087
                                                
                                                
                                                
                                                8,941Prepaid
      expenses and other current assets
                                                
                                                
                                                3,483
                                                
                                                
                                                
                                                3,014Deferred
      income taxes, net
                                                
                                                
                                                353
                                                
                                                
                                                
                                                353Total
      current assets
                                                
                                                
                                                146,912
                                                
                                                
                                                
                                                159,208Property
      and equipment, net
                                                
                                                
                                                9,774
                                                
                                                
                                                
                                                10,057Deferred
      financing costs, net
                                                
                                                
                                                173
                                                
                                                
                                                
                                                213Goodwill
                                                
                                                
                                                32,073
                                                
                                                
                                                
                                                32,073Other
      assets, net
                                                
                                                
                                                166
                                                
                                                
                                                
                                                185Total
      assets
                                                
                                                $
                                                189,098
                                                
                                                
                                                
                                                201,736Liabilities
      and Stockholders’ DeficitCurrent
      liabilities:Accounts
      payable
                                                
                                                $
                                                2,140
                                                
                                                
                                                
                                                2,675Short-term
      debt (related party)
                                                
                                                
                                                1,778
                                                
                                                
                                                
                                                1,778Accrued
      expenses
                                                
                                                
                                                114,492
                                                
                                                
                                                
                                                131,441Total
      current liabilities
                                                
                                                
                                                118,410
                                                
                                                
                                                
                                                135,894Long-term
      debt
                                                
                                                
                                                73,088
                                                
                                                
                                                
                                                68,200Deferred
      taxes, net
                                                
                                                
                                                1,046
                                                
                                                
                                                
                                                1,074Other
      liabilities
                                                
                                                
                                                280
                                                
                                                
                                                
                                                401Total
      liabilities
                                                
                                                
                                                192,824
                                                
                                                
                                                
                                                205,569Commitments
      and contingenciesStockholders’
      deficit:Common
      stock, $.01 par value; 100,000,000 shares authorized; 17,387,560 shares
      issued and outstanding in 2009 and 2008
                                                
                                                
                                                174
                                                
                                                
                                                
                                                174Convertible
      preferred stock, $.01 par value:Series
      2003A, 6,500 shares authorized; 6,148 shares issued and outstanding at
      March 29, 2009 and December 28, 2008, with an aggregate liquidation
      preference of $8,965 at March 29, 2009and
      $8,850 at December 28, 2008
                                                
                                                
                                                4,304
                                                
                                                
                                                
                                                4,304Series
      2003B, 3,500 shares authorized; 513 shares issued and outstanding at March
      29, 2009 and December 28, 2008, with an aggregate liquidation preference
      of $724 at March 29, 2009 and $714 at December 28, 2008
                                                
                                                
                                                513
                                                
                                                
                                                
                                                513Series
      2004A, 15,000 shares authorized; 6,737 shares issued and outstanding at
      March 29, 2009 and December 28, 2008, with an aggregate liquidation
      preference of $8,916 at March 29, 2009 and $8,790 at December 28,
      2008
                                                
                                                
                                                10,264
                                                
                                                
                                                
                                                10,264Additional
      paid-in capital
                                                
                                                
                                                48,406
                                                
                                                
                                                
                                                48,406Accumulated
      other comprehensive loss
                                                
                                                
                                                (571
                                                )
                                                
                                                
                                                (522
                                                )Accumulated
      deficit
                                                
                                                
                                                (66,816
                                                )
                                                
                                                
                                                (66,972
                                                )Total
      stockholders’ deficit
                                                
                                                
                                                (3,726
                                                )
                                                
                                                
                                                (3,833
                                                )Total
      liabilities and stockholders’ deficit
                                                
                                                $
                                                189,098
                                                
                                                
                                                
                                                201,736The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.


3




COMFORCE
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(in
thousands except per share amounts)


(unaudited)





Three
      Months EndedMarch
      29, 2009
                      
                      
                      March
      30, 2008Net
      sales of services
                      
                      $
                      138,029
                      
                      
                      
                      150,210Costs
      and expenses:Cost
      of services
                      
                      
                      117,410
                      
                      
                      
                      126,402Selling,
      general and administrative expenses
                      
                      
                      18,774
                      
                      
                      
                      19,619Depreciation
      and amortization
                      
                      
                      836
                      
                      
                      
                      675Total
      costs and expenses
                      
                      
                      137,020
                      
                      
                      
                      146,696Operating
      income
                      
                      
                      1,009
                      
                      
                      
                      3,514Other
      expense:Interest
      expense
                      
                      
                      (644
                      )
                      
                      
                      (1,439
                      )Other
      expense, net
                      
                      
                      (73
                      )
                      
                      
                      (283
                      )(717
                      )
                      
                      
                      (1,722
                      )Income
      before income taxes
                      
                      
                      292
                      
                      
                      
                      1,792Provision
      for income taxes
                      
                      
                      136
                      
                      
                      
                      800Net
      income
                      
                      $
                      156
                      
                      
                      
                      992Dividends
      on preferred stock
                      
                      
                      251
                      
                      
                      
                      251Net
      (loss) income available to common stockholders
                      
                      $
                      (95
                      )
                      
                      
                      741Basic
      (loss) income per common share
                      
                      $
                      (0.01
                      )
                      
                      
                      0.04Diluted
      (loss) income per common share
                      
                      $
                      (0.01
                      )
                      
                      
                      0.03Weighted
      average common shares outstanding, basic
                      
                      
                      17,388
                      
                      
                      
                      17,388Weighted
      average common shares outstanding, diluted
                      
                      
                      17,388
                      
                      
                      
                      32,624







The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


4


COMFORCE
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)




Three
      Months EndedMarch
      29, 2009
                          
                          
                          March
      30, 2008Cash
      flows from operating activities:Net
      income
                          
                          $
                          156
                          
                          
                          
                          992Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization of property and equipment
                          
                          
                          836
                          
                          
                          
                          675Amortization
      of deferred financing fees
                          
                          
                          40
                          
                          
                          
                          48Net
      provision for bad debts
                          
                          
                          25
                          
                          
                          
                          -Changes
      in assets and liabilities:Accounts,
      funding and service fees receivable
                          
                          
                          11,561
                          
                          
                          
                          (106
                          )Prepaid
      expenses and other current assets
                          
                          
                          (475
                          )
                          
                          
                          435Accounts
      payable and accrued expenses
                          
                          
                          (17,439
                          )
                          
                          
                          4,596Income
      tax receivable
                          
                          
                          22
                          
                          
                          
                          4Net
      cash (used in) provided by operating activities
                          
                          
                          (5,274
                          )
                          
                          
                          6,644Cash
      flows from investing activities:Purchases
      of property and equipment
                          
                          
                          (553
                          )
                          
                          
                          (1,068
                          )Net
      cash used in investing activities
                          
                          
                          (553
                          )
                          
