**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





x QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


**For
      the quarterly period ended September 24, 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





**COMFORCE
      Corporation**


(Exact
      name of registrant as specified in its charter)





**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)**(516)
                437-3300**Registrant’s
                telephone number, including area code**Not
                Applicable**Former
                name, former address and former fiscal year, if changed since last
                report





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


Yes 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 October 31, 2006Common
                stock, $.01 par value
            
            17,354,371
                shares








**COMFORCE
      Corporation**





INDEX










PageNumberPART
                I
            FINANCIAL
                INFORMATION
            3Item
                1.
            Financial
                Statements (unaudited)
            3Condensed
                Consolidated Balance Sheets at September 24, 2006 and December 25,
                2005
            3Condensed
                Consolidated Statements of Operations for the three and nine months
                ended
                September 24, 2006 and September 25, 2005
            4Condensed
                Consolidated Statements of Cash Flows for the nine months ended September
                24, 2006 and September 25, 2005
            5Notes
                to Unaudited Condensed Consolidated Financial Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            24Item
                4.
            Controls
                and Procedures
            24PART
                II
            OTHER
                INFORMATION
            25Item
                1.
            Legal
                Proceedings
            25Item
                1A.
            Risk
                Factors
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item
                3.
            Defaults
                Upon Senior Securities
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            25Item
                5.
            Other
                Information
            25Item
                6.
            Exhibits
            26SIGNATURES
            27








2


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





COMFORCE
      CORPORATION AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEETS


(in
      thousands, except share and per share amounts)


(unaudited)





September
                24,
              2006
            
            December
                25,
              2005**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            4,534
            
            
            8,417Accounts
                receivable, less allowance of $351 and $354 in 2006 and 2005, respectively
            
            
            112,464
            
            
            103,201Funding
                and service fees receivable, less allowance of $271 and $351 in 2006
                and
                2005, respectively
            
            
            15,290
            
            
            15,715Prepaid
                expenses and other current assets
            
            
            4,295
            
            
            4,997Deferred
                income taxes, net
            
            
            1,926
            
            
            2,004Total
                current assets
            
            
            138,509
            
            
            134,334Deferred
                income taxes, net
            
            
            1,088
            
            
            1,100Property
                and equipment, net
            
            
            4,936
            
            
            5,260Intangible
                assets, net
            
            
            --
            
            
            40Goodwill,
                net
            
            
            32,073
            
            
            32,073Deferred
                financing costs, net
            
            
            788
            
            
            851Other
                assets
            
            
            264
            
            
            320Total
                assets
            
            $
            177,658
            
            
            173,978**Liabilities
                and Stockholders’ Deficit**Current
                liabilities:Accounts
                payable
            
            $
            2,283
            
            
            3,864Accrued
                expenses
            
            
            104,383
            
            
            87,307Total
                current liabilities
            
            
            106,666
            
            
            91,171Long-term
                debt (including related party debt of $1,462 in 2006 and $1,405 in
                2005)
            
            
            91,462
            
            
            105,792Other
                liabilities
            
            
            37
            
            
            46Total
                liabilities
            
            
            198,165
            
            
            197,009Commitments
                and contingenciesStockholders’
                deficit:Common
                stock, $.01 par value; 100,000,000 shares authorized; 17,339,371
                and
                17,079,532 shares issued and outstanding at September 24, 2006 and
                December 25, 2005, respectively
            
            
            173
            
            
            171Convertible
                preferred stock, $.01 par value:Series
                2003A, 6,500 shares authorized; 6,148 shares issued and outstanding
                at
                September 24, 2006 and December 25, 2005, with an aggregate liquidation
                preference of $7,812 at September 24, 2006 and $7,466 at December
                25,
                2005
            
            
            4,304
            
            
            4,304Series
                2003B, 3,500 shares authorized; 513 shares issued and outstanding
                at
                September 24, 2006 and December 25, 2005, with an aggregate liquidation
                preference of $629 at September 24, 2006 and $600 at December 25,
                2005
            
            
            513
            
            
            513Series
                2004A, 15,000 shares authorized; 6,737 shares issued and outstanding
                at
                September 24, 2006 and December 25, 2005, with an aggregate liquidation
                preference of $7,651 at September 24, 2006 and $7,272 at December
                25,
                2005
            
            
            10,264
            
            
            10,264Additional
                paid-in capital
            
            
            48,143
            
            
            47,727Accumulated
                other comprehensive income
            
            
            (2
            )
            
            147Accumulated
                deficit
            
            
            (83,902
            )
            
