##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 25, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number: 1-6081



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COMFORCE Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 36-2262248                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                                            |  |           
|----------------------------------------------------------- |  | ----------
|415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York |  | 11797     
|(Address of principal executive offices)                    |  | (Zip Code)

Registrants telephone number, including area code: (516) 437-3300

Not Applicable

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



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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  x    No ̈

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one):    Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

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 August 2, 2006
|Common stock, $.01 par value |  | 17,335,365 shares            



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##### Table of Contents

COMFORCE Corporation

INDEX



|           |  |                                                                                                                    |  |           
|---------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----------
|           |  |                                                                                                                    |  | PageNumber
|PART I     |  | FINANCIAL INFORMATION                                                                                              |  | 3         
|           |  |                                                                                                                   
|Item 1.    |  | Financial Statements (unaudited)                                                                                   |  | 3         
|           |  |                                                                                                                   
|           |  | Condensed Consolidated Balance Sheets at June 25, 2006 and December 25, 2005                                       |  | 3         
|           |  |                                                                                                                   
|           |  | Condensed Consolidated Statements of Operations for the three and six months ended June 25, 2006 and June 26, 2005 |  | 4         
|           |  |                                                                                                                   
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 25, 2006 and June 26, 2005           |  | 5         
|           |  |                                                                                                                   
|           |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                     |  | 6         
|           |  |                                                                                                                   
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 16        
|           |  |                                                                                                                   
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                         |  | 22        
|           |  |                                                                                                                   
|Item 4.    |  | Controls and Procedures                                                                                            |  | 22        
|           |  |                                                                                                                   
|PART II    |  | OTHER INFORMATION                                                                                                  |  | 23        
|           |  |                                                                                                                   
|Item 1.    |  | Legal Proceedings                                                                                                  |  | 23        
|           |  |                                                                                                                   
|Item 1A.   |  | Risk Factors                                                                                                       |  | 23        
|           |  |                                                                                                                   
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  | 23        
|           |  |                                                                                                                   
|Item 3.    |  | Defaults Upon Senior Securities                                                                                    |  | 23        
|           |  |                                                                                                                   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                |  | 23        
|           |  |                                                                                                                   
|Item 5.    |  | Other Information                                                                                                  |  | 24        
|           |  |                                                                                                                   
|Item 6.    |  | Exhibits                                                                                                           |  | 24        
|           | 
|SIGNATURES |  | 25                                                                                                                



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##### Table of Contents

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)



|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | ------- | -
|                                                                                                                                                                                                                        |  | June 25, 2006 |         |   | December 25,2005 |        
|Assets                                                                                                                                                                                                                  |  |               |         |   |                  |         |  
|Current assets:                                                                                                                                                                                                         |  |               |         |   |                  |         |  
|Cash and cash equivalents                                                                                                                                                                                               |  | $             | 8,974   |   |                  | 8,417   |  
|Accounts receivable, less allowance of $351 and $354 in 2006 and 2005, respectively                                                                                                                                     |  |               | 108,387 |   |                  | 103,201 |  
|Funding and service fees receivable, less allowance of $311 and $351 in 2006 and 2005, respectively                                                                                                                     |  |               | 13,421  |   |                  | 15,715  |  
|Prepaid expenses and other current assets                                                                                                                                                                               |  |               | 4,143   |   |                  | 4,997   |  
|Deferred income taxes, net                                                                                                                                                                                              |  |               | 1,926   |   |                  | 2,004   |  
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Total current assets                                                                                                                                                                                                    |  |               | 136,851 |   |                  | 134,334 |  
|                                                                                                                                                                                                                        |  |              
|Deferred income taxes, net                                                                                                                                                                                              |  |               | 1,076   |   |                  | 1,100   |  
|Property and equipment, net                                                                                                                                                                                             |  |               | 5,028   |   |                  | 5,260   |  
|Intangible assets, net                                                                                                                                                                                                  |  |               | 22      |   |                  | 40      |  
|Goodwill, net                                                                                                                                                                                                           |  |               | 32,073  |   |                  | 32,073  |  
|Deferred financing costs, net                                                                                                                                                                                           |  |               | 628     |   |                  | 851     |  
|Other assets                                                                                                                                                                                                            |  |               | 278     |   |                  | 320     |  
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Total assets                                                                                                                                                                                                            |  | $             | 175,956 |   |                  | 173,978 |  
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Liabilities and Stockholders Deficit                                                                                                                                                                                   |  |               |         |   |                  |         |  
|                                                                                                                                                                                                                        |  |              
|Current liabilities:                                                                                                                                                                                                    |  |               |         |   |                  |         |  
|Accounts payable                                                                                                                                                                                                        |  | $             | 2,465   |   |                  | 3,864   |  
|Accrued expenses                                                                                                                                                                                                        |  |               | 96,096  |   |                  | 87,307  |  
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Total current liabilities                                                                                                                                                                                               |  |               | 98,561  |   |                  | 91,171  |  
|Long-term debt (including related party debt of $1,462 in 2006 and $1,405 in 2005)                                                                                                                                      |  |               | 98,772  |   |                  | 105,792 |  
|Other liabilities                                                                                                                                                                                                       |  |               | 40      |   |                  | 46      |  
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Total liabilities                                                                                                                                                                                                       |  |               | 197,373 |   |                  | 197,009 |  
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Commitments and contingencies                                                                                                                                                                                           |  |               |         |   |                  |         |  
|                                                                                                                                                                                                                        |  |              
|Stockholders deficit:                                                                                                                                                                                                  |  |               |         |   |                  |         |  
|Common stock, $.01 par value; 100,000,000 shares authorized; 17,335,362 and 17,079,532 shares issued and outstanding at June 25, 2006 and
December 25, 2005, respectively                                               |  |               | 173     |   |                  | 171     |  
|Convertible preferred stock, $.01 par value:                                                                                                                                                                            |  |               |         |   |                  |         |  
|Series 2003A, 6,500 shares authorized; 6,148 shares issued and outstanding at June 25, 2006 and December 25, 2005, with an aggregate
liquidation preference of $7,697 at June 25, 2006 and $7,466 at December 25, 2005  |  |               | 4,304   |   |                  | 4,304   |  
|Series 2003B, 3,500 shares authorized; 513 shares issued and outstanding at June 25, 2006 and December 25, 2005, with an aggregate
liquidation preference of $619 at June 25, 2006 and $600 at December 25, 2005        |  |               | 513     |   |                  | 513     |  
|Series 2004A, 15,000 shares authorized; 6,737 shares issued and outstanding at June 25, 2006 and December 25, 2005, with an
aggregate liquidation preference of $7,525 at June 25, 2006 and $7,273 at December 25, 2005 |  |               | 10,264  |   |                  | 10,264  |  
|Additional paid-in capital                                                                                                                                                                                              |  |               | 48,136  |   |                  | 47,727  |  
|Accumulated other comprehensive income                                                                                                                                                                                  |  |               | 17      |   |                  | 147     |  
|Accumulated deficit                                                                                                                                                                                                     |  |               | (84,824 | ) |                  | (86,157 | )
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Total stockholders deficit                                                                                                                                                                                             |  |               | (21,417 | ) |                  | (23,031 | )
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  
|Total liabilities and stockholders deficit                                                                                                                                                                             |  | $             | 175,956 |   |                  | 173,978 |  
|                                                                                                                                                                                                                        |  |               |         |   |                  |         |  

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



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

(unaudited)