                          
                          (1,068
                          )Cash
      flows from financing activities:Net
      repayments under capital lease obligations
                          
                          
                          (62
                          )
                          
                          
                          (57
                          )Net
      borrowings under line of credit agreements
                          
                          
                          4,888
                          
                          
                          
                          1,500Net
      cash provided by financing activities
                          
                          
                          4,826
                          
                          
                          
                          1,443Net
      (decrease) increase in cash and cash equivalents
                          
                          
                          (1,001
                          )
                          
                          
                          7,019Effect
      of exchange rates on cash
                          
                          
                          (191
                          )
                          
                          
                          131Cash
      and cash equivalents at beginning of period
                          
                          
                          6,137
                          
                          
                          
                          6,654Cash
      and cash equivalents at end of period
                          
                          $
                          4,945
                          
                          
                          
                          13,804Supplemental
      disclosures:Cash
      paid for:Interest
                          
                          $
                          561
                          
                          
                          
                          1,054Income
      taxes
                          
                          
                          880
                          
                          
                          
                          227






The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.




5


COMFORCE
CORPORATION AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






1.   GENERAL




COMFORCE
Corporation (“COMFORCE”) is a provider of outsourced staffing management
services that enable Fortune 1000 companies and other large employers to
consolidate, automate and manage staffing, compliance and oversight processes
for their contingent workforces.  The Company also provides specialty
staffing, consulting and other outsourcing services to Fortune 1000 companies
and other large employers for their healthcare support services, technical and
engineering, information technology, telecommunications and other staffing
needs.  In addition, the Company provides funding and back office
support services to independent consulting and staffing companies.




COMFORCE
Operating, Inc. (“COI”), a wholly-owned subsidiary of COMFORCE, was formed for
the purpose of facilitating certain of the Company’s financing transactions in
November 1997.  Unless the context otherwise requires, the term the
“Company” refers to COMFORCE, COI and all of their direct and indirect
subsidiaries, all of which are wholly-owned.




The
accompanying unaudited interim condensed consolidated financial statements of
the Company have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission.  Certain information and footnote
disclosures normally included in annual financial statements have been condensed
or omitted pursuant to those rules and regulations.  In the opinion of
management, all adjustments, consisting of normal recurring adjustments
considered necessary for a fair presentation, have been
included.  Management believes that the disclosures made are adequate
to ensure that the information presented is not misleading; however, these
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s annual report
on Form 10-K for the fiscal year ended December 28, 2008.  The results
for the three month period ended March 29, 2009 are not necessarily indicative
of the results of operations that might be expected for the entire
year.






2.   ESTIMATES




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Some of the significant estimates involved are the
collectibility of receivables, the fair value of goodwill and share-based
compensation expense, the recoverability of long-lived assets, deferred tax
assets and tax uncertainties, accrued workers compensation liabilities and the
assessment of litigation and contingencies.  Actual results could
differ from those estimates.






3.   NEW
ACCOUNTING PRONOUNCEMENTS




In
December 2007, the Financial Accounting Standards Board (the “FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) SFAS 141-R, Business Combinations (“SFAS
141-R”).  This statement is effective for us on December 29, 2008, and
applies prospectively to business combinations for which the acquisition date is
on or after December 29, 2008.  SFAS 141-R significantly changes the
accounting for acquisitions. Some of the major provisions are that acquisition
related costs will generally be expensed as incurred, contingent consideration
will be recorded at fair value on the acquisition date, with adjustments to
certain forms of contingent liabilities impacting the results of operations. The
impact that SFAS 141-R will have on our consolidated financial statements will
depend on the nature, terms, and size of any such business
combinations.




6


In
December 2007, the FASB issued FAS No. 160, Noncontrolling
Interest in Consolidated Financial Statements (“FAS 160”). FAS 160
re-characterizes minority interests in consolidated subsidiaries as
non-controlling interests and requires the classification of minority interests
as a component of equity. Under FAS 160, a change in control will be measured at
fair value, with any gain or loss recognized in earnings. The effective date for
FAS 160 was December 29, 2008 for the Company. We currently do not have
minority interests in our consolidated subsidiaries.




On
December 31, 2007, we adopted certain provisions of SFAS No. 157, Fair Value Measurements(“SFAS 157”).  SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 applies when another standard requires or permits
assets or liabilities to be measured at fair value.  Accordingly, SFAS
157 does not require any new fair value measurements. On December 29, 2008, we
adopted the remaining provisions of SFAS 157 as it relates to nonfinancial
assets and liabilities that are not recognized or disclosed at fair value on a
recurring basis. The adoption of SFAS 157 did not materially impact our
consolidated financial statements.






4.   DEBT




Long-term
and short-term debt at March 29, 2009 and December 28, 2008, consisted of (in
thousands):




March
      29, 2009
                                  
                                  December
      28, 2008Convertible
      Related Party Note, due December 2, 2009
                                  $              1,778
                                  
                                  1,778Revolving
      line of credit, due July 24, 2010, with interest payable at prime and/or
      LIBOR plus a stated percentage with weighted average rates
      of  2.2% (LIBOR plus 1.50%) at March 29, 2009 and 3.4% (LIBOR
      plus 1.50%) at December 28, 2008
                                  73,088
                                  
                                  68,200Total
      long-term and short-term debt
                                  $            74,866
                                  
                                  69,978







Contractual
maturities of long-term debt are as follows (in thousands):




2010
                  
                  $
                  73,088Total
                  
                  $
                  73,088







Convertible
Related Party Note:  The Company’s
8.0% Subordinated Convertible Note due December 2, 2009 (the “Convertible Note”)
is convertible into common stock at $1.70 per share (or, in certain
circumstances, into a participating preferred stock which in turn would be
convertible into common stock at the same effective rate).




Under the
terms of the Convertible Note, interest is payable either in cash or in-kind at
the Company’s election.  Debt service costs associated with the
Convertible Note have been satisfied through additions to principal through
December 1, 2008 (the most recent semi-annual interest payment
date).  Additional principal is convertible into common stock on the
same basis as other amounts outstanding under the Convertible Note, which
provides for conversion into common stock at the rate of $1.70 per
share.  The Convertible Note may be prepaid in whole or in part,
provided that the market value of the Company’s common stock exceeds $2.13 per
share for a specified period of time.  The holder has 10 days to
convert the Convertible Note following notice of prepayment.  The
holder of the Convertible Note is a related party, Fanning CPD Assets, LP, a
limited partnership in which John C. Fanning, the Company’s chairman and chief
executive officer, holds an 82.4% economic interest.  The Company is
currently in discussions with the holder of the Convertible Note to potentially
extend this obligation beyond its current maturity date of December 2,
2009.  No assurance can be given that the Company will resolve such
discussions on a satisfactory basis.  As of the date of the issuance
of these consolidated financial statements, the Company had sufficient excess
availability under its bank credit facility, based upon the borrowing base as
defined in the loan agreement, to fully repay the Convertible Note (see
“--Revolving Line of Credit,” below).