            (86,157
            )Total
                stockholders’ deficit
            
            
            (20,507
            )
            
            (23,031
            )Total
                liabilities and stockholders’ deficit
            
            $
            177,658
            
            
            173,978




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


3


COMFORCE
      CORPORATION AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(in
      thousands except per share amounts)


(unaudited)


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  24, 2006
              
              September
                  25, 2005
              
              September
                  24, 2006
              
              September
                  25, 2005Net
                  sales of services
              
              $
              140,158
              
              $
              139,066
              
              $
              418,809
              
              $
              397,669Costs
                  and expenses:Cost
                  of services
              
              
              118,207
              
              
              118,438
              
              
              354,471
              
              
              340,357Selling,
                  general and administrative expenses
              
              
              17,055
              
              
              15,452
              
              
              50,368
              
              
              44,260Depreciation
                  and amortization
              
              
              787
              
              
              948
              
              
              2,337
              
              
              2,672Total
                  costs and expenses
              
              
              136,049
              
              
              134,838
              
              
              407,176
              
              
              387,289Operating
                  income
              
              
              4,109
              
              
              4,228
              
              
              11,633
              
              
              10,380Other
                  income (expense):Interest
                  expense
              
              
              (2,292
              )
              
              (2,783
              )
              
              (7,222
              )
              
              (8,346
              )Loss
                  on debt extinguishment
              
              
              (151
              )
              
              (37
              )
              
              (169
              )
              
              (290
              )Other
                  income (expense), net
              
              
              64
              
              
              160
              
              
              264
              
              
              153(2,379
              )
              
              (2,660
              )
              
              (7,127
              )
              
              (8,483
              )Income
                  from continuing operations before income taxes
              
              
              1,730
              
              
              1,568
              
              
              4,506
              
              
              1,897Provision
                  (benefit) for income taxes
              
              
              808
              
              
              (3,545
              )
              
              2,251
              
              
              (3,374
              )Income
                  from continuing operations
              
              
              922
              
              
              5,113
              
              
              2,255
              
              
              5,271Income
                  from discontinued operations, net
              
              
              --
              
              
              --
              
              
              --
              
              
              101Net
                  income
              
              $
              922
              
              $
              5,113
              
              $
              2,255
              
              $
              5,372Dividends
                  on preferred stock
              
              
              252
              
              
              254
              
              
              754
              
              
              754Net
                  income available to common stockholders
              
              $
              670
              
              $
              4,859
              
              $
              1,501
              
              $
              4,618Basic
                  income per common share:Income
                  from continuing operations
              
              $
              0.04
              
              $
              0.29
              
              $
              0.09
              
              $
              0.27Income
                  from discontinued operations
              
              
              --
              
              
              --
              
              
              --
              
              
              0.00Basic
                  income per common share
              
              $
              0.04
              
              $
              0.29
              
              $
              0.09
              
              $
              0.27Diluted
                  income per common share:Income
                  from continuing operations
              
              $
              0.03
              
              $
              0.17
              
              $
              0.07
              
              $
              0.18Income
                  from discontinued operations
              
              
              --
              
              
              --
              
              
              --
              
              
              0.00Diluted
                  income per common share
              
              $
              0.03
              
              $
              0.17
              
              $
              0.07
              
              $
              0.18Weighted
                  average common shares outstanding, basic
              
              
              17,337
              
              
              16,917
              
              
              17,302
              
              
              16,862Weighted
                  average common shares outstanding, diluted
              
              
              31,420
              
              
              30,130
              
              
              26,741
              
              
              29,766





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


4


COMFORCE
      CORPORATION AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
      thousands)


(unaudited)




Nine
                Months EndedSeptember
                24, 2006
            
            September
                25, 2005Cash
                flows from operating activities:
            
            
            
            (revised,
                note 3)Net
                income
            
            $
            2,255
            
            $
            5,372Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
                and amortization of property and equipment
            
            
            2,297
            
            
            2,641Amortization
                of intangible assets
            
            
            40
            
            
            31Amortization
                of deferred financing fees
            
            
            335
            
            
            399Net
                recoveries of bad debts
            
            
            (80
            )
            
            (182
            )Deferred
                income taxes
            
            
            77
            
            
            --Interest
                expense paid by the issuance of convertible notes
            
            
            57
            
            
            52Loss
                on repurchase of Senior Notes
            
            
            169
            
            
            290Gain
                from sale of discontinued niche telecom operations
            
            
            --
            
            
            (101
            )Equity-based
                consulting expense
            
            
            --
            
            
            30Tax
                benefit from stock option exercises
            
            
            (123
            )
            