|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|----------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                      |  | Three Months Ended |         |   | Six Months Ended |  
|                                                      |  | June 25,2006       |         |   | June 26,2005     |   |         | June 25,2006 |  |   | June 26,2005 |  
|Net sales of services                                 |  | $                  | 143,577 |   |                  | $ | 134,909 |              |  | $ | 278,651      |   |  | $ | 258,603 |  
|                                                      |  |                    |         |  
|Costs and expenses:                                   |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Cost of services                                      |  |                    | 121,424 |   |                  |   | 115,116 |              |  |   | 236,264      |   |  |   | 221,919 |  
|Selling, general and administrative expenses          |  |                    | 17,059  |   |                  |   | 15,104  |              |  |   | 33,313       |   |  |   | 28,808  |  
|Depreciation and amortization                         |  |                    | 814     |   |                  |   | 878     |              |  |   | 1,550        |   |  |   | 1,724   |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Total costs and expenses                              |  |                    | 139,297 |   |                  |   | 131,098 |              |  |   | 271,127      |   |  |   | 252,451 |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Operating income                                      |  |                    | 4,280   |   |                  |   | 3,811   |              |  |   | 7,524        |   |  |   | 6,152   |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Other income (expense):                               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Interest expense                                      |  |                    | (2,484  | ) |                  |   | (2,738  | )            |  |   | (4,930       | ) |  |   | (5,563  | )
|Loss on debt extinguishment                           |  |                    | (18     | ) |                  |   | (253    | )            |  |   | (18          | ) |  |   | (253    | )
|Other income (expense), net                           |  |                    | 218     |   |                  |   | (32     | )            |  |   | 200          |   |  |   | (7      | )
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|                                                      |  |                    | (2,284  | ) |                  |   | (3,023  | )            |  |   | (4,748       | ) |  |   | (5,823  | )
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income from continuing operations before income taxes |  |                    | 1,996   |   |                  |   | 788     |              |  |   | 2,776        |   |  |   | 329     |  
|Provision for income taxes                            |  |                    | 973     |   |                  |   | 380     |              |  |   | 1,443        |   |  |   | 171     |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income from continuing operations                     |  |                    | 1,023   |   |                  |   | 408     |              |  |   | 1,333        |   |  |   | 158     |  
|Income from discontinued operations                   |  |                    |        |   |                  |   | 101     |              |  |   |             |   |  |   | 101     |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income                                            |  | $                  | 1,023   |   |                  | $ | 509     |              |  | $ | 1,333        |   |  | $ | 259     |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Dividends on preferred stock                          |  |                    | 251     |   |                  |   | 250     |              |  |   | 502          |   |  |   | 500     |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss) available to common stockholders    |  | $                  | 772     |   |                  | $ | 259     |              |  | $ | 831          |   |  | $ | (241    | )
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Basic income (loss) per common share:                 |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations              |  | $                  | 0.04    |   |                  | $ | 0.01    |              |  | $ | 0.05         |   |  | $ | (0.02   | )
|Income from discontinued operations                   |  |                    |        |   |                  |   | 0.01    |              |  |   |             |   |  |   | 0.01    |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Basic income (loss) per common share                  |  | $                  | 0.04    |   |                  | $ | 0.02    |              |  | $ | 0.05         |   |  | $ | (0.01   | )
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Diluted income (loss) per common share:               |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations              |  | $                  | 0.03    |   |                  | $ | 0.01    |              |  |   | 0.04         |   |  |   | (0.02   | )
|Income from discontinued operations                   |  |                    |        |   |                  |   |        |              |  |   |             |   |  |   | 0.01    |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Diluted income (loss) per common share                |  | $                  | 0.03    |   |                  | $ | 0.01    |              |  | $ | 0.04         |   |  | $ | (0.01   | )
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Weighted average common shares outstanding, basic     |  |                    | 17,335  |   |                  |   | 16,910  |              |  |   | 17,285       |   |  |   | 16,834  |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Weighted average common shares outstanding, diluted   |  |                    | 31,319  |   |                  |   | 18,279  |              |  |   | 26,755       |   |  |   | 16,834  |  
|                                                      |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  

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



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                            |  |                  |        |   |                   |   |         |  
|------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------------- | - | ------- | -
|                                                                                            |  | Six Months Ended |       
|                                                                                            |  | June 25, 2006    |        |   | June 26, 2005     |  
|                                                                                            |  |                  |        |   | (revised, note 3) |  
|Cash flows from operating activities:                                                       |  |                  |        |   |                   |   |         |  
|Net income                                                                                  |  | $                | 1,333  |   |                   | $ | 259     |  
|                                                                                            |  |                 
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                  |        |   |                   |   |         |  
|Depreciation and amortization of property and equipment                                     |  |                  | 1,532  |   |                   |   | 1,704   |  
|Amortization of intangible assets                                                           |  |                  | 18     |   |                   |   | 21      |  
|Amortization of deferred financing fees                                                     |  |                  | 248    |   |                   |   | 269     |  
|Net recoveries of bad debts                                                                 |  |                  | (40    | ) |                   |   | (213    | )
|Deferred income taxes                                                                       |  |                  | 77     |   |                   |   |        |  
|Interest expense paid by the issuance of convertible notes                                  |  |                  | 57     |   |                   |   | 52      |  
|Loss on repurchase of Senior Notes                                                          |  |                  | 18     |   |                   |   | 253     |  
|Gain from sale of discontinued niche telecom operations                                     |  |                  |       |   |                   |   | (101    | )
|Equity-based consulting expense                                                             |  |                  |       |   |                   |   | 30      |  
|Tax benefit from stock option exercises                                                     |  |                  | (121   | ) |                   |   | 156     |  
|Share-based compensation expense                                                            |  |                  | 98     |   |                   |   |        |  
|Changes in assets and liabilities:                                                          |  |                  |        |   |                   |   |         |  
|Accounts, funding and service fees receivable                                               |  |                  | (2,971 | ) |                   |   | (10,465 | )
|Prepaid expenses and other current assets                                                   |  |                  | 869    |   |                   |   | (626    | )
|Accounts payable and accrued expenses                                                       |  |                  | 7,509  |   |                   |   | (801    | )
|Income tax receivable                                                                       |  |                  | 27     |   |                   |   | 169     |  
|                                                                                            |  |                  |        |   |                   |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                  | 8,654  |   |                   |   | (9,293  | )
|                                                                                            |  |                  |        |   |                   |   |         |  
|Cash flows from investing activities:                                                       |  |                  |        |   |                   |   |         |  
|Purchases of property and equipment                                                         |  |                  | (1,299 | ) |                   |   | (1,139  | )
|Cash proceeds from sale of niche telecom operations                                         |  |                  |       |   |                   |   | 225     |  
|                                                                                            |  |                  |        |   |                   |   |         |  
|Net cash used in investing activities                                                       |  |                  | (1,299 | ) |                   |   | (914    | )
|                                                                                            |  |                  |        |   |                   |   |         |  
|Cash flows from financing activities:                                                       |  |                  |        |   |                   |   |         |  
|Net repayments under capital lease obligations                                              |  |                  | (6     | ) |                   |   | (91     | )
|Net repayments under line of credit agreements                                              |  |                  | (5,077 | ) |                   |   | 10,589  |  
|Repurchase of Senior Notes                                                                  |  |                  | (2,005 | ) |                   |   | (9,154  | )
|Tax benefit from stock option exercises                                                     |  |                  | 121    |   |                   |   |        |  
|Debt financing costs                                                                        |  |                  |       |   |                   |   | (63     | )
|Proceeds from exercise of stock options                                                     |  |                  | 169    |   |                   |   | 199     |  
|                                                                                            |  |                  |        |   |                   |   |         |  
|Net cash (used in) provided by financing activities                                         |  |                  | (6,798 | ) |                   |   | 1,480   |  
|                                                                                            |  |                  |        |   |                   |   |         |  
|Net increase (decrease) in cash and cash equivalents                                        |  |                  | 557    |   |                   |   | (8,727  | )
|Cash and cash equivalents at beginning of period                                            |  |                  | 8,417  |   |                   |   | 15,233  |  
|                                                                                            |  |                  |        |   |                   |   |         |  
|Cash and cash equivalents at end of period                                                  |  | $                | 8,974  |   |                   | $ | 6,506   |  
|                                                                                            |  |                  |        |   |                   |   |         |  
|Supplemental disclosures:                                                                   |  |                  |        |   |                   |   |         |  
|Cash paid for:                                                                              |  |                  |        |   |                   |   |         |  
|Interest                                                                                    |  | $                | 4,738  |   |                   | $ | 4,838   |  
|Income taxes                                                                                |  |                  | 1,776  |   |                   |   | 731     |  

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



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##### Table of Contents

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.

The accompanying unaudited interim condensed consolidated financial statements of COMFORCE
and its subsidiaries, including COMFORCE Operating, Inc. (COI) (collectively, 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. Although management believes that the disclosures made are adequate to ensure that the information presented is not misleading, 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 25, 2005. The results for the three and six month periods ended June 25, 2006 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 and deferred tax assets, accrued workers compensation
liabilities and the assessment of litigation and contingencies. Actual results could differ from those estimates.

3. REVISION TO CASH FLOW PRESENTATION
OF DISCONTINUED OPERATIONS

In 2004, the Company sold its interests in two telecom subsidiaries in the Companys Staff Augmentation
segment, resulting in such businesses being classified as discontinued operations. For the purposes of the consolidated statements of cash flows, as permitted by the provisions of Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards 95, Statement of Cash Flows (SFAS No. 95), cash flows related to these discontinued operations have not been separately disclosed. Cash flows related to these discontinued operations for the six
months ended June 26, 2005 were previously separately disclosed, but such presentation has been revised to conform to the presentation in other periods.

4. SHARE-BASED PAYMENTS

Effective December 26, 2005, the Company adopted the provisions of the FASB Statement of
Financial Accounting Standards 123(R), Share-Based Payments(SFAS No. 123(R)), which establishes the accounting for employee share-based awards. Under the provisions of SFAS No. 123(R), share-based compensation is
measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company adopted SFAS No. 123(R) using the
modified-prospective method and, accordingly, prior period results have not been restated to reflect the fair value method of recognizing compensation expense relating to stock options. All new awards are subject to the provisions of SFAS 123(R).
Since all outstanding option awards were fully vested on the date of adoption, no compensation expense was recorded for outstanding awards. For the three and six months ended June 25, 2006, $98,000 of



6



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##### Table of Contents

compensation expense has been recorded within selling, general and administrative expense and the Company has recorded an
income tax benefit of $38,000 in the accompanying statements of operations for options granted during the second quarter of 2006, which options immediately vested.