7




Revolving Line of
Credit:  At March 29, 2009, COMFORCE, COI and various of their
operating subsidiaries, as co-borrowers and guarantors, were parties to a $110.0
million Revolving Credit and Security Agreement (the “PNC Credit Facility”) with
PNC Bank, National Association, as a lender and administrative agent (“PNC”),
and other financial institutions participating as lenders to provide for a
revolving line of credit with available borrowings based, generally, on 87.0% of
the Company’s accounts receivable aged 90 days or less, subject to specified
limitations and exceptions.




Borrowings
under the PNC Credit Facility bear interest, at the Company’s option, at a per
annum rate equal to either (i) the greater of the federal funds rate plus 0.5%
or the base commercial lending rate of PNC as announced from time to time, or
(ii) LIBOR plus a specified margin, determined as follows:




Fixed
      charge coverage ratio*
                                      
                                      Margin
      (%)greater
      than 1.75:1.00
                                      
                                      1.50greater
      than 1.50:1.00 to 1.75:1.00
                                      
                                      1.75greater
      than 1.30:1.00 to 1.50:1.00
                                      
                                      2.00greater
      than 1.05:1.00 to 1.30:1.00
                                      
                                      2.25equal
      to or less than 1.05:1.00
                                      
                                      2.50*as
      defined in the PNC Credit Facility loan documents







The PNC
Credit Facility also provides for a commitment fee of 0.25% of the unused
portion of the facility. The obligations under the PNC Credit Facility are
collateralized by a pledge of the capital stock of certain operating
subsidiaries of the Company and by security interests in substantially all of
the assets of the Company.  The PNC Credit Facility contains various
financial and other covenants and conditions, including, but not limited to, a
prohibition on paying cash dividends and limitations on engaging in affiliate
transactions, making acquisitions and incurring additional
indebtedness.  The PNC Credit Facility also limits capital
expenditures to $6.0 million annually.




Under the
PNC Credit Facility, the Company had outstanding $4.2 million of standby letters
of credit, principally as security for the Company’s obligations under its
workers compensation insurance policies and had remaining availability of $17.9
million as of March 29, 2009 based upon the borrowing base as defined in the
loan agreement.  The Company was in compliance with all financial
covenants under the PNC Credit Facility at March 29, 2009.  The
Company has had preliminary discussions with PNC to extend the PNC Credit
Facility beyond its current maturity date of July 24, 2010.  No
assurance can be given that the Company will resolve such discussions on a
satisfactory basis.  If we are unable to satisfactorily resolve such
discussions with PNC or otherwise find a source of capital to repay or refinance
this obligation, we will be unable to repay the PNC Credit Facility at maturity,
which would have a material adverse effect on our financial
condition.  The credit markets have tightened significantly since the
second quarter of 2008.  We cannot predict whether capital will be
available to us with interest rates and on terms acceptable to us, if at all,
when the PNC Credit Facility matures.






5.   (LOSS)
INCOME PER SHARE




Basic
(loss) income per common share is computed by dividing net (loss) income
available to common stockholders by the weighted average number of shares of
common stock outstanding during each period.  Diluted (loss) income
per share is computed assuming the exercise of stock options and warrants with
exercise prices less than the average market value of the common stock during
the period and the conversion of convertible debt and preferred stock into
common stock to the extent such conversion assumption is
dilutive.  The following represents a reconciliation of the numerators
and denominators for the basic and diluted (loss) income per share computations
(in thousands, except per share amounts):




8





Three
      Months EndedMarch
      29, 2009
                
                
                March
      30, 2008Basic
      (loss) income per common share:Net
      income
                
                $
                156
                
                
                
                992Dividends
      on preferred stock:Series
      2003A
                
                
                115
                
                
                
                115Series
      2003B
                
                
                10
                
                
                
                10Series
      2004A
                
                
                126
                
                
                
                126251
                
                
                
                251(Loss)
      income available to common stockholders
                
                $
                (95
                )
                
                
                741Weighted
      average common shares outstanding
                
                
                17,388
                
                
                
                17,388Basic
      (loss) income per common share
                
                $
                (0.01
                )
                
                
                0.04





Diluted
      (loss) income per common share:(Loss)
      income available to common stockholders
                  
                  $
                  (95
                  )
                  
                  
                  741Dividends
      on preferred stock:Series
      2003A
                  
                  
                  -
                  
                  
                  
                  115Series
      2003B
                  
                  
                  -
                  
                  
                  
                  10Series
      2004A
                  
                  
                  -
                  
                  
                  
                  126-
                  
                  
                  
                  251After
      tax equivalent of interest expense on 8% Subordinated Convertible
      Note
                  
                  
                  -
                  
                  
                  
                  20(Loss)
      income for purposes of computing diluted income per common
      share
                  
                  $
                  (95
                  )
                  
                  
                  1,012Weighted
      average common shares outstanding
                  
                  
                  17,388
                  
                  
                  
                  17,388Dilutive
      stock options
                  
                  
                  -
                  
                  
                  
                  147Assumed
      conversion of 8% Subordinated Convertible Note
                  
                  
                  -
                  
                  
                  
                  974Assumed
      conversion of Preferred Stock:Series
      2003A
                  
                  
                  -
                  
                  
                  
                  7,989Series
      2003B
                  
                  
                  -
                  
                  
                  
                  1,253Series
      2004A
                  
                  
                  -
                  
                  
                  
                  4,873Weighted
      average common shares outstanding for purposes of computing diluted (loss)
      income per share
                  
                  
                  17,388
                  
                  
                  
                  32,624Diluted
      (loss) income per common share
                  
                  $
                  (0.01
                  )
                  
                  
                  0.03





In
addition, options and warrants to purchase 2.2 million and 1.9 million shares of
common stock were outstanding as of the end of the first quarter of 2009 and
2008, respectively, but were not included in the computation of diluted (loss)
income per share because their effect would be anti-dilutive.






6.   INDUSTRY
SEGMENT INFORMATION




The
Company’s reportable segments are distinguished principally by the types of
services offered to the Company’s clients.  The Company manages its
operations and reports its results through three operating segments -- Human
Capital Management Services, Staff Augmentation and Financial Outsourcing
Services.  The Human Capital Management Services segment primarily
provides contingent workforce management services.  The Staff
Augmentation segment provides healthcare support, technical and engineering,
information technology (IT), telecommunications and other staffing services. The
Financial Outsourcing Services segment provides funding and back office support
services to independent consulting and staffing companies.




9


COMFORCE
evaluates the performance of its segments and allocates resources to them based
on operating contribution, which represents segment revenues less direct costs
of operations, excluding the allocation of corporate general and administrative
expenses.  Assets of the operating segments reflect primarily accounts
receivable and goodwill associated with segment activities; all other assets are
included as corporate assets.  The Company does not evaluate or
account for expenditures for long-lived assets on a segment basis.