            211Stock
                compensation expense
            
            
            98
            
            
            --Changes
                in assets and liabilities:Accounts,
                funding and service fees receivable
            
            
            (8,908
            )
            
            (17,716
            )Prepaid
                expenses and other assets
            
            
            721
            
            
            (796
            )Accounts
                payable and accrued expenses
            
            
            15,613
            
            
            7,309Income
                tax receivable
            
            
            37
            
            
            171Net
                cash provided by (used in) operating activities
            
            
            12,588
            
            
            (2,289
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (1,973
            )
            
            (1,826
            )Cash
                proceeds from sale of niche telecom operations
            
            
            --
            
            
            225Net
                cash used in investing activities
            
            
            (1,973
            )
            
            (1,601
            )Cash
                flows from financing activities:Net
                repayments under capital lease obligations
            
            
            (6
            )
            
            (103
            )Net
                repayments borrowings under line of credit agreements
            
            
            9,033
            
            
            5,279Repurchase
                of Senior Notes
            
            
            (23,461
            )
            
            (11,767
            )Tax
                benefit from stock option exercises
            
            
            123
            
            
            --Debt
                financing costs
            
            
            (361
            )
            
            (68
            )Proceeds
                from exercise of stock options
            
            
            174
            
            
            265Net
                cash used in financing activities
            
            
            (14,498
            )
            
            (6,394
            )Net
                decrease in cash and cash equivalents
            
            
            (3,883
            )
            
            (10,284
            )Cash
                and cash equivalents at beginning of period
            
            
            8,417
            
            
            15,233Cash
                and cash equivalents at end of period
            
            $
            4,534
            
            $
            4,949Supplemental
                disclosures:Cash
                paid for:Interest
            
            $
            6,492
            
            $
            5,854Income
                taxes
            
            
            3,247
            
            
            892




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


5


**COMFORCE
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**1.**  **GENERAL**




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




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 nine month periods ended
      September 24, 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 nine months ended September 25, 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






6
 
  expense
        was recorded for outstanding awards. For the nine months ended September
        24,
        2006, $98,000 of 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 nine months ended September 25, 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 equaled or exceeded the market value of
      the
      Company’s stock at the date of grant, the stock options had no intrinsic value
      upon grant and 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 nine months ended September 25, 2005 been based upon the fair value method
      determined in accordance with SFAS No. 123(R), the Company’s pro forma net
      income and net income per share would have been (in thousands, except per share
      amounts):







Three
                Months Ended
            
            Nine
                Months EndedSeptember
                25, 2005
            
            September
                25, 2005Net
                income available to common stockholders, as reported
            
            $
            4,859
            
            $
            4,618Less:
                Total share-based employee compensation expense determined under
                the fair
                value based method for all awards, net of related tax effects
            
            
            --
            
            
            502Pro
                forma net incom
            
            $
            4,859
            
            $
            4,116Net
                income per share:As
                reported - Basic
            
            $
            0.29
            
            $
            0.27As
                reported - Diluted
            
            
            0.17
            
            
            0.18Pro
                forma - Basic
            
            $
            0.29
            
            $
            0.24Pro
                forma - Diluted
            
            
            0.17
            
            
            0.17







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 value 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
      nine months ended September 24, 2006 and $1.16 during the nine months ended
      September 25, 2005. 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 nine month periods are listed in the table
      below:







7




Nine
                Months EndedSeptember
                24,2006
            
            September
                25, 2005Expected
                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 known or expected trends. 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
      income tax benefit realized relating to the exercise of stock option awards
      was
      $200,000 for the nine months ended September 24, 2006, of which $123,000 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 operating
      cash
      inflows. The income tax benefit realized relating to the exercise of stock
      option awards was $201,000 for the nine months ended September 25, 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 September 24, 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




The
      following table summarizes stock option activity during the nine months ended
      September 24, 2006:





Numberof
                Shares
            
            WeightedAverageExercise
                Price
            
            WeightedAverageRemainingContractual
                Term (Years)
            
            AggregateIntrinsicValueOutstanding
                at December 25, 2005
            
            
            3,178,378
            
            $
            3.40Granted
            
            
            70,000
            
            
            2.66Forfeitures
            
            
            (42,200
            )
            
            2.42Expired
            
            
            (526,250
            )
            
            7.03Exercised
            
            
            (259,628
            )
            
            0.67
            
            
            
            
            
            513,521Outstanding
                at September 24, 2006
            
            
            2,420,300
            
            $
            2.90
            
            
            5.40
            
            
            903,050Options
                exercisable at September 24, 2006
            
            
            2,420,300
            
            $
            2.90
            
            
            5.40
            
            
            903,050





The
      total
      cash received from stock option exercises for the nine months ended September
      24, 2006 and September 25, 2005 was $174,000 and $265,000, 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 nine months ended September 24, 2006 and September 25, 2005 was
      $514,000 and $585,000, respectively.