During the three and six months ended June 26, 2005 (and for periods prior to December 26, 2005), the Company recorded compensation expense for employee stock options based upon their intrinsic value on the
date of grant pursuant to Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Since the exercise price for such options was equal to the fair market value of the Companys stock at
the date of grant, the stock options had no intrinsic value upon grant and, therefore, no expense was recorded in the Companys condensed consolidated statements of operations.

Had the compensation cost of the Companys employee share-based payments for the three and six months ended June 26, 2005 been determined in
accordance with SFAS No. 123(R), the Companys pro forma net loss and net loss per share would have been (in thousands, except per share amounts):



|                                                                                                                                              |  |                   |       |   |                 |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | - | --------------- | - | ----- | -
|                                                                                                                                              |  | Three MonthsEnded |       |   | Six MonthsEnded |  
|                                                                                                                                              |  | June 26, 2005     |       |   | June 26, 2005   |  
|Net income (loss) available to common stockholders, as reported                                                                               |  | $                 | 259   |   |                 | $ | (241  | )
|Less: Total share-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                   | 385   |   |                 |   | 502   |  
|                                                                                                                                              |  |                   |       |   |                 |   |       |  
|Pro forma net loss                                                                                                                            |  | $                 | (126  | ) |                 | $ | (743  | )
|                                                                                                                                              |  |                   |       |   |                 |   |       |  
|Net income (loss) per share:                                                                                                                  |  |                   |       |   |                 |   |       |  
|As reportedBasic                                                                                                                             |  | $                 | 0.02  |   |                 | $ | (0.01 | )
|As reportedDiluted                                                                                                                           |  |                   | 0.01  |   |                 |   | (0.01 | )
|                                                                                                                                              |  |                  
|Pro formaBasic                                                                                                                               |  | $                 | (0.01 | ) |                 | $ | (0.04 | )
|Pro formaDiluted                                                                                                                             |  |                   | (0.01 | ) |                 |   | (0.04 | )

Under the modified-prospective method, SFAS No. 123(R) applies to all new awards and to
awards outstanding on the effective date that are subsequently modified or cancelled since all outstanding awards on the date of adoption were fully vested. The Company recognizes compensation expense for the fair values of all awards on a
straight-line basis over the total requisite service period. Cumulative compensation expense recognized at any date will at least equal the grant date fair value of the vested portion of the award at that time.

The Company estimates the fair value of share-based payments using the Black-Scholes option pricing model. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by the employees who receive equity awards.

The per share weighted average
fair value of stock options granted were $1.40 during the three and six months ended June 25, 2006 and $0.78 and $1.16 during the three and six months ended June 26, 2005, respectively. In addition to the exercise and grant date prices of
the awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants in the six month periods are listed in the table below:



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|                        |  |                  |   |  |              |  
|----------------------- |  | ---------------- | - |  | ------------ | -
|                        |  | Six Months Ended |  
|                        |  | June 25,2006     |   |  | June 26,2005 |  
|Expected dividend yield |  | 0.0              | % |  | 0.0          | %
|Expected volatility     |  | 55.0             | % |  | 38.1         | %
|Risk-free interest rate |  | 5.0              | % |  | 3.8          | %
|Expected term (years)   |  | 5                |   |  | 5            |  

The Company estimates expected volatility based primarily on historical daily price changes of the
Companys stock and other factors. The risk-free interest rate is based on the United States (U.S.) treasury yield curve in effect at the time of grant. The expected option term is the number of years that the Company estimates that
options will be outstanding prior to exercise. The expected term of the awards issued after December 26, 2005 was determined using the simplified method prescribed in SEC Staff Accounting Bulletin (SAB) No. 107.

The actual income tax benefit realized relating to the exercise of stock option awards was $198,000 for the six months ended June 25,
2006, which is classified as a financing cash inflow in the Companys condensed consolidated statement of cash flows. Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits related to share-based compensation as
an operating cash inflow. The actual income tax benefit realized relating to the exercise of stock option awards was $146,000 for the six months ended June 26, 2005.

Stock Option Plans

Long-Term Stock Investment Plan:The Companys
Long-Term Stock Investment Plan, as amended (the 1993 Plan), provided for the granting to employees, officers, directors and consultants of non-qualified stock options to purchase shares of the Companys common stock. In addition,
employees of the Company were eligible to be granted incentive stock options. The 1993 Plan also provided formula grants to non-employee members of the Board of Directors. The term of the options could be no more than 10 years. The 1993 Plan
provided for the grant of options to purchase up to 5,000,000 shares of the Companys common stock, at prices generally not less than the fair market value at the date of grant with the exception of incentive options granted to anyone who,
prior to the grant, owned more than 10% of the voting power, in which case the exercise price could not be less than 110% of the fair market value. No options or other rights are issuable under the 1993 Plan after December 31, 2002.

2002 Stock Option Plan: The Companys 2002 Stock Option Plan (the 2002 Plan) provides for the granting to employees,
officers, directors and consultants of incentive and non-qualified stock options to purchase shares of the Companys common stock. In addition, employees of the Company are eligible to be granted incentive stock options. The Stock Option
Committee of the Board of Directors, consistent with the terms of the Plan, will determine the types of awards to be granted, the terms and conditions of each award and the number of shares of common stock to be covered by each award. Grants of
incentive and non-qualified stock options may not have a term exceeding 10 years, or five years in the case of an incentive stock option granted to a stockholder who owns stock representing more than 10% of the voting power. The 2002 Plan, as
amended at the Companys 2006 annual meeting of stockholders held June 7, 2006, provides for the grant of options to purchase up to 2,000,000 shares of the Companys common stock. Options are to be granted under the 2002 Plan at
prices not less than the fair market value of the Companys common stock at the date of grant with the exception of incentive options granted to anyone who, prior to the grant, owns more than 10% of the voting power, in which case the exercise
price cannot be less than 110% of the fair market value. As of June 25, 2006, 1.2 million stock options are available for future grant under the 2002 Plan.

Options are generally granted under stock option plans at an exercise price equal to the closing stock price on the date of grant, with a 10-year term, and vesting in equal increments over a three-year period (with
the exception of options issued to directors, which generally fully vest on the date of grant).



8



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The following table summarizes stock option activity during the six months ended June 25, 2006:



|                                     |  |                  |   |  |                               |      |                                                    |      |                         |          
|------------------------------------ |  | ---------------- | - |  | ----------------------------- | ---- | -------------------------------------------------- | ---- | ----------------------- | ---------
|                                     |  | Number of Shares |   |  | WeightedAverageExercise Price |      | Weighted Average Remaining ContractualTerm (Years) |      | AggregateIntrinsicValue
|Outstanding at December 25, 2005     |  | 3,178,378        |   |  | $                             | 3.40 |                                                    |      |                         |          
|Granted                              |  | 70,000           |   |  |                               | 2.66 |                                                    |      |                         |          
|Forfeitures                          |  | (41,200          | ) |  |                               | 2.23 |                                                    |      |                         |          
|Expired                              |  | (526,250         | ) |  |                               | 7.03 |                                                    |      |                         |          
|Exercised                            |  | (255,628         | ) |  |                               | 0.66 |                                                    |      |                         | 508,061  
|                                     |  |                  |   |  |                               |      |                                                    |      |                         |          
|Outstanding at June 25, 2006         |  | 2,425,300        |   |  | $                             | 2.90 |                                                    | 5.65 |                         | 1,012,010
|                                     |  |                  |   |  |                               |      |                                                    |      |                         |          
|Options exercisable at June 25, 2006 |  | 2,425,300        |   |  | $                             | 2.90 |                                                    | 5.65 |                         | 1,012,010
|                                     |  |                  |   |  |                               |      |                                                    |      |                         |          

The total cash received from stock option exercises for the six months ended June 25, 2006
and June 26, 2005 was $169,000 and $199,000, respectively. The Company expects to settle future employee stock option exercises with the issuance of new shares. The total intrinsic value of stock options exercised during the six months ended
June 25, 2006 and June 26, 2005 was $508,000 and $440,000, respectively.

5. DEBT

Long-term debt at June 25, 2006 and December 25, 2005 consisted of (in thousands):



|                                                                                                                                                                                                                                  |  |               |        |                  |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ---------------- | - | -------
|                                                                                                                                                                                                                                  |  | June 25, 2006 |        | December 25,2005
|12% Senior Notes, due December 1, 2007*                                                                                                                                                                                           |  | $             | 44,310 |                  | $ | 46,310 
|8% Subordinated Convertible Notes, due 2009                                                                                                                                                                                       |  |               | 1,462  |                  |   | 1,405  
|Revolving line of credit*, due July 24, 2007, with interest payable at prime plus 0.5% and/or LIBOR plus 1.75% (2.0% prior to
March 1, 2006), at a weighted average rate of 6.89% at June 25, 2006 and 6.24% at December 25, 2005 |  |               | 53,000 |                  |   | 58,077 
|                                                                                                                                                                                                                                  |  |               |        |                  |   |        
|Total long-term debt                                                                                                                                                                                                              |  | $             | 98,772 |                  | $ | 105,792
|                                                                                                                                                                                                                                  |  |               |        |                  |   |        

---

* See note 11.