The table
below presents information on revenues and operating contribution for each
segment for the three months ended March 29, 2009 and March 30, 2008, and items
which reconcile segment operating contribution to COMFORCE’s reported income
before income taxes (in thousands):




Three
      Months EndedMarch
      29, 2009
                      
                      
                      March
      30, 2008Net
      sales of services:Human
      Capital Management Services
                      
                      $
                      90,748
                      
                      
                      
                      96,009Staff
      Augmentation
                      
                      
                      46,801
                      
                      
                      
                      53,467Financial
      Outsourcing Services
                      
                      
                      480
                      
                      
                      
                      734$
                      138,029
                      
                      
                      
                      150,210Operating
      contribution:Human
      Capital Management Services
                      
                      $
                      3,189
                      
                      
                      
                      3,620Staff
      Augmentation
                      
                      
                      3,113
                      
                      
                      
                      4,638Financial
      Outsourcing Services
                      
                      
                      440
                      
                      
                      
                      6896,742
                      
                      
                      
                      8,947Consolidated
      expenses:Corporate
      general and administrative expenses
                      
                      
                      4,897
                      
                      
                      
                      4,758Depreciation
      and amortization
                      
                      
                      836
                      
                      
                      
                      675Interest
      and other, net
                      
                      
                      717
                      
                      
                      
                      1,7226,450
                      
                      
                      
                      7,155Income
      before income taxes
                      
                      $
                      292
                      
                      
                      
                      1,792





At
                      March 29,
      2009
                    
                    
                    At
                      December 28,
      2008Total
      assets:Human
      Capital Management Services
                    
                    $
                    105,915
                    
                    
                    
                    113,775Staff
      Augmentation
                    
                    
                    57,202
                    
                    
                    
                    59,061Financial
      Outsourcing Services
                    
                    
                    7,087
                    
                    
                    
                    8,941Corporate
                    
                    
                    18,894
                    
                    
                    
                    19,959$
                    189,098
                    
                    
                    
                    201,736







10




7.   COMPREHENSIVE
INCOME




The
components of comprehensive income are as follows (in thousands):




Three
      Months EndedMarch
      29, 2009
                          
                          
                          March
      30, 2008Net
      income
                          
                          $
                          156
                          
                          
                          
                          992Foreign
      currency translation adjustment, net of tax
                          
                          
                          (49
                          )
                          
                          
                          166Total
      comprehensive income
                          
                          $
                          107
                          
                          
                          
                          1,158









8.   ACCRUED
EXPENSES




Accrued
expenses as of March 29, 2009 and December 28, 2008 consisted of (in
thousands):




March
      29, 2009
                            
                            
                            December
      28, 2008Payroll,
      payroll taxes and sub-vendor payments
                            
                            $
                            99,475
                            
                            
                            
                            106,310Book
      overdrafts
                            
                            
                            4,995
                            
                            
                            
                            13,497Other
                            
                            
                            10,022
                            
                            
                            
                            11,634$
                            114,492
                            
                            
                            
                            131,441







9.   LITIGATION
AND OTHER CONTINGENCIES




Lake Calumet
Matter:  In November 2003, the Company received a general
notice letter from the United States Environmental Protection Agency (the “U.S.
EPA”) that it is a potentially responsible party at Chicago’s Lake Calumet
Cluster Site, which for decades beginning in the late 19th/early 20th centuries
had served as a waste disposal site. In December 2004, the U.S. EPA sent the
Company and numerous other companies special notice letters requiring the
recipients to make an offer by a date certain to perform a remedial
investigation and feasibility study (RI/FS) to select a remedy to clean up the
site.  The Company’s predecessor, Apeco Corporation (“Apeco”), a
manufacturer of photocopiers, allegedly sent waste material to this
site.  The State of Illinois and the U.S. EPA have proposed that the
site be designated as a Superfund site.  The Company is one of over
400 potentially responsible parties most of which may no longer be in operation
or viable to which notices were sent, and the Company has joined a working group
of more than 100 members representing over 120 potentially responsible parties
for the purpose of responding to the United States and Illinois environmental
protection agencies.




The
Illinois EPA took control of the site and began to construct a cap on the
site.  In 2008, the Company received a demand from the U.S. EPA for
more than $2.0 million in past costs and a demand from the Illinois
Environmental Protection Agency (“IEPA”) for over $14.0 million in IEPA's past
costs for its partial work on the cap.  The agencies are also
demanding that the parties complete construction of the cap and investigate
whether a groundwater remedy is required.  Cost estimates for that
work have not yet been made and a final allocation of costs among the
potentially responsible parties have not yet been made and a group has not yet,
but will likely form to address these demands.  The Company's share is
expected to be less than 1% of the total liability for these costs assuming that
the level of participation remains at least as high as it has been in the
past.  The group believes that it has some defenses and challenges to
the government's past cost claims and will likely try to negotiate a reduction
in the amount of the claims.  Furthermore, the Company has made
inquiries of the insurance carriers for Apeco to determine if it has coverage
under old insurance policies.  No assurance can be given that the
costs to the Company to resolve this claim will be within management’s
estimates.




11


Pipeline Case:  In
July 2005, the Company’s subsidiary, COMFORCE Technical Services, Inc. (“CTS”)
was served with an amended complaint in the suit titled Reyes V. East Bay
Municipal Utility District, et al, filed in the Superior Court of California,
Alameda County, in connection with a gas pipeline explosion in November 2004
that killed five workers and injured four others.  As part of a
construction project to lay a water transmission line, a backhoe operator
employed by a construction contractor unaffiliated with CTS allegedly struck and
breached a gas pipeline and an explosion occurred when leaking gas
ignited.  The complaint names various persons involved in the
construction project as defendants, including CTS.  The complaint
alleges, among other things, that CTS was negligent in failing to properly mark
the location of the pipeline.  The complaint did not specify specific
monetary damages.




CTS was
subsequently named as a defendant in 15 other lawsuits concerning this accident
in the Superior Court of California which have been consolidated with the Reyes
case in a single coordinated action styled as the Gas Pipeline Explosion Cases
in the Superior Court of California, Contra Costa County.  Two
co-defendants brought cross-claims against CTS.  In addition, a
company that provided insurance coverage to a private home and property damaged
by the explosion brought a subrogation action against CTS.  CTS denies
any culpability for this accident.  Following an investigation of the
accident, Cal-OSHA issued citations to four unrelated contractors on the
project, but declined to issue any citations against CTS.  Although
Cal-OSHA did not issue a citation against CTS, it will not be determinative in
the pending civil cases.