**5.**  **DEBT**




**** Long-term
      debt at September 24, 2006 and December 25, 2005 consisted of (in
      thousands):




September
                24,
              2006
            
            December
                25,
              200512%
                Senior Notes, due December 1, 2010*
            
            $
            22,890
            
            $
            46,3108%
                Subordinated Convertible Notes, dueDecember
                2, 2009
            
            
            1,462
            
            
            1,405Revolving
                line of credit, due July 24, 2010*, 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 7.15% at September 24, 2006 and 6.24% at December
                25,
                2005
            
            
            67,110
            
            
            58,077Total
                long-term debt
            
            $
            91,462
            
            $
            105,792


________________


*
      Formerly due on this date in 2007 (see below).







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





2009
            
            $
            1,4622010
            
            
            90,000Total
            
            $
            91,462




***Senior
      Notes*** **:** In
      November 1997, COI issued $110 million original principal amount of its 12%
      Senior Notes due December 1, 2007, subsequently extended until December 1,
      2010
      (the “Senior Notes”), 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.






9




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 COI believes it was in
      compliance at September 24, 2006) that require COI to ensure among other things
      that:




**·**
            COI
                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;




**·**
            COI
                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 COI’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;




**·**
            COI
                does not enter into transactions with affiliates other than in accordance
                with the Indenture; and




**·**
            COI
                does not invest in other businesses or engage in other business activities
                unless permitted under the
                Indenture.




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




In
      June
      and July 2006, COI solicited the consents of the holders of its Senior Notes
      to
      (1) permit consents and waivers granted under the Indenture 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 protections, as described below.
      Under the terms of the Indenture, the first proposal required the approval
      of
      the holders of a majority in principal amount of the Senior Notes and the second
      proposal required approval of all of the holders. The requisite consents to
      adopt the first proposal were obtained by June 30, 2006, at which time COI
      and
      Wilmington Trust Company, as trustee, entered into the Third Supplemental
      Indenture to provide for the irrevocability of consents and
      waivers.




The
      holders of $22.9 million aggregate principal amount of Senior Notes consented
      to
      the second proposal to extend the maturity of the Senior Notes. The holders
      of
      $21.4 million aggregate principal amount of Senior Notes declined to consent
      to
      this proposal. At the request of COI, on July 17, 2006, Wilmington Trust
      Company, as trustee, sent a notice of redemption to the non-consenting holders
      and, in accordance with the notice, on August 16, 2006, COI redeemed all $21.4
      million of Senior Notes held by the non-consenting holders at par, plus interest
      accrued from the last interest payment date of June 1, 2006 to the date of
      redemption. As a result of this redemption, COI recognized a loss on debt
      extinguishment of $151,000 in the third quarter of 2006, including the write-off
      of $115,000 of deferred financial costs. COI utilized loan proceeds under its
      revolving credit facility to pay the redemption price (see “Revolving Credit
      Facility” in this note 5, below). Upon completion of this redemption, COI held
      irrevocable consents to the second proposal from the holders of 100% of the
      aggregate principal amount of Senior Notes then outstanding. Accordingly, on
      August 17, 2007, COI and Wilmington Trust Company, as trustee, entered into
      a
      Fourth Supplemental Indenture. The Fourth Supplemental Indenture amended the
      Indenture and Senior Notes by:






10




**·**
            extending
                the maturity date of the Senior Notes from December 1, 2007 to December
                1,
                2010; and


**·**
            providing
                call protection to holders of the Senior Notes under which COI will
                have
                the option to redeem the Senior Notes upon payment of a redemption
                price
                as follows:





*Redemption
                price**
            
            *If
                redemption at COI’s election occurs:*103%
            
            from
                August 16, 2006 through November 30, 2007102%
            
            from
                December 1, 2007 through November 30, 2008101%
            
            from
                December 1, 2008 through November 30, 2009100%
            
            on
                December 1, 2009 or thereafter*
                As a percentage of the principal outstanding at the redemption date,
                plus
                accrued interest to the redemption
                date.