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



|      |  |   |       
|----- |  | - | ------
|2007  |  | $ | 97,310
|2009  |  |   | 1,462 
|      |  |   |       
|Total |  | $ | 98,772
|      |  |   |       

Senior Notes: The Company issued $110 million original principal amount of
its 12% Senior Notes due December 1, 2007 (the Senior Notes) in November 1997, principally to fund its acquisition of Uniforce Services, Inc. The Senior Notes provide for semi-annual payments of interest at the rate of 12% per
annum. As of August 3, 2006, $44.3 million principal amount of the Senior Notes remained outstanding. The maturity date of the Senior Notes is December 1, 2007. The Company is seeking to extend the maturity date of the Senior Notes and, in
this connection, redeem certain of the Senior Notes (see note 11).



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The Senior Notes are governed by an indenture (the Indenture) under which Wilmington Trust
Company serves as the trustee. The Indenture contains a number of significant restrictions and covenants (with which the Company believes it was in compliance at June 25, 2006) that require the Company to ensure among other things that:



| |  |  | the Company does not grant a security interest in its assets or incur indebtedness, except indebtedness incurred in accordance with the Indenture, which permits indebtedness
subordinated to and due later than the Senior Notes and that meets other conditions in the Indenture, indebtedness on a parity with the Senior Notes meeting specified conditions in the Indenture, renewals or replacements of any bank credit facility,
capital lease obligations, securitization transactions, indebtedness within specified dollar limitations and other exceptions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company does not sell or dispose of its assets except in accordance with the covenants and conditions in the Indenture, or issue shares of its capital stock except in accordance
with the covenants and conditions in the Indenture;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the net proceeds from any permitted sale of the Companys capital stock or its assets are applied to repay any bank credit facility, or, if not required by the lender or such
net proceeds are not reinvested in other assets, to redeem Senior Notes or be applied for other specified proper purposes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company does not enter into transactions with affiliates other than in accordance with the Indenture; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the Company does not invest in other businesses or engage in other business activities unless permitted under the Indenture.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

In May 2006, the Company repurchased $2.0 million principal amount of its Senior Notes from an unrelated party, principally utilizing available funds
under its revolving credit facility (see PNC Credit Facility in this note 5, below). As a result of this repurchase, the Company recognized loss on debt extinguishment of $18,000 in the second quarter of 2006, including the write-off of
$13,000 of deferred financing costs.

Convertible Note: The Companys 8.0% Subordinated Convertible Notes due
December 2, 2009 (the Convertible Note) are convertible into common stock at $1.70 per share.

On December 8, 2004,
the Company issued 6,737 shares of its Series 2004A Convertible Preferred Stock in exchange for $6,726,385 of its Convertible Note, plus accrued interest of $10,463, in a transaction with the Fanning CPD Assets, LP (the Fanning
Partnership). This exchange eliminated $6.7 million of long-term debt while maintaining, under the terms of the 2004A Series Preferred Stock, the same common stock conversion rights as existed for the Convertible Note. As part of the
transaction, the Convertible Note was restated at the principal amount of $1,299,402, and the terms were modified to permit the Company to pay interest in cash or kind, at its election, for the balance of the term of the Convertible Note.

Under the terms of the Convertible Note prior to this amendment, interest was to be payable only in cash beginning with the interest
payment due on June 1, 2005. The debt service costs associated with the Convertible Note have been satisfied through additions to principal through June 1, 2006 (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. As a result of its election to pay interest in kind under the
Convertible Note, on June 1, 2006 the Company recognized beneficial conversion features of $39,000 in 2006 which resulted in an increase in deferred financing costs and paid-in capital. 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 for a specified period of time and, for any prepayment prior to December 1, 2006, upon payment of a prepayment premium of 1.0%. The holder has 10 days to convert
the Convertible Notes following notice of prepayment.



10



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##### Table of Contents

The Fanning Partnership is a limited partnership in which John C. Fanning, the Companys chairman
and chief executive officer, holds the principal economic interest. Rosemary Maniscalco, a director of the Company, is the general partner of the Fanning Partnership, but has no pecuniary interest therein. Harry V. Maccarrone, a director and the
executive vice president and chief financial officer of the Company is the trustee of a trust and general partner of a partnership that are limited partners in the Fanning Partnership, but he has no pecuniary interest therein other than a nominal
interest. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a financial point of view, and the Companys independent
directors approved the terms of the transaction.

Revolving Line of Credit: At June 25, 2006, COMFORCE, COI and
various of their operating subsidiaries, as co-borrowers and guarantors, were parties to an $85.0 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 85.0% of the Companys accounts receivable aged 90 days
or less, subject to specified limitations and exceptions.

At June 25, 2006, the Company had remaining availability, as defined in the
agreement, under the PNC Credit Facility of $24.3 million. As of June 25, 2006, the Company had outstanding $5.1 million of standby letters of credit under this facility. The Company was in compliance with all financial covenants under the PNC
Credit Facility at June 25, 2006. At June 25, 2006, the maturity date of the PNC Credit Facility was June 24, 2007. The Company entered into the PNC Credit Facility in June 2003 and it has been subject to various amendments, most
recently in July 2006 (see note 11).

6. INCOME (LOSS) PER SHARE

Basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted income
(loss) per share is computed assuming the conversion of stock options and warrants with exercise prices less than the average market value of the Companys 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 basic and diluted income per share computations (in thousands):



|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|---------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ------ | -
|                                                                                                     |  | Three Months Ended |        | Six Months Ended |  
|                                                                                                     |  | June 25, 2006      |        | June 26, 2005    |   | June 25, 2006 |  | June 26, 2005 |       
|Basic income (loss) per common share:                                                                |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Income from continuing operations                                                                    |  | $                  | 1,023  |                  | $ | 408           |  | $             | 1,333  |  | $ | 158    |  
|Dividends on preferred stock:                                                                        |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Series 2003A                                                                                         |  |                    | 115    |                  |   | 115           |  |               | 231    |  |   | 231    |  
|Series 2003B                                                                                         |  |                    | 10     |                  |   | 10            |  |               | 19     |  |   | 19     |  
|Series 2004A                                                                                         |  |                    | 126    |                  |   | 125           |  |               | 252    |  |   | 250    |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|                                                                                                     |  |                    | 251    |                  |   | 250           |  |               | 502    |  |   | 500    |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Income (loss) available to common stockholders from continuing operations                            |  | $                  | 772    |                  | $ | 158           |  | $             | 831    |  | $ | (342   | )
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Weighted average common shares outstanding                                                           |  |                    | 17,335 |                  |   | 16,910        |  |               | 17,285 |  |   | 16,834 |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Basic income (loss) per common share from continuing operations                                      |  | $                  | 0.04   |                  | $ | 0.01          |  | $             | 0.05   |  | $ | (0.02  | )
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Diluted income (loss) per common share:                                                              |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Income (loss) available to common stockholders from continuing operations                            |  | $                  | 772    |                  | $ | 158           |  | $             | 831    |  | $ | (342   | )
|Dividends on preferred stock:                                                                        |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Series 2003A                                                                                         |  |                    | 115    |                  |   |              |  |               | 231    |  |   |       |  
|Series 2003B                                                                                         |  |                    | 10     |                  |   | 10            |  |               | 19     |  |   |       |  
|Series 2004A                                                                                         |  |                    | 126    |                  |   |              |  |               |       |  |   |       |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|                                                                                                     |  |                    | 251    |                  |   | 10            |  |               | 250    |  |   |       |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|After tax equivalent of interest expense on 8% Subordinated Convertible Note                         |  |                    | 17     |                  |   |              |  |               | 35     |  |   |       |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Income (loss) for purposes of computing diluted income per share from continuing operations          |  | $                  | 1,040  |                  | $ | 168           |  | $             | 1,116  |  | $ | (342   | )
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Weighted average common shares outstanding                                                           |  |                    | 17,335 |                  |   | 16,910        |  |               | 17,285 |  |   | 16,834 |  
|Dilutive stock options                                                                               |  |                    | 434    |                  |   | 312           |  |               | 415    |  |   |       |  
|                                                                                                     |  |                    |        |                 
|Assumed conversion of 8% Subordinated Convertible Note                                               |  |                    | 847    |                  |   |              |  |               | 833    |  |   |       |  
|Assumed conversion of Preferred Stock                                                                |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Series 2003A                                                                                         |  |                    | 7,221  |                  |   |              |  |               | 7,111  |  |   |       |  
|Series 2003B                                                                                         |  |                    | 1,129  |                  |   | 1,057         |  |               | 1,111  |  |   |       |  
|Series 2004A                                                                                         |  |                    | 4,353  |                  |   |              |  |               |       |  |   |       |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Weighted average common shares outstanding for purposes of computing diluted income (loss) per share |  |                    | 31,319 |                  |   | 18,279        |  |               | 26,755 |  |   | 16,834 |  
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  
|Diluted income (loss) per share from continuing operations                                           |  | $                  | 0.03   |                  | $ | 0.01          |  | $             | 0.04   |  | $ | (0.02  | )
|                                                                                                     |  |                    |        |                  |   |               |  |               |        |  |   |        |  



11



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##### Table of Contents

As of the six months ended June 25, 2006, 4.3 million shares issuable upon conversion of the
Series 2004A Preferred Stock were excluded from the above calculations as their effect would have been anti-dilutive. Options and warrants to purchase 1.2 million and 4.3 million shares of common stock were outstanding as of June 25,
2006 and June 26, 2005, respectively, but were not included in the computation of diluted income per share because their effect would be anti-dilutive.