CTS
requested that its insurance carriers defend it in these actions, and the
carrier under the primary policy appointed counsel and has defended CTS in these
actions.  As of June 2007, CTS settled with 17 of the 19 plaintiffs,
in each case within the limits of its primary policy, except as described
below.  With the settlements, the limits under the primary policy have
been reached.  The umbrella insurance carrier for CTS had previously
denied the claims of CTS for coverage, claiming that the matter was within
the policy exclusions.  This carrier also initiated a declaratory
action in Contra Costa County, California in which it asked the court to
determine whether the claims against CTS were within the policy
exclusions.  In March 2007, CTS and this carrier reached a tentative
settlement under which the carrier agreed to dismiss CTS from the declaratory
action and defend and insure CTS in the remaining cases when the primary
coverage limits have been reached, subject to an agreed upon contribution by CTS
and the carrier's reservation of rights to seek recovery against CTS for the
claims of Mountain Cascade, Inc., a co-defendant not related to CTS
that served as a contractor for East Bay Municipal Utility
District.  Management of CTS (and the Company) believes that any
losses in respect of Mountain Cascade should be covered under the umbrella
policy.  However, the carrier has declined to release
its reservation of rights as to this unresolved Mountain Cascade claim, and
the amount that CTS will be required to contribute to any settlement of or
judgment on the remaining plaintiffs’ cases is not determinable.  As
of February 2009 one of the two remaining matters was settled as the unresolved
portion of a settlement was finalized as an appeal that was being taken from a
prior ruling on the settlement was not pursued timely and dismissed by the court
at the same time we were advised the party was discontinuing its pursuit and
would accept its allocated portion of a prior settlement.  This leaves
only the claim by Mountain Cascade, Inc.
unresolved.   Accordingly, management of CTS (and the Company)
cannot estimate the amount of losses that CTS may ultimately incur in connection
with these cases, if any, other than to estimate that any losses will be less
than $1.5 million. No assurance can be given that the costs to CTS to resolve
all remaining claims will be within management’s estimates.




Contract
Contingency:In 2006, CTS entered into a contract with a
United States government agency (the “Agency”) to provide technical, operational
and professional services in foreign countries throughout the world for
humanitarian purposes.  Persons employed by CTS in the host countries
include U.S. nationals, nationals of the host countries (local nationals) and
nationals of other countries (third country nationals). The contract provides,
generally, that the U.S. government will reimburse the Company for all direct
labor properly chargeable to the contract plus fringe benefits, in some cases at
specified rates and profit.




The
contract did not directly address taxes payable to foreign jurisdictions, but
the contracting officer advised CTS by letter that it should not make tax
payments or withholdings in the host countries because the Agency had negotiated
or would negotiate with the host countries and expected these discussions to
lead to bilateral agreements exempting contractors and contractor personnel from
all tax liability.  The contract provides that CTS will be reimbursed
for “all fines, penalties, and reasonable litigation expenses incurred as a
result of compliance with specific contract terms and conditions or written
instructions from the Contracting Officer.”




12


The
contracting officer subsequently advised CTS that the U.S. government has
concluded its efforts to obtain bilateral agreements, and directed CTS to
itself  undertake mitigation efforts.  CTS engaged an
independent accounting firm to assist it with these efforts, which have been
substantially completed except in some countries experiencing social unrest and
government instability.  As a result of its analysis of host country
tax laws and negotiations with host country governments, in most cases, CTS has
either determined that no liability exists for wage tax liabilities or it has
instituted procedures to withhold or pay applicable wage taxes for its
employees.  As for any remaining host countries, management has
concluded that it is not probable that wage tax assessments will be made against
CTS or, if made, that they will be enforced against it.  Although the
Agency has agreed to reimburse us with respect to any such wage tax liabilities,
any amounts assessed against CTS for wage tax liabilities could potentially
exceed the amount available to us from our own resources or under the PNC Credit
Facility.  In such event, it is anticipated that the Company would
request PNC to make a special advance or request the Agency to pre-fund these
liabilities.




Other Matters:The
Company is also a party to contract and employment-related litigation matters,
and audits of state and local tax returns arising in the ordinary course of its
business.  In the opinion of Management, the aggregate liability, if
any, with respect to any such legal proceedings that arise in the ordinary
course of business will not materially adversely affect our financial position,
results of operations, or cash flows.  The Company expenses legal
costs associated with contingencies when incurred.  The Company
maintains general liability insurance, property insurance, automobile insurance,
fidelity insurance, errors and omissions insurance, professional/medical
malpractice insurance, fiduciary insurance, cyber insurance and directors’ and
officers’ liability insurance for domestic and foreign operations as management
deems appropriate and prudent. The Company is generally self-insured with
respect to workers compensation, but maintains excess workers compensation
coverage to limit its maximum exposure to such claims.






ITEM
2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS




The
discussion set forth below supplements the information found in the audited
consolidated financial statements and related notes of COMFORCE Corporation
(“COMFORCE”) and its wholly-owned subsidiaries, including COMFORCE Operating,
Inc. (“COI”) (collectively, the “Company”).






Overview




Staffing
personnel placed by the Company are employees of the Company. The Company is
responsible for employment related expenses for its employees, including workers
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and general payroll expenses.  The Company offers health,
dental, 401(k), disability and life insurance to its eligible employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
clients, resulting in significant outstanding receivables.  To the
extent the Company grows, these receivables will increase and there will be
greater need for borrowing availability under the PNC Credit
Facility.  At April 19, 2009, the Company had outstanding $71.1
million principal amount under the PNC Credit Facility with remaining
availability of up to $14.9 million, based upon the borrowing base as defined in
the loan agreement, to fund operations.  The Company has had
preliminary discussions with PNC to extend the PNC Credit Facility beyond its
current maturity date of July 24, 2010.  No assurance can be given
that the Company will resolve such discussions on a satisfactory
basis.  If we are unable to satisfactorily resolve such discussions
with PNC or otherwise find a source of capital to repay or refinance this
obligation, we will be unable to repay the PNC Credit Facility at maturity,
which would have a material adverse effect on our financial
condition.  The credit markets have tightened significantly since the
second quarter of 2008.  We cannot predict whether capital will be
available to us with interest rates and on terms acceptable to us, if at all,
when the PNC Credit Facility matures.




The
Company reports its results through three operating segments -- Human Capital
Management Services, Staff Augmentation and Financial Outsourcing
Services.  The Human Capital Management Services segment primarily
provides staffing management services that enable Fortune 1000 companies and
other large employers to consolidate, automate and manage staffing, compliance
and oversight processes for their contingent workforces.  The Staff
Augmentation segment provides healthcare support services, technical and
engineering, information technology,
telecommunications and other staffing needs.  The Financial
Outsourcing Services segment provides funding and back office support services
to independent consulting and staffing companies.