***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.




In
      December 2004, the Company issued 6,737 shares of its Series 2004A Convertible
      Preferred Stock in exchange for $6.7 million of its Convertible Note, plus
      accrued interest of $10,463, in a transaction with the Fanning CPD Assets,
      LP
      (the “Fanning Partnership”), a related party, as described below. 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 $1.3
      million, 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.
      This amendment extended, for the balance of the term, the provision allowing
      the
      Company to pay interest either in cash or in kind, and as a result 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.




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 and vice chairman of the Company,
      is
      the general partner of the Fanning Partnership, but holds no pecuniary interest
      therein. 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
      September 24, 2006, COMFORCE, COI and various of their operating subsidiaries,
      as co-borrowers and guarantors, were parties to a $110.0 million Revolving
      Credit and Security Agreement (the “PNC Credit Facility”) with PNC Bank,
      National Association, as a lender and administrative agent (“PNC”), and other
      financial institutions participating as lenders to provide for a revolving
      line
      of credit with available borrowings based, generally, on 87.0% of the Company’s
      accounts receivable aged 90 days or less, subject to specified limitations
      and
      exceptions.




Effective
      as of July 12, 2006, the Company entered into an amendment to the PNC Credit
      Facility to, among other things:






11





**·**
            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;


**·**
            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;


**·**
            extend
                the maturity of the PNC Credit Facility until July 24, 2010;
                and


**·**
            permit
                up to $25.0 million of loan proceeds to be used, and which were used,
                to
                pay the redemption price of the Senior Notes (as described above
                in this
                note 5 under “Senior Notes”), subject to a reduction of the maximum funds
                available under the PNC Credit Facility to effect redemptions in
                2007.




At
      September 24, 2006, the Company had remaining availability, as defined in the
      agreement, under the PNC Credit Facility of $18.1 million. As of September
      24,
      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 September 24, 2006.






**6.**  **INCOME
      PER SHARE**




Basic
      income per common share is computed by dividing net income available to common
      stockholders by the weighted average number of shares of common stock
      outstanding during each period. Diluted income 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
            
            Nine
                Months EndedSeptember
                24,
              2006
            
            September
                25,
              2005
            
            September
                24,
              2006
            
            September
                25,
              2005Basic
                income per common share:Income
                from continuing operations
            
            $
            922
            
            $
            5,113
            
            $
            2,255
            
            $
            5,271Dividends
                on preferred stock:Series
                2003A
            
            
            115
            
            
            115
            
            
            346
            
            
            346Series
                2003B
            
            
            10
            
            
            10
            
            
            29
            
            
            29Series
                2004A
            
            
            127
            
            
            129
            
            
            379
            
            
            379252
            
            
            254
            
            
            754
            
            
            754Income
                available to common stockholders from continuing operations
            
            $
            670
            
            $
            4,859
            
            $
            1,501
            
            $
            4,517Weighted
                average common shares outstanding
            
            
            17,337
            
            
            16,917
            
            
            17,302
            
            
            16,862Basic
                income per common share from continuing operations
            
            $
            0.04
            
            $
            0.29
            
            $
            0.09
            
            $
            0.27


12


Diluted
      income per common share:


Income
                available to common stockholders from continuing operations
            
            $
            670
            
            $
            4,859
            
            $
            1,501
            
            $
            4,517Dividends
                on preferred stock:Series
                2003A
            
            
            115
            
            
            115
            
            
            346
            
            
            346Series
                2003B
            
            
            10
            
            
            10
            
            
            29
            
            
            29Series
                2004A
            
            
            127
            
            
            129
            
            
            --
            
            
            379252
            
            
            254
            
            
            375
            
            
            754After
                tax equivalent of interest expense on 8% Subordinated Convertible
                Note
            
            
            18
            
            
            16
            
            
            52
            
            
            48Income
                for purposes of computing diluted income per common share from continuing
                operations
            
            $
            940
            
            $
            5,129
            
            $
            1,928
            
            $
            5,319Weighted
                average common shares outstanding
            
            
            17,337
            
            
            16,917
            
            
            17,302
            
            
            16,862Dilutive
                stock options
            
            
            325
            
            
            317
            
            
            385
            
            
            443Assumed
                conversion of 8% Subordinated Convertible Note
            
            
            855
            
            
            800
            
            
            832
            
            
            769Assumed
                conversion of Preferred Stock:Series
                2003A
            
            
            7,330
            
            
            6,891
            
            
            7,111
            
            
            6,672Series
                2003B
            
            
            1,146
            
            
            1,075
            
            
            1,111
            
            
            1,039Series
                2004A
            
            
            4,427
            
            
            4,130
            
            
            --
            
            
            3,981Weighted
                average common shares outstanding for purposes of computing diluted
                income
                per share
            
            
            31,420
            
            
            30,130
            
            
            26,741
            
            
            29,766Diluted
                income per common share from continuing operations
            
            $
            0.03
            
            $
            0.17
            
            $
            0.07
            
            $
            0.18







As
      of
      September 24, 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 1.3 million
      and
      3.3 million shares of common stock were outstanding as of September 24, 2006
      and
      September 25, 2005, respectively, but were not included in the computation
      of
      diluted income per share because their effect would be anti-dilutive.