7. INDUSTRY SEGMENT INFORMATION

COMFORCE has determined that its 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 services, technical and engineering, information technology, telecommunications and
other staffing services. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.

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 and share-based payment expenses. Assets of the operating segments reflect primarily net 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 the revenues and operating contribution for each segment for the three and six month periods ended June 25, 2006 and June 26, 2005, and items which reconcile segment operating contribution to COMFORCEs reported income
from continuing operations before income taxes (in thousands):



|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        
|----------------------------------------------------- |  | ------------------ | ------- | ---------------- | - | ------------- |  | ------------- | ------- |  | - | -------
|                                                      |  | Three Months Ended |         | Six Months Ended
|                                                      |  | June 25, 2006      |         | June 26, 2005    |   | June 25, 2006 |  | June 26, 2005
|Net sales of services:                                |  |                    |         |                  |   |               |  |               |         |  |   |        
|Human Capital Management Services                     |  | $                  | 85,362  |                  | $ | 77,640        |  | $             | 164,181 |  | $ | 149,326
|Staff Augmentation                                    |  |                    | 57,216  |                  |   | 56,148        |  |               | 112,637 |  |   | 106,962
|Financial Outsourcing Services                        |  |                    | 999     |                  |   | 1,121         |  |               | 1,833   |  |   | 2,315  
|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        
|                                                      |  | $                  | 143,577 |                  | $ | 134,909       |  | $             | 278,651 |  | $ | 258,603
|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        
|Operating contribution:                               |  |                    |         |                  |   |               |  |               |         |  |   |        
|Human Capital Management Services                     |  | $                  | 4,130   |                  | $ | 3,040         |  | $             | 7,023   |  | $ | 5,577  
|Staff Augmentation                                    |  |                    | 4,888   |                  |   | 5,407         |  |               | 9,602   |  |   | 8,771  
|Financial Outsourcing Services                        |  |                    | 757     |                  |   | 799           |  |               | 1,375   |  |   | 1,889  
|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        
|                                                      |  |                    | 9,775   |                  |   | 9,246         |  |               | 18,000  |  |   | 16,237 
|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        
|Consolidated expenses:                                |  |                    |         |                  |   |               |  |               |         |  |   |        
|Corporate general and administrative expenses         |  |                    | 4,681   |                  |   | 4,557         |  |               | 8,926   |  |   | 8,361  
|Depreciation and amortization                         |  |                    | 814     |                  |   | 878           |  |               | 1,550   |  |   | 1,724  
|Interest and other, net                               |  |                    | 2,266   |                  |   | 2,770         |  |               | 4,730   |  |   | 5,570  
|Loss on debt extinguishment                           |  |                    | 18      |                  |   | 253           |  |               | 18      |  |   | 253    
|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        
|                                                      |  |                    | 7,779   |                  |   | 8,458         |  |               | 15,224  |  |   | 15,908 
|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        
|Income from continuing operations before income taxes |  | $                  | 1,996   |                  | $ | 788           |  | $             | 2,776   |  | $ | 329    
|                                                      |  |                    |         |                  |   |               |  |               |         |  |   |        



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|                                  |  |             |         |             |   |        
|--------------------------------- |  | ----------- | ------- | ----------- | - | -------
|                                  |  | At June 25, |         | At Dec. 25,
|                                  |  | 2006        |         | 2005       
|Total assets:                     |  |             |         |             |   |        
|Staff Augmentation                |  | $           | 55,988  |             | $ | 58,794 
|Human Capital Management Services |  |             | 84,472  |             |   | 76,480 
|Financial Outsourcing Services    |  |             | 13,421  |             |   | 15,715 
|Corporate                         |  |             | 22,075  |             |   | 22,989 
|                                  |  |             |         |             |   |        
|                                  |  | $           | 175,956 |             | $ | 173,978
|                                  |  |             |         |             |   |        

8. NEW ACCOUNTING STANDARDS

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS 123(R)). This statement replaces SFAS No. 123, Accounting for Stock Based Compensation and supercedes
APB No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires all stock based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the grant date fair
value of the stock options or other equity instruments. The Company adopted, using the modified-prospective method, the provisions of SFAS 123(R) for the six months ended June 25, 2006. The initial adoption had no impact on the Companys
financial position or results of operations as all share-based payments outstanding as of the date of adoption were fully vested prior to December 26, 2005.

In September 2005, the FASB issued EITF No. 05-08, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature (EITF 05-08). This EITF deals with the accounting for
the tax effects of beneficial conversion features associated with convertible debt. The effect of the adoption of EITF 05-08 was not material. As a result, the Company recognizes deferred tax liabilities for the difference between the book and tax
basis of any beneficial conversion feature with a corresponding adjustment to the additional paid-in capital. The adoption in the first quarter of 2006 did not have a material impact on the Companys financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation
of FASB Statement No. 109(FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the effects of a tax position be recognized in our financial statements only if that position is more
likely than not to be sustained based solely on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Companys 2007 fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.



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9. COMPREHENSIVE INCOME

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



|                                        |  |                    |       |   |                  |   |     |              |  |   |              |   |  |   |    
|--------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | --- | ------------ |  | - | ------------ | - |  | - | ---
|                                        |  | Three Months Ended |       |   | Six Months Ended
|                                        |  | June 25,2006       |       |   | June 26,2005     |   |     | June 25,2006 |  |   | June 26,2005
|Net income (loss)                       |  | $                  | 1,023 |   |                  | $ | 509 |              |  | $ | 1,333        |   |  | $ | 259
|Foreign currency translation adjustment |  |                    | (39   | ) |                  |   | (7  | )            |  |   | (130         | ) |  |   | 2  
|                                        |  |                    |       |   |                  |   |     |              |  |   |              |   |  |   |    
|Total comprehensive income              |  | $                  | 984   |   |                  | $ | 502 |              |  | $ | 1,203        |   |  | $ | 261
|                                        |  |                    |       |   |                  |   |     |              |  |   |              |   |  |   |    

10. LITIGATION AND CONTINGENCIES

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 20thcenturies 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 (many 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.

Until the United States and Illinois
environmental protection and other agencies agree upon remedies, accurate estimates of clean-up costs cannot be made and site studies cannot be completed. Consequently, no assessment can be made as to any potential liability to the Company.
Furthermore, the Company is initiating inquiries of the insurance carriers for Apeco to determine if it has coverage under old insurance policies. Although another company had agreed to indemnify the Company against environmental liabilities, this
indemnitor is currently in bankruptcy and the Company does not expect to pursue its indemnity claims since obtaining any recovery against this indemnitor appears to be unlikely.

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 gasoline 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 gasoline pipeline and an explosion occurred when leaking gasoline 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 does not
specify monetary damages.

CTS was subsequently named as defendant in fourteen 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. CTS denies any responsibility for
this accident. CTS has requested that its insurance carriers defend it in these actions, and the carriers have appointed counsel to defend CTS in the case, subject to the carriers reservation of rights. Management of CTS (and the Company)
cannot estimate the amount of damages, if any, to which CTS may



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be liable. 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, and no assurance can be given that CTS will not be held to be responsible for
damages in excess of its policy limits.

The Company is a party to routine contract and employment-related litigation matters and routine
audits of state and local tax returns arising in the ordinary course of its business. Except as described above, there are no other pending matters, individually or in the aggregate, if adversely determined, are believed by management to be material
to the business or financial condition of the Company. The Company maintains general liability insurance, property insurance, automobile insurance, fidelity insurance, errors and omissions insurance, professional and medical malpractice insurance,
fiduciary insurance, and directors and officers liability insurance. 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.

11. SUBSEQUENT EVENTS

On
July 13, 2006, the Company entered into an amendment dated as of July 12, 2006 to the PNC Credit Facility to, among other things, (1) increase the maximum availability under the facility from $85.0 million to $110.0 million, with
borrowings based, generally, on 87.0% (as compared to 85.0% prior to the amendment) of the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions, (2) lower the per annum interest rate
calculated in reference to LIBOR to 1.50% in excess of LIBOR if the Companys fixed charge coverage ratio is greater than 1.75:1.00, (3) extend the maturity of the PNC Credit Facility until July 24, 2007 or, if COI is successful in
extending for three years the maturity date of its Senior Notes, until July 24, 2010, and (4) permit the redemption of the Senior Notes, on the terms described below in this note 11, and permit up to $25.0 million of loan proceeds to be
used to pay the redemption price of the Senior Notes, subject to the satisfaction of applicable financial and other covenants under the PNC Credit Facility. If, as anticipated, the Company borrows the full amount required to effect the redemption
under the PNC Credit Facility, the amount available under the facility commencing January 1, 2007 to redeem or repurchase additional Senior Notes in 2007 (subject to the satisfaction of applicable financial and other covenants) will be reduced
from $15.0 million to approximately $14.0 million.