13




Recent
Developments




Current
United States and worldwide economic conditions have resulted in an
extraordinary tightening of credit markets.  These economic conditions
have been characterized in news reports as a global economic crisis that has
been marked by dramatic and rapid shifts in market conditions and government
responses, and they have resulted in unprecedented intervention in financial
institutions and markets by governments throughout the
world.  Although many economists originally characterized this crisis
as limited to the subprime mortgage markets, the current adverse conditions have
quickly spread to broader financial, manufacturing and labor
markets.   As reported by the Bureau of Labor Statistics (U.S.
Department of Labor) in a report released April 3, 2009, nonfarm payroll
employment continued to decline sharply (by 663,000) in March 2009, with the
unemployment rate rising to 8.5% from 8.1% in February 2009.  This
report further stated that payroll employment had decreased by 3.3 million over
the past five months and described job losses in March 2009 as “large and
widespread across the major industry sectors.”  The staffing industry
has been significantly and adversely affected by current economic conditions and
weak labor markets.




In
October 2008, the Emergency Economic Stabilization Act of 2008 was enacted.
Under this act, up to $700 billion has been made available to stabilize U.S.
banks and enable the government to purchase devalued financial instruments held
by banks and other financial institutions.  The Federal Reserve
continues to take other measures to stabilize the U.S. financial system and
encourage lending.  In February 2009, the American Recovery and
Reinvestment Act of 2009 was signed into law, which provides up to $787 billion
in broad based relief to stimulate economic activity, including $288 billion in
tax relief, $148 billion for health care, $91 billion for education, $83 billion
for worker benefits, job training and unemployment relief, and $81 billion in
infrastructure development.




Management
has been closely monitoring the economic conditions and government
responses.  The Company has also implemented new procedures to contain
or reduce its expenses.  The impact of the tight credit markets on our
interest expense through the first quarter of 2009 was limited, but we expect
our interest expense in future periods to increase unless the credit markets
improve significantly.  While the current economic conditions did not
have a significant impact on our operations through the end of 2008, we have
observed a weakening in the labor markets that has resulted in declines in
revenues in all segments of our business during the first quarter of 2009 as
compared to the comparable 2008 period.  Furthermore, some of our
clients have announced reductions in workforce, including contingent labor,
which may cause some of the vendors we manage as part of our Human Capital
Management Services and RightSourcing Services programs to reduce or discontinue
operations, which would further impact our management of these
programs.  We continue to experience the impact of these conditions as
of the date of this filing.




See “Risk
Factors--Global economic conditions have created turmoil in credit and labor
markets that could have a significant adverse impact on our operations” in Item
1A of our annual report on Form 10-K.




Results
of Operations


Three
Months ended March 29, 2009 compared to March 30, 2008


Net sales
of services for the three months ended March 29, 2009 were $138.0 million, which
represents an 8.1% decrease from the $150.2 million in net sales of services
recorded for the three months ended March 30, 2008.  Net sales of
services in the Human Capital Management Services segment decreased by $5.3
million, or 5.5% due primarily to a decrease in services provided to existing
clients, particularly in the services provided to clients that have been
significantly affected by economic conditions.  This decrease in
services provided to existing clients was partially offset by an increase of
services provided to new clients.  While management believes that over
the past decade there has been a historical trend for companies to rely
increasingly on providers of human capital management services, such as those
provided by the Company’s PrO Unlimited subsidiary, the current economic
environment has impacted this trend (see “Overview and Recent Developments” in
this Item 2).  Management has also observed that, during 2008 and the
first quarter of 2009, PrO’s clients generally did not seek to expand the scope
of services they engaged PrO to perform.   In the Staff
Augmentation segment, net sales of services decreased $6.7 million, or 12.5%,
reflecting a decrease in clients’ demand for services across all lines of
business in this segment.




14


Cost of
services for the three months ended March 29, 2009 was 85.1% of net sales of
services as compared to 84.2% for the three months ended March 30,
2008.  Cost of services as a percentage of net sales of services in
the Human Capital Management Services segment for the first three months of 2009
was 87.3% as compared to 87.0% for the first three months of 2008.  In
the Staff Augmentation segment, cost of services as a percentage of net sales of
services for the first three months of 2009 was 81.7% as compared to 80.1% for
the first three months of 2008, principally due to pricing pressures and to
lower sales volume to higher margin clients.




Selling,
general and administrative expenses as a percentage of net sales of services
were 13.6 % for the three months ended March 29, 2009, compared to 13.1% for the
three months ended March 30, 2008.  The $845,000 decrease in selling,
general and administrative expenses is primarily due to lower personnel costs in
the Human Capital Management Services segment principally due to the decrease of
net sales of services discussed above.  However, selling, general and
administrative expenses as a percentage of net sales of services increased in
the first three months of 2009 as compared to the same period in 2008 because
net sales declined at a faster rate than these expenses were
reduced.




Operating
income for the three months ended March 29, 2009 was $1.0 million, or 0.7% of
net sales, as compared to operating income of $3.5 million, or 2.3% of net
sales, for the three months ended March 30, 2008.  The Company’s
operating income for the first three months of 2009 was lower than for the 2008
period principally due to a decrease in net sales of services in the Human
Capital Management Services sector and to a decrease in net sales of services
and lower gross margins in the Staff Augmentation sector, partially offset by a
decrease in selling, general, and administrative expenses discussed
above.




The
Company’s interest expense was principally attributable to interest recorded on
the PNC Credit Facility, the Convertible Note and, prior to their redemption,
the 12% Senior Notes. Interest expense of $644,000 for the first three months of
2009 was lower as compared to the interest expense of $1.4 million for the first
three months of 2008.  This decrease in interest expense was
principally due to the repurchase and redemption of $11.7 million of the
Company’s 12% Senior Notes due December 1, 2010 (the “Senior Notes”) since the
end of the first quarter of 2008, and to lower interest rates under the PNC
Credit Facility.




Other
expense, net, for the three months ended March 29, 2009 of $73,000 compared to
$283,000 for the three months ended March 30, 2008, principally consists of
losses on foreign currency exchanges.




The
income tax provision for the three months ended March 29, 2009 was $136,000 (a
rate of 46.6%) on income before income taxes of $292,000.  The income
tax provision for the three months ended March 30, 2008 was $800,000 (a rate of
44.6%) on income before income taxes of $1.8 million.




The
Company’s total unrecognized tax benefit as of March 29, 2009 was approximately
$822,000, which, if recognized, would affect the Company’s effective tax
rate.  As of March 29, 2009, the Company had approximately $7,200 of
accrued interest and penalties reflected in the tax provision.






Financial
Condition, Liquidity and Capital Resources




As
described in “Overview and Recent Developments” in this Item 2, management has
observed weakening of the labor markets and a tightening of the credit markets
coupled with an increase in interest rates.  These conditions, which
are interrelated, could affect our liquidity in future periods in a number of
ways, including by:




·
            decreasing
      the demand for contingent staff, although the pool of employee candidates
      should increase;




·
            affecting
      our clients’ ability to timely make payment on our invoices;
      and




·
            increasing
      our interest expense and, if conditions persist or deteriorate, making it
      more difficult for us to refinance or extend the PNC Credit Facility at
      its maturity on July 24, 2010.