13




**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 nine month periods ended September 24, 2006 and
      September 25, 2005, and items which reconcile segment operating contribution
      to
      COMFORCE’s reported income from continuing operations before income taxes (in
      thousands):




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                24, 2006
            
            September
                25, 2005
            
            September
                24, 2006
            
            September
                25, 2005Net
                sales of services:Human
                Capital Management Services
            
            $
            84,469
            
            $
            79,430
            
            $
            248,650
            
            $
            228,756Staff
                Augmentation
            
            
            54,777
            
            
            58,585
            
            
            167,414
            
            
            165,547Financial
                Outsourcing Services
            
            
            912
            
            
            1,051
            
            
            2,745
            
            
            3,366$
            140,158
            
            $
            139,066
            
            $
            418,809
            
            $
            397,669Operating
                contribution:Human
                Capital Management Services
            
            $
            3,871
            
            $
            2,782
            
            $
            10,894
            
            $
            8,359Staff
                Augmentation
            
            
            4,892
            
            
            5,512
            
            
            14,494
            
            
            14,283Financial
                Outsourcing Services
            
            
            723
            
            
            754
            
            
            2,098
            
            
            2,6439,486
            
            
            9,048
            
            
            27,486
            
            
            25,285Consolidated
                expenses:Corporate
                general and administrative expenses
            
            
            4,590
            
            
            3,872
            
            
            13,516
            
            
            12,233Depreciation
                and amortization
            
            
            787
            
            
            948
            
            
            2,337
            
            
            2,672Interest
                and other, net
            
            
            2,228
            
            
            2,623
            
            
            6,958
            
            
            8,193Loss
                on debt extinguishment
            
            
            151
            
            
            37
            
            
            169
            
            
            2907,756
            
            
            7,480
            
            
            22,980
            
            
            23,388Income
                from continuing operations before income taxes
            
            $
            1,730
            
            $
            1,568
            
            $
            4,506
            
            $
            1,897




September
                24,
              2006
            
            
            December
                25,
              2005Total
                assets:Staff
                Augmentation
            
            $
            56,644
            
            $
            58,794Human
                Capital Management Services
            
            
            87,893
            
            
            76,480Financial
                Outsourcing Services
            
            
            15,290
            
            
            15,715Corporate
            
            
            17,831
            
            
            22,989$
            177,658
            
            $
            173,978






14


**8.**  **NEW
      ACCOUNTING STANDARDS**




On
      September 13, 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108 (“SAB No. 108”) which provides interpretive guidance
      on how the effects of the carryover or reversal of prior year misstatements
      should be considered in quantifying a current year misstatement. If the effect
      of initial adoption is determined to be material, the cumulative effect may
      be
      reported as an adjustment to the beginning of the reporting company’s retained
      earnings with disclosure of the nature and amount of each individual error
      being
      corrected in the cumulative adjustment. This guidance is applicable for the
      Company beginning in fiscal year 2007. The Company is in the process of
      assessing the effect SAB No. 108 may have on its consolidated financial
      statements.




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 nine months ended September 24, 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
      June
      2006, the FASB issued Financial Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      No. 48”). FIN No. 48 establishes a recognition threshold and measurement for
      income tax positions recognized in an enterprise’s financial statements in
      accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      FIN No.
      48 also prescribes a two-step evaluation process for tax positions. The first
      step is recognition and the second is measurement. For recognition, an
      enterprise judgmentally determines whether it is more-likely-than-not that
      a tax
      position will be sustained upon examination, including resolution of related
      appeals or litigation processes, based on the technical merits of the position.
      If the tax position meets the more-likely-than-not recognition threshold, it
      is
      measured and recognized in the financial statements as the largest amount of
      tax
      benefit that is greater than 50% likely of being realized. If a tax position
      does not meet the more-likely-than-not recognition threshold, the benefit of
      that position is not recognized in the financial statements.