COI recently completed a solicitation of consents under which it requested the holders
of its Senior Notes to (1) permit consents to be irrevocable for up to 60 days, and (2) extend the maturity date of the Senior Notes from December 1, 2007 to December 1, 2010 with call protection of 103%, 102% and 101% of
outstanding principal for the periods ending November 30, 2007, 2008 and 2009, respectively.

The holders of the requisite principal
amount of Senior Notes consented to the proposal as to the revocability of consents, which was effectuated upon adoption by COI and Wilmington Trust Company, as trustee, of the Third Supplemental Indenture dated as of June 30, 2006.

The holders of $22,890,000 aggregate principal amount of Senior Notes consented to the proposal to extend the maturity of the Senior Notes, which
consents will remain irrevocable until August 28, 2006. The non-consenting holders hold $21,420,000 aggregate principal amount of Senior Notes. On July 17, 2006, a notice of redemption was sent to these non-consenting holders. The notice
provides that the Senior Notes held by the non-consenting holders will be redeemed by COI at par, plus interest accrued from the last interest payment date of June 1, 2006 until the redemption date, which is August 16, 2006. Upon
completion of this redemption of the Senior Notes, COI will hold consents from the holders of 100% of the aggregate principal amount of Senior Notes then outstanding, and it intends, subject to satisfying all other requirements under the Indenture,
to adopt a Fourth Supplemental Indenture to extend the term of the Senior Notes until December 1, 2010. As described above, the COI intends to utilize loan proceeds under the PNC Credit Facility to pay the redemption price for the Senior Notes.
No assurance can be given that these transactions will be completed.



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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 billable employees. Staffing and consulting companies, including the Company, typically pay
their billable employees for their services before receiving payment from their customers, often 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 a credit facility to fund current operations.

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.

Recent Developments

On July 13, 2006, the
Company entered into an amendment dated as of July 12, 2006 to the PNC Credit Facility to, among other things, (1) increase the maximum availability under the facility from $85.0 million to $110.0 million, with borrowings based, generally,
on 87.0% (as compared to 85.0% prior to the amendment) of the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions, (2) lower the per annum interest rate calculated in reference to LIBOR to
1.50% in excess of LIBOR if the Companys fixed charge coverage ratio is greater than 1.75:1.00, (3) extend the maturity of the PNC Credit Facility until July 24, 2007 or, if COI is successful in extending for three years the maturity
date of its Senior Notes, until July 24, 2010, and (4) permit the redemption of the Senior Notes on the terms described below and in note 11 to the Companys condensed consolidated financial statements, and permit up to $25.0 million
of loan proceeds to be used to pay the redemption price of the Senior Notes, subject to the satisfaction of applicable financial and other covenants under the PNC Credit Facility. If, as anticipated, the Company borrows the full amount required to
effect the redemption under the PNC Credit Facility, the amount available under the facility commencing January 1, 2007 to redeem or repurchase additional Senior Notes in 2007 (subject to the satisfaction of applicable financial and other
covenants) will be reduced from $15.0 million to approximately $14.0 million.

COI recently completed a solicitation of consents under
which it requested the holders of its Senior Notes to (1) permit consents to be irrevocable for up to 60 days, and (2) extend the maturity date of the Senior Notes from December 1, 2007 to December 1, 2010 with call protection of
103%, 102% and 101% of outstanding principal for the periods ending November 30, 2007, 2008 and 2009, respectively.

The holders of
the requisite principal amount of Senior Notes consented to the proposal as to the revocability of consents, which was effectuated upon adoption by COI and Wilmington Trust Company, as trustee, of the Third Supplemental Indenture dated as of
June 30, 2006.

The holders of $22,890,000 aggregate principal amount of Senior Notes consented to the proposal to extend the maturity
of the Senior Notes, which consents will remain irrevocable until, at the earliest, August 28, 2006. The



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non-consenting holders hold $21,420,000 aggregate principal amount of Senior Notes. On July 17, 2006, a notice of
redemption was sent to these non-consenting holders. The notice provides that the Senior Notes held by the non-consenting holders will be redeemed by COI at par, plus interest accrued from the last interest payment date of June 1, 2006 until
the redemption date, which is August 16, 2006. Upon completion of this redemption of the Senior Notes, COI will hold consents from the holders of 100% of the aggregate principal amount of Senior Notes then outstanding, and it intends, subject
to satisfying all other requirements under the Indenture, to adopt a Fourth Supplemental Indenture to extend the term of the Senior Notes until December 1, 2010. As described above, the COI intends to utilize loan proceeds under the PNC Credit
Facility to pay the redemption price for the Senior Notes. No assurance can be given that these transactions will be completed.

Critical Accounting
Policies and Estimates

As disclosed in the annual report on Form 10-K for the fiscal year ended December 25, 2005, the discussion
and analysis of our financial condition and results of operations are based upon our 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 allowance for doubtful accounts, accrued workers compensation liability, goodwill impairment and share-based compensation expense, and
income taxes. Since December 25, 2005, 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.

Results of Operations

Three Months Ended June 25, 2006
compared to Three Months Ended June 26, 2005

Net sales of services for the three months ended June 25, 2006 were $143.6
million, which represents a 6.4% increase from the $134.9 million in net sales of services realized for the three months ended June 26, 2005. Net sales of services in the Human Capital Management Services segment increased by $7.7 million, or
9.9%, due to an increase in services provided to existing and new clients. Management believes such increase is reflective of a trend for companies to rely increasingly on providers of human capital management services, such as those provided by the
Companys PrO Unlimited subsidiary. In the Staff Augmentation segment, the increase of $1.1 million, or 1.9%, is principally attributable to services provided to information technology customers, partially offset by a reduction in services
provided to technical services and telecom customers. Sales of services were lower by $122,000 or 10.9%, in the Financial Outsourcing Services segment, principally due to a reduction in the number of customers we service.

Cost of services for the three months ended June 25, 2006 was 84.6% of net sales of services as compared to cost of services of 85.3% of net sales
of services for the three months ended June 26, 2005. The cost of services as a percentage of net sales for the second quarter of 2006 decreased from the year ago period principally due to higher gross margins as a result of increased
consultant consolidation services provided by the Human Capital Management Services segment and higher margins for healthcare support services in the Staff Augmentation segment, partially offset by a decrease of fees due the reduction of clients
serviced under the Financial Outsourcing Services segment.

Selling, general and administrative expenses as a percentage of net sales of
services were 11.9% for the three months ended June 25, 2006, compared to 11.2% for the three months ended June 26, 2005. The $2.0 million increase in selling, general and administrative expenses is primarily due to an increase in support
personnel costs associated with the increase of net sales discussed above.

Operating income for the three months ended June 25, 2006
was $4.3 million, or 3.0% of net sales, as compared to operating income of $3.8 million, or 2.8% of net sales, for the three months ended June 26, 2005. The Companys higher operating income for the second quarter of 2006 is principally
due to an increase in net sales of services and a reduction in cost of services, which was partially offset by an increase in selling, general and administrative expenses discussed above.



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The Companys interest expense for the three months ended June 25, 2006 was principally
attributable to interest recorded on the PNC Credit Facility, the Convertible Note and the Senior Notes. The interest expense of $2.5 million for the second quarter of 2006 was lower as compared to the interest expense of $2.7 million for the second
quarter of 2005. This reduction was principally due to the repurchase of $18.1 million of Senior Notes in fiscal 2005. These decreases were partially offset by increased interest expense on the Companys revolving line of credit due to higher
average interest rates in the second quarter of 2006. The Company expects future interest expense reductions due to the redemption of its Senior Notes. See Financial Condition, Liquidity and Capital Resources in this Item 2 and note
11 to the Companys condensed consolidated financial statements.

The income tax provision for the three months ended June 25,
2006 was $1.0 million (a rate of 48.7%) on income before income taxes of $2.0 million. The income tax provision for the second quarter of 2005 was $380,000 (a rate of 48.2%) on income from continuing operations before income taxes of $788,000. The
difference between income taxes at the federal statutory income tax rate and the Companys tax provision for the respective periods relates primarily to state income taxes and a disallowance for non-deductible expenses and adjustments to tax
contingencies.