15




The
Company generally pays its billable employees weekly or bi-weekly for their
services, and remits certain statutory payroll and related taxes as well as
other fringe benefits.  Invoices are generated to reflect these costs
plus the Company’s markup.  These invoices are typically paid within
40 days.  Increases in the Company’s net sales of services, resulting
from expansion of existing offices or establishment of new offices, will require
additional cash resources.




Staffing
personnel placed by the Company are employees of the Company. The Company is
responsible for employment related expenses for its employees, including workers
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and general payroll expenses.  The Company offers health,
dental, 401(k), disability and life insurance to its eligible employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
customers, resulting in significant outstanding receivables.  To the
extent the Company grows, these receivables will increase and there will be
greater need for borrowing availability under the PNC Credit
Facility.  At April 19, 2009, the Company had outstanding $71.1
million principal amount under the PNC Credit Facility with remaining
availability of up to $14.9 million based upon the borrowing base, as defined
under the PNC Credit Facility agreement, to fund operations.




Off-Balance Sheet and Contractual
Obligations: As of March 29, 2009, we had no off-balance sheet
arrangements other than operating leases entered into in the normal course of
business, as indicated in the table below.  The following table
represents contractual commitments associated with operating lease agreements,
employment agreements and principal repayments on debt obligations (excluding
interest):




Payments
      due by fiscal year (in thousands)2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      ThereafterOperating
      Leases
                      
                      $
                      2,200
                      
                      
                      $
                      1,837
                      
                      
                      $
                      1,182
                      
                      
                      $
                      700
                      
                      
                      $
                      23Employment
      Agreements
                      
                      
                      741
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -PNC
      Credit Facility(1)-
      principal repayments
                      
                      
                      -
                      
                      
                      
                      73,088
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Convertible
      Note(1)
      - principal repayments
                      
                      
                      1,778
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      4,719
                      
                      
                      $
                      74,925
                      
                      
                      $
                      1,182
                      
                      
                      $
                      700
                      
                      
                      $
                      23





(1)   See
      note 4 to our condensed consolidated financial
  statements.







COMFORCE,
COI and various of their operating subsidiaries, as co-borrowers and guarantors,
are parties to the $110.0 million PNC Credit Facility with PNC, as a lender and
administrative agent, and other financial institutions participating as lenders
to provide for a revolving line of credit with available borrowings based,
generally, on 87.0% of the Company’s accounts receivable aged 90 days or less,
subject to specified limitations and exceptions.  The Company entered
into the PNC Credit Facility in June 2003 and it has been subject to eight
amendments.




The
obligations under the PNC Credit Facility are collateralized by a pledge of the
capital stock of certain key operating subsidiaries of the Company and by
security interests in substantially all of the assets of the Company. The PNC
Credit Facility contains various financial and other covenants and conditions,
including, but not limited to, a prohibition on paying cash dividends and
limitations on engaging in affiliate transactions, making acquisitions and
incurring additional indebtedness.  The maturity date of the PNC
Credit Facility is July 24, 2010.




The
Company also had standby letters of credit outstanding under the PNC Credit
Facility at March 29, 2009 in the aggregate amount of $4.2 million, principally
as security for the Company’s obligations under its workers compensation
insurance policies.




16


As
reported in the accompanying cash flow statement, during the first quarter of
2009, our primary source of funds was $4.8 million provided by financing
activities, which, as a result of our lower profitability, was less than the
$5.3 million used in operating activities.  We also used cash of
$553,000 in investing activities due to the purchases of property and
equipment.




At March
29, 2009, we had outstanding $73.1 million principal amount under the PNC Credit
Facility bearing interest at a weighted average rate of 2.16% per
annum.  At such date, we had remaining availability of up to $17.9
million based upon the borrowing base, as defined in the agreement, under the
PNC Credit Facility.




At March
29, 2009, we also had outstanding $1.8 million principal amount of Convertible
Notes bearing interest at 8% per annum.




Our
Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per
annum and, at March 29, 2009 there were cumulated, unpaid and undeclared
dividends of $2.8 million on the Series 2003A Preferred Stock, $212,000 on the
Series 2003B Preferred Stock and $2.2 million on the Series 2004A Preferred
Stock.  If such dividends and underlying instruments were converted to
voting or non-voting common stock, the aggregate amount would equal 15.1 million
shares at March 29, 2009 (as compared to 14.3 million shares at March 30,
2008).




Management
of the Company believes that cash flow from operations and funds anticipated to
be available under the PNC Credit Facility will be sufficient to service the
Company’s indebtedness and to meet currently anticipated working capital
requirements for the next 12 months.  The Company was in compliance
with all covenants under the PNC Credit Facility at March 29, 2009 and expects
to remain in compliance for the next 12 months.  The Company has had
preliminary discussions with PNC to extend the PNC Credit Facility beyond its
current maturity date of July 24, 2010. No assurance can be given that the
Company will resolve such discussions on a satisfactory basis.




The
Company is currently undergoing audits for certain state and local tax
returns.  The results of these audits are not expected to have a
material effect upon the results of operations.




In 2006,
COMFORCE Technical Services, Inc. (“CTS”) entered into a contract with a United
States government agency (the “Agency”) to provide technical, operational and
professional services in foreign countries throughout the world for humanitarian
purposes.  Persons employed by CTS in the host countries include U.S.
nationals, nationals of the host countries (local nationals) and nationals of
other countries (third country nationals). The contract provides, generally,
that the U.S. government will reimburse the Company for all direct labor
properly chargeable to the contract plus fringe benefits, in some cases at
specified rates and profit.  Although not anticipated, the amount of
foreign payroll taxes and other taxes related to these employees could
potentially exceed the amount available to us from our own resources or under
the PNC Credit Facility (see note 9).






Critical
Accounting Policies and Estimates




As
disclosed in the annual report on Form 10-K for the year ended December 28,
2008, the discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States.  The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements.  These judgments can be subjective and complex, and
consequently actual results could differ from those estimates.  Our
most critical accounting policies relate to revenue recognition, allowance for
doubtful accounts, accrued workers compensation liability, goodwill impairment,
and income taxes.  Since December 28, 2008, there have been no changes
in our critical accounting policies and no other significant changes to the
methods used in the assumptions and estimates related to them.




17




New
Accounting Pronouncements




In
December 2007, the FASB issued SFAS 141-R, Business
Combination.  This statement is effective for us on December
29, 2008, and applies prospectively to business combinations for which the
acquisition date is on or after December 29, 2008.  SFAS 141-R
significantly changes the accounting for acquisitions. Some of the major
provisions are that acquisition related costs will generally be expensed as
incurred, contingent consideration will be recorded at fair value on the
acquisition date, with adjustments to certain forms of contingent liabilities
impacting the results of operations. The impact that SFAS 141-R will have on our
consolidated financial statements will depend on the nature, terms, and size of
any such business combinations.