Tax
      positions that meet the more-likely-than-not recognition threshold at the
      effective date of FIN No. 48 may be recognized, or continue to be recognized,
      upon adoption of FIN No. 48. The cumulative effect of applying the provisions
      of
      FIN No. 48 shall be reported as an adjustment to the opening balance of retained
      earnings for the year of adoption. FIN No. 48 is effective for the Company
      beginning in fiscal year 2007, with earlier adoption permitted. The Company
      is
      in the process of assessing the effect FIN No. 48 may have on its consolidated
      financial statements.




15




**9.**  **COMPREHENSIVE
      INCOME**




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




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                24, 2006
            
            September
                25, 2005
            
            September
                24, 2006
            
            September
                25, 2005Net
                income
            
            $
            922
            
            $
            5,113
            
            $
            2,255
            
            $
            5,372Foreign
                currency translation adjustment
            
            
            (19
            )
            
            (29
            )
            
            (149
            )
            
            (27
            )Total
                comprehensive income
            
            $
            903
            
            $
            5,084
            
            $
            2,106
            
            $
            5,345




**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 19 th /early
      20 th centuries had served as a waste disposal site. In December 2004, the U.S. EPA
      sent the Company and numerous other companies special notice letters requiring
      the recipients to make an offer by a date certain to perform a remedial
      investigation and feasibility study (RI/FS) to select a remedy to clean up
      the
      site. The Company’s predecessor, Apeco Corporation (“Apeco”), a manufacturer of
      photocopiers, allegedly sent waste material to this site. The State of Illinois
      and the U.S. EPA have proposed that the site be designated as a Superfund site.
      The Company is one of over 400 potentially responsible parties (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 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.




16


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 for domestic and foreign operations
      as management deems appropriate and prudent. The Company is generally
      self-insured with respect to workers compensation, but maintains excess workers
      compensation coverage to limit its maximum exposure to such claims.






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




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






**Overview**




Staffing
      personnel placed by the Company are employees of the Company. The Company is
      responsible for employment related expenses for its employees, including workers
      compensation, unemployment compensation insurance, Medicare and Social Security
      taxes and general payroll expenses. The Company offers health, dental, 401(k),
      disability and life insurance to its eligible employees. Staffing and consulting
      companies, including the Company, typically pay their billable employees for
      their services before receiving payment from their 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**




In
      June
      and July 2006, COI solicited the consents of the holders of its Senior Notes
      to
      (1) permit consents and waivers granted under the Indenture 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 protections, as described below.
      Under the terms of the Indenture, the first proposal required the approval
      of
      the holders of a majority in principal amount of the Senior Notes and the second
      proposal required approval of all of the holders. The requisite consents to
      adopt the first proposal were obtained by June 30, 2006, at which time COI
      and
      Wilmington Trust Company, as trustee, entered into the Third Supplemental
      Indenture to provide for the irrevocability of consents and
      waivers.






17




The
      holders of $22.9 million aggregate principal amount of Senior Notes consented
      to
      the second proposal to extend the maturity of the Senior Notes. The holders
      hold
      $21.4 million aggregate principal amount of Senior Notes declined to consent
      to
      this proposal. At the request of COI, on July 17, 2006, Wilmington Trust
      Company, as trustee, sent a notice of redemption to the non-consenting holders
      and, in accordance with the notice, on August 16, 2006, COI redeemed all $21.4
      million of Senior Notes held by the non-consenting holders at par, plus interest
      accrued from the last interest payment date of June 1, 2006 to the date of
      redemption. As a result of this redemption, COI recognized a loss on debt
      extinguishment of $151,000 in the third quarter of 2006, including the write-off
      of $115,000 of deferred financing costs. COI utilized loan proceeds under the
      PNC Credit Facility to pay the redemption price. Upon completion of this
      redemption, COI held irrevocable consents to the second proposal from the
      holders of 100% of the aggregate principal amount of Senior Notes then
      outstanding. Accordingly, on August 17, 2007, COI and Wilmington Trust Company,
      as trustee, entered into a Fourth Supplemental Indenture. The Fourth
      Supplemental Indenture amended the Indenture and Senior Notes by:




**·**
            extending
                the maturity date of the Senior Notes from December 1, 2007 to December
                1,
                2010; and


**·**
            providing
                call protection to holders of the Senior Notes under which COI will
                have
                the option to redeem the Senior Notes upon payment of a redemption
                price
                as follows:





*Redemption
                price**
            
            *If
                redemption at COI’s election occurs:*103%
            
            from
                August 16, 2006 through November 30, 2007102%
            
            from
                December 1, 2007 through November 30, 2008101%
            
            from
                December 1, 2008 through November 30, 2009100%
            
            on
                December 1, 2009 or thereafter*
                As percentage of the principal outstanding at the redemption date,
                plus
                accrued interest to the redemption
                date.