Six Months Ended June 25, 2006 compared to Six Months Ended June 26, 2005

Net sales of services for the six months ended June 25, 2006 were $278.7 million, which represents a 7.8% increase from the $258.6 million in net
sales of services realized for the six months ended June 26, 2005. Net sales of services in the Human Capital Management Services segment increased by $14.9 million, or 9.9%, due to an increase in services provided to existing and new clients.
Management believes such increase is reflective of a trend for companies to rely increasingly on providers of human capital management services, such as those provided by the Companys PrO Unlimited subsidiary. In the Staff Augmentation
segment, the increase of $5.7 million, or 5.3%, is principally attributable to services provided to information technology, healthcare and telecom customers, partially offset by a reduction in services provided to technical services customers. Sales
of services were lower by $482,000, or 20.8%, in the Financial Outsourcing Services segment, principally due to a reduction in the number of customers we service.

Cost of services for the six months ended June 25, 2006 was 84.8% of net sales of services as compared to cost of services of 85.8% of net sales of services for the six months ended June 26, 2005. The cost
of services as a percentage of net sales for the first two quarters of 2006 decreased from the year ago period principally due to higher gross margins as a result of increased consultant consolidation services provided by the Human Capital
Management Services segment and higher margins for healthcare support services in the Staff Augmentation segment, partially offset by a decrease of fees due to a reduction in the number of clients serviced under the Financial Outsourcing Services
segment.

Selling, general and administrative expenses as a percentage of net sales of services were 12.0% for the six months ended
June 25, 2006, compared to 11.1% for the six months ended June 26, 2005. The $4.5 million increase in selling, general and administrative expenses is primarily due to an increase in support personnel costs associated with the increase of
net sales discussed above.

Operating income for the six months ended June 25, 2006 was $7.5 million, or 2.7% of net sales, as
compared to operating income of $6.2 million, or 2.4% of net sales, for the six months ended June 26, 2005. The Companys higher operating income for the first two quarters of 2006 is principally due to an increase in net sales of services
and a reduction in cost of services, which was partially offset by an increase in selling, general and administrative expenses discussed above.

The Companys interest expense for the six months ended June 25, 2006 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Note and the Senior Notes. The interest expense of $4.9 million
for the first two quarters of 2006 was lower as compared to the interest expense of $5.6 million for the first two quarters of 2005. This reduction was principally due to the repurchase of $18.1 million of Senior Notes



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during fiscal 2005. These decreases were partially offset by increased interest expense on the Companys revolving
line of credit due to higher average outstanding balances and interest rates in the first two quarters of 2006. The Company expects future interest expense reductions due to the redemption of its Senior Notes. See Financial Condition,
Liquidity and Capital Resources in this Item 2 and note 11 to the Companys condensed consolidated financial statements.

The income tax provision for the six months ended June 25, 2006 was $1.4 million (a rate of 52.0%) on income before income taxes of $2.8 million. The income tax provision for the first six months of 2005 was $171,000 (a rate of 52.0%)
on income from continuing operations before income taxes of $329,000. The difference between income taxes at the federal statutory income tax rate and the Companys tax provision for the respective periods relates primarily to state income
taxes and a disallowance for non-deductible expenses and adjustments to tax contingencies.

Financial Condition, Liquidity and Capital Resources

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 45 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.

Off-Balance Sheet and
Contractual Obligations: During three and six months ended June 25, 2006, the Company 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 and principal repayments on debt obligations (excluding interest):



|                                          |  |                                            |       |      |   |        |  |      |       |            |   |       |  |   |      
|----------------------------------------- |  | ------------------------------------------ | ----- | ---- | - | ------ |  | ---- | ----- | ---------- | - | ----- |  | - | -----
|                                          |  | Payments due by fiscal year (in thousands)
|                                          |  | 2006                                       |       | 2007 |   | 2008   |  | 2009 |       | Thereafter
|Operating Leases                          |  | $                                          | 1,308 |      | $ | 2,112  |  | $    | 1,726 |            | $ | 1,556 |  | $ | 1,323
|PNC Credit Facility*principal repayments |  |                                            |      |      |   | 53,000 |  |      |      |            |   |      |  |   |     
|Senior Notes*principal repayments        |  |                                            |      |      |   | 44,310 |  |      |      |            |   |      |  |   |     
|Convertible Noteprincipal repayments     |  |                                            |      |      |   |       |  |      |      |            |   | 1,462 |  |   |     
|                                          |  |                                            |       |      |   |        |  |      |       |            |   |       |  |   |      
|Total                                     |  | $                                          | 1,308 |      | $ | 99,422 |  | $    | 1,726 |            | $ | 3,018 |  | $ | 1,323
|                                          |  |                                            |       |      |   |        |  |      |       |            |   |       |  |   |      

---

|* | See note 11 to the Companys condensed consolidated financial statements.
|- | -------------------------------------------------------------------------



COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, are parties to the $110.0 million (as amended July 12,
2006) 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 six amendments, most recently in July 2006 (see Recent
Events in this Item 2 and note 11 to the Companys condensed consolidated financial statements).

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, 2007, or July 24, 2010 if, as anticipated, COI is successful in extending the maturity date of its Senior Notes for three years (see Recent Events in this Item 2 and note 11 to the
Companys condensed consolidated financial statements). The Company was in compliance with all financial covenants under the PNC Credit Facility at June 25, 2006.

The Company also had standby letters of credit outstanding at June 25, 2006 in the aggregate amount of $5.1 million.



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During the six months ended June 25, 2006, the Companys primary sources of funds were $8.7
million of cash provided by operating activities. Cash and cash equivalents increased $557,000 during the six months ended June 25, 2006.

At June 25, 2006, the Company had outstanding $53.0 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 6.9% per annum. At such date, the Company had remaining availability of
$24.3 million, as defined in the agreement, under the PNC Credit Facility. (determined without reference to the additional availability under the PNC Credit Facility, as amended in July 2007see Recent Developments in this
Item 2).

At June 25, 2006, the Company also had outstanding (i) $44.3 million principal amount of Senior Notes bearing
interest at 12% per annum and (ii) $1.5 million principal amount of Convertible Notes bearing interest at 8% per annum. On July 17, 2006, $21,420,000 of Senior Notes were called for redemption. The remaining Senior Note holders
have consented to an extension of the maturity date of the Senior Notes until December 1, 2010, which the Company expects to effectuate upon completion of this partial redemption (see Recent Events in this Item 2 and note 11 to
the Companys condensed consolidated financial statements).

Substantially all of the consolidated net assets of the Company are
assets of COI and all of the net income that had been generated by the Company was attributable to the operations of COI. Except for permitted distributions, these assets and any cumulated net income are restricted as to their use by COMFORCE. The
Indenture imposes restrictions on COI making specified payments, which are referred to as restricted payments, including making distributions or paying dividends (referred to as upstreaming funds) to COMFORCE. Under the Indenture, COI is
not permitted to make cash distributions to COMFORCE other than to upstream $2.0 million annually to pay public company expenses, and to upstream funds to the extent COI meets the restricted payments test under the Indenture, the most significant
component of which is based upon 50% of net income generated by COI since January 1, 1998 on a cumulative basis, less prior distributions made in reliance on this provision. In calculating net income for this purpose, under the terms of the
Indenture, the Company must apply generally accepted accounting principles as in effect at the time the Indenture was entered into in 1997. Principally as a result of distributions made, and losses incurred by COI in prior years, COI can make no
distributions to COMFORCE based upon the cumulative net income provisions of the Indenture until COI generates additional net income of approximately $10.8 million. However, COMFORCE has approximately $1.9 million available at June 25, 2006
from proceeds it has generated from the sale of stock, principally upon the exercise of options and warrants. This $1.9 million may be used by COMFORCE to pay interest and principal on the Convertible Notes or for other business purposes.

The Company has made significant progress in improving its capital structure through the elimination of long-term debt through the
purchase or exchange of Senior Notes, Convertible Notes and other instruments. Since June 2000, the Company has reduced its public debt from $138.8 million to $44.3 million. If we are able to successfully complete the Companys partial
redemption of Senior Notes as scheduled on August 16, 2006, its public debt will be reduced to $22.9 million (see Recent Events in this Item 2 and note 11 to the Companys condensed consolidated financial statements). The
Company has reduced its annualized interest expense by borrowing at the lower rates available under the PNC Credit Facility to effectuate repurchases of long-term debt and by exchanging preferred stock and lower interest rate Convertible Notes for
public debt. Similarly, the Company expects to utilize available loan proceeds under the PNC Credit Facility for the partial redemption of Senior Notes.

The Companys Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at June 25, 2006 there were cumulated, unpaid and undeclared dividends of $1.5 million on the
Series 2003A Preferred Stock, $106,000 on the Series 2003B Preferred Stock and $788,000 on the Series 2004A Preferred Stock.

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 twelve months. The Company was in compliance with all financial covenants under the PNC Credit Facility at June 25, 2006 and expects to remain in compliance for the next 12 months.



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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.

Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment (SFAS 123(R)). This statement replaces SFAS No. 123,
Accounting for Stock Based Compensation and supercedes APB No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires all stock based compensation to be recognized as an expense in the financial statements and
that such cost be measured according to the grant date fair value of the stock options or other equity instruments. The Company adopted, using the modified-prospective method, the provisions of SFAS 123(R) for the six months ended June 25,
2006. The adoption had no impact on the Companys financial position or results of operations as all share-based payments were fully-vested prior to December 26, 2005.