In
December 2007, the FASB issued FAS 160, Noncontrolling Interest in
Consolidated Financial Statements. FAS 160 re-characterizes minority
interests in consolidated subsidiaries as non-controlling interests and requires
the classification of minority interests as a component of equity. Under FAS
160, a change in control will be measured at fair value, with any gain or loss
recognized in earnings. The effective date for FAS 160 was December 29, 2008 for
the Company. We currently do not have minority interests in our consolidated
subsidiaries.




On
December 31, 2007, we adopted certain provisions of SFAS 157, Fair Value
Measurement.  SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 applies when another standard requires or permits
assets or liabilities to be measured at fair value.  Accordingly, SFAS
157 does not require any new fair value measurements. On December 29, 2008, we
adopted the remaining provisions of SFAS 157 as it relates to nonfinancial
assets and liabilities that are not recognized or disclosed at fair value on a
recurring basis. The adoption of SFAS 157 did not materially impact our
consolidated financial statements.






Seasonality




In the
Human Capital Management Services segment, PrO Unlimited does not observe
significant seasonal variations in its business.  In the Staff
Augmentation segment, demand for services has historically been lower during the
second half of the fourth quarter through the following second quarter, and,
generally shows gradual improvement until the second half of the fourth
quarter.  The Company’s quarterly operating results are, however,
affected by the number of billing days in the quarter.  Management has
noted that the observance of seasonal trends has been limited in the current
economic climate.






Forward
Looking Statements




We have
made statements under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under this Item 2, as well as in
other sections of this report that are forward-looking statements.  In
some cases, you can identify these statements by forward-looking words such as
“may,” “might,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “forecasts,” “projects,” “predicts,” “intends,”
“potential,” “continue,” the negative of these terms and other comparable
terminology.  These forward-looking statements, which are subject to
risks, uncertainties and assumptions about us, may include projections of our
future financial performance, our anticipated growth strategies and anticipated
trends in our business and industry. These statements are only predictions based
on our current expectations and projections about future events.




Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee our future results, level of activity,
performance or achievements, particularly in light of the current global
economic crisis that has been marked by dramatic and rapid shifts in market
conditions and government responses (see “Overview and Recent Developments” and
“Financial Condition, Liquidity and Capital Resources,” each in this Item
2).  Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of any of these forward-looking statements. We
undertake no obligation to update any of these forward-looking statements after
the date of this report to conform our prior statements to actual results or
revised expectations.




18


Factors
which may cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements include the following:




·
            unfavorable
      global, national or local economic conditions that cause our clients to
      defer hiring contingent workers or reduce spending on the human capital
      management services and staffing that we
  provide;




·
            the
      current banking crisis has created a tightening of the credit markets
      coupled with increasing interest rates, which, if these conditions persist
      or deteriorate, could significantly increase our interest expense and make
      it more difficult and costly for us to refinance or extend the PNC Credit
      Facility at its maturity on July 24,
2010;




·
            significant
      increases in the effective rates of any payroll-related costs that we are
      unable to pass on to our clients;




·
            increases
      in the costs of complying with the complex federal, state and foreign laws
      and regulations in which we operate, or our inability to comply with these
      laws and regulations;




·
            our
      inability to collect fees due to the bankruptcy of our clients, including
      the amount of any wages we have paid to our employees for work performed
      for these clients;




·
            our
      inability to keep pace with rapid changes in technology in our
      industry;




·
            potential
      losses relating to the placement of our employees in other workplaces,
      including our employees’ misuse of client proprietary information,
      misappropriation of funds, discrimination, harassment, theft of property,
      accidents, torts or other claims;




·
            our
      inability to successfully develop new services or enhance our existing
      services as the markets in which we compete grow more
      competitive;




·
            unfavorable
      developments in our business may result in the necessity of writing off
      goodwill in future periods;




·
            as
      a result of covenants and restrictions in the agreements governing the PNC
      Credit Facility or any future debt instruments, our inability to use
      available cash in the manner management believes will maximize stockholder
      value;




·
            unfavorable
      press or analysts’ reports concerning our industry or our company could
      negatively affect the perception investors have of our company and our
      prospects; or




·
            any
      of the other factors described under “Risk Factors” in Item 1A of our
      annual report on Form 10-K for the year ended December 28,
      2008.









ITEM
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




The
information required under Item 3 has been disclosed in Item 7A of the Company’s
annual report on Form 10-K for the year ended December 28,
2008.  Since December 28, 2008, there has been no material change in
the Company’s market risks from those reported in the Company’s annual report on
Form 10-K for the year ended December 28, 2008.




19


ITEM
4T.   CONTROLS AND PROCEDURES




Our
management has evaluated, with the participation of our chief executive officer
and chief financial officer, the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”) as of March 29, 2009 based
upon the procedures required under paragraph (b) of Rule 13a-15 under the
Exchange Act.   On the basis of this evaluation, our management
has concluded that as of March 29, 2009 our disclosure controls and procedures
are effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act.  Our disclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure.




There has
been no change in the Company’s internal controls over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 under the Exchange Act that occurred during the three months ended March
29, 2009 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.








PART
II - OTHER INFORMATION




ITEM
1.   LEGAL PROCEEDINGS.




Since the
date of the filing of the Company’s annual report on Form 10-K for the year
ended December 28, 2008, there have been no material new legal proceedings
involving the Company or any material developments to the proceedings described
in such Form 10-K.






ITEM
1A.   RISK FACTORS.




Since the
date of the filing of the Company’s annual report on Form 10-K for the year
ended December 28, 2008, there have been no material changes to the risk factors
described under Item 1A in such Form 10-K.






ITEM
2.   UNREGISTERED SALES OF EQUITY Securities and Use of
Proceeds.




Not
applicable.




ITEM
3.   DEFAULTS UPON SENIOR SECURITIES.




Not
applicable.




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




None.




ITEM
5.   OTHER INFORMATION.




None.




20


ITEM
6.   EXHIBITS.




31.1
            Rule
      13a-14(a) certification of chief executive officer in accordance with
      section 302 of the Sarbanes-Oxley Act of 2002.31.2
            Rule
      13a-14(a) certification of chief financial officer in accordance with
      section 302 of the Sarbanes-Oxley Act of 2002.32.1
            Section
      1350 certification of chief executive officer in accordance with section
      906 of the Sarbanes-Oxley Act of 2002.32.2
            Section
      1350 certification of chief financial officer in accordance with section
      906 of the Sarbanes-Oxley Act of
2002.







21





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.









COMFORCE
      Corporation/s/
      Harry V. MaccarroneHarry
      V. MaccarroneExecutive
      Vice President and Chief Financial OfficerDate:  May
      7, 2009









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