Effective
      as of July 12, 2006, the Company entered into an amendment to the PNC Credit
      Facility to, among other things:




**·**
            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;


**·**
            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;


**·**
            extend
                the maturity of the PNC Credit Facility until July 24, 2010;
                and


**·**
            permit
                up to $25.0 million of loan proceeds to be used, and which were used,
                to
                pay the redemption price of the Senior Notes (as described above),
                subject
                to a reduction of the maximum funds available under the PNC Credit
                Facility to effect redemptions in
                2007.







**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, 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.






18




**Results
      of Operations**




***Three
      Months Ended September 24, 2006 compared to Three Months Ended September 25,
      2005***




Net
      sales
      of services for the three months ended September 24, 2006 were $140.2 million,
      which represents a 0.8% increase from the $139.1 million in net sales of
      services realized for the three months ended September 25, 2005. Net sales
      of
      services in the Human Capital Management Services segment increased by $5.0
      million, or 6.3%, due to an increase in services provided principally to
      existing clients. In the Staff Augmentation segment, the decrease of $3.8
      million, or 6.5%, is principally attributable to a reduction in services
      provided to technical services and telecom customers, partially offset by an
      increase of demand for our services provided to information technology
      customers. The reduction in technical services provided by the Company was
      principally attributable to a significant reduction in domestic services
      provided under government-related subcontracts and a reduction in the services
      provided to other technical service customers. In addition, net sales of
      services in the telecom sector were lower due to a reduction in demand from
      our
      largest telecom client. Sales of services were lower by $139,000 or 13.2%,
      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 September 24, 2006 was 84.3% of net sales
      of
      services as compared to cost of services of 85.2% of net sales of services
      for
      the three months ended September 25, 2005. The cost of services as a percentage
      of net sales for the third 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 favorable workers compensation claims experience, partially offset by lower
      gross margins for telecom, technical and information technology
      services.




Selling,
      general and administrative expenses as a percentage of net sales of services
      were 12.2% for the three months ended September 24, 2006, compared to 11.1%
      for
      the three months ended September 25, 2005. The $1.6 million increase in selling,
      general and administrative expenses is primarily due to higher personnel costs
      incurred to support the increase in consultant consolidation services provided
      in the Human Capital Management Services segment discussed above and an increase
      of corporate expenses associated with personnel costs and professional fees.




Operating
      income for the three months ended September 24, 2006 was $4.1 million, or 2.9%
      of net sales, as compared to operating income of $4.2 million, or 3.0% of net
      sales, for the three months ended September 25, 2005. The Company’s lower
      operating income for the third quarter of 2006 is principally due to an increase
      in selling, general and administrative expenses discussed above, partially
      offset by an increase in net sales of services and gross margins in the Human
      Capital Management Services segment.




The
      Company’s interest expense for the three months ended September 24, 2006 was
      principally attributable to interest recorded on the PNC Credit Facility, the
      Convertible Note and the Senior Notes. The interest expense of $2.3 million
      for
      the third quarter of 2006 was lower as compared to the interest expense of
      $2.8
      million for the third quarter of 2005. This reduction was principally due to
      the
      repurchase of $18.1 million of Senior Notes in fiscal 2005 and the repurchase
      and redemption of $23.4 million of Senior Notes in the second and third quarters
      of 2006. These decreases were partially offset by increased interest expense
      on
      the Company’s revolving line of credit due to higher average interest rates and
      borrowings in the third quarter of 2006. The Company also expects interest
      expense reductions in future periods due to the redemption of its Senior Notes.
      See note 5 to the Company’s condensed consolidated financial
      statements.




The
      income tax provision for the three months ended September 24, 2006 was $808,000
      (a rate of 46.7%) on income before income taxes of $1.7 million. For the three
      months ended September 25, 2005, the income tax provision includes a tax benefit
      of $4.3 million from the resolution of certain federal and state income tax
      contingencies. Excluding this tax benefit, the income tax provision for the
      third quarter of 2005 was $797,000 (a rate of 50.8%) on income from continuing
      operations before income taxes of $1.6 million. 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.






19




**Nine
      Months Ended September 24, 2006 compared to Nine Months Ended September 25,
      2005**




Net
      sales
      of services for the nine months ended September 24, 2006 were $418.8 million,
      which represents a