In September 2005, the FASB issued EITF No. 05-08, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature
(EITF 05-08). This EITF deals with the accounting for the tax effects of beneficial conversion features associated with convertible debt. The effect of the adoption of EITF 05-08 was not material. As a result, the Company recognizes
deferred tax liabilities for the difference between the book and tax basis of any beneficial conversion feature with a corresponding adjustment to the additional paid-in capital. The adoption in the first quarter of 2006 did not have a material
impact on the Companys financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109(FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the effects of a tax
position be recognized in our financial statements only if that position is more likely than not to be sustained based solely on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Companys
2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

Seasonality

The Companys quarterly operating
results are affected primarily by the number of billing days in the quarter and the seasonality of its customers businesses. Demand for technical and engineering services, IT and telecom staffing 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.

Forward Looking Statements

We have made statements under the captions Business in Item 1 and
Managements Discussion and Analysis of Financial Condition and Results of Operations under this Item 7, 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. 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.



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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 customers to defer hiring contingent workers or reduce spending on the human capital management services and
staffing that we provide;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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 customers, including the amount of any wages we have paid to our employees for work performed for these customers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to keep pace with rapid changes in technology in our industry;
| | - |  | ----------------------------------------------------------------------------



| |  |  | in that we place our employees in other workplaces, losses incurred by reason of our employees misuse of customer 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the necessity of writing off goodwill in future periods;
| | - |  | --------------------------------------------------------



| |  |  | as a result of covenants and restrictions in the documents governing the Senior Notes, the PNC Credit Facility or any future debt instruments, our inability to use available cash in
the manner management believes will maximize shareholder value; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any of the other factors described under Risk Factors in Item 1A of the Companys annual report on Form 10-K for the year ended December 25, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 3
has been disclosed in Item 7A of the Companys annual report on Form 10-K for the year ended December 25, 2005. There has been no material change in the disclosure regarding market risk.

ITEM 4. CONTROLS AND PROCEDURES

The Companys management evaluated, with the participation of the
chief executive officer and chief financial officer, the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, the chief executive officer and chief
financial officer have concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this Report. There has been no change in the Companys internal controls over financial reporting
that occurred during the quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



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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 25, 2005, there have been no material new legal proceedings involving the Company or any material developments to the proceedings described in such Form 10-K except as described below.

In the matter concerning the notice sent to the Company and numerous other unrelated companies from the United States Environmental Protection Agency
(the U.S. EPA) that they are potentially responsible parties at Chicagos Lake Calumet Cluster Site, the U.S. EPA has entered into discussions with the Illinois environmental protection and other agencies concerning the proper
remedies. Until the United States and Illinois environmental protection agencies agree upon remedies, accurate estimates of clean-up costs cannot be made and site studies cannot be completed. See note 10 to the Companys condensed consolidated
financial statements.

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 25, 2005, 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.

On June 7, 2006, the annual meeting of
the stockholders of the Company was held. At this meeting, the stockholders voted (1) to elect directors for a term of one year, (2) to amend the COMFORCE Corporation 2002 Stock Option Plan to increase the number of option shares available
for issuance to officers, directors, key employees and agents from 1,000,000 to 2,000,000, and (3) to ratify the appointment of KPMG LLP as the Companys independent certified public accountants for the fiscal year ending December 31,
2006.

In the election of directors, the following individuals were elected to the board of directors upon the vote shown below.



|                    |  |            |  |         
|------------------- |  | ---------- |  | --------
|Nominee             |  | For        |  | Withheld
|John C. Fanning     |  | 14,904,620 |  | 177,445 
|Harry V. Maccarrone |  | 14,821,324 |  | 260,741 
|Rosemary Maniscalco |  | 14,817,922 |  | 264,143 
|Kenneth J. Daley    |  | 14,904,204 |  | 177,861 
|Daniel Raynor       |  | 14,906,708 |  | 175,357 
|Gordon Robinett     |  | 14,817,883 |  | 264,182 
|Pierce J. Flynn     |  | 14,810,904 |  | 271,161 

The proposal to amend the COMFORCE Corporation 2002 Stock Option Plan was approved. Broker
non-votes were excluded in determining the number of shares present in person or by proxy and entitled to vote on this matter since the street name holders were not entitled to vote on this matter except upon the direction of the beneficial holders
of the shares. The votes were cast as follows:



|          |  |         |  |             |  |                 
|--------- |  | ------- |  | ----------- |  | ----------------
|For       |  | Against |  | Abstentions |  | Broker Non-Votes
|7,249,045 |  | 65,352  |  | 6,483       |  | 7,761,185       



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The proposal to ratify the appointment of KPMG LLP as the Companys independent certified public
accountants was approved. The votes were cast as follows:



|           |  |         |  |            
|---------- |  | ------- |  | -----------
|For        |  | Against |  | Abstentions
|14,900,937 |  | 91,385  |  | 89,743     

ITEM 5. OTHER INFORMATION.

On August 7, 2007, the Company entered into amended and restated employment
agreements with John C. Fanning, Chairman and Chief Executive Officer of the Company, and Harry V. Maccarrone, Executive Vice President and Chief Financial Officer of the Company.

The agreement with Mr. Fanning, as restated, provides for a salary increase effective August 1, 2006 at the rate of $500,000 per annum, subject to
annual increases as of April 1 of each year during the term of 7% or the percentage increase in the Consumer Price Index, whichever is higher. The restated agreement further provides for annual incentive compensation equal to 7.5% of the
Companys pre-tax operating income, as defined, in excess of $5.0 million and less than $8.0 million, plus 5.0% of the Companys pre-tax operating income in excess of $8.0 million and less than $10.0 million, plus 2.5% of the
Companys pre-tax operating income in excess of $10.0 million (which is to be prorated for the balance of 2006). The restated agreement continues until December 31, 2008. The restated agreement retains the existing $30,000
non-accountable expense allowance payable to Mr. Fanning during each calendar year.

The restated agreement also continues to be
terminable by the Company for just cause and retains the existing non-competition and confidentiality restrictions. The restated agreement provides that, if it is terminated or not extended, other than for just cause, Mr. Fanning
will be entitled to a severance payment equal to one years compensation (with the bonus calculated at the highest rate during the last three years) and reimbursement for health insurance costs for three years.

As restated, the agreement further provides that, if a change of control occurs (as defined by reference to Section 409A of the Internal Revenue Code),
he will be entitled to receive a lump sum payment on the date of the change of control equal to 300% of (i) his then current annual base salary, and (ii) the highest annul bonus and incentive compensation paid to him during the three most
recent calendar years. The restated agreement also provides, in the event of a change of control, that Mr. Fanning will be reimbursed for certain legal fees and expenses, will receive an amount equal to the value of his leased vehicle and will
receive recompense for any excise taxes imposed and a gross up payment based on projected federal, state and local income taxes payable by him due to his receipt of these change of control payments. These change of control provisions are
substantially the same as the provisions in Mr. Fannings existing agreement, except as modified to comport with Section 409A of the Internal Revenue Code and regulations proposed thereunder.

The restated agreement with Mr. Maccarrone extends the term until December 31, 2008, but does not increase Mr. Maccarrones base salary of
$330,440 per year, which is subject to annual increases of 7% or the percentage increase in the Consumer Price Index on April 1 of each year, whichever is higher. Mr. Maccarrones restated agreement provides for an allowance of $15,000 in
the aggregate for accountable and non-accountable expenses. The restated agreement does not include incentive compensation provisions and has less restrictive non-competition and non-solicitation provisions than Mr. Fannings agreement, but it
is in other respects substantially the same as Mr. Fannings agreement, as restated.

ITEM 6. EXHIBITS.



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Amendment to Bylaws of COMFORCE Corporation, as adopted and effective as of May 3, 2006 (included as an exhibit to COMFORCE Corporations Current Report on Form 8-K filed
May 4, 2006 and incorporated herein by reference).                                                                                                                                                                   
|     | 
|4.1  |  | Third Supplemental Indenture dated as of June 30, 2006 between COMFORCE Corporation and Wilmington Trust Company, as trustee, to Indenture dated as of November 26, 1997, as
amended.                                                                                                                                                                                                           
|     | 
|10.1 |  | Amendment No. 6 to Revolving Credit and Security Agreement dated as of July 12, 2006 among the Company and certain of its operating subsidiaries, as borrowers, and PNC Bank, National
Association, as agent and lender, and other participating lenders (included as an exhibit to COMFORCE Corporations Current Report on Form 8-K filed July 18, 2006 and incorporated herein by reference).
|     | 
|10.2 |  | Amendment to the Companys 2002 Stock Option Plan adopted at the Companys 2006 annual meeting of stockholders held June 7, 2006.                                                                                                                                                                                                                                                               
|     | 
|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.                                                                                                                                                                                                                                                                         



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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. Maccarrone                             
|Harry V. Maccarrone                                 
|Executive Vice President and Chief Financial Officer
|Date: August 7, 2006                                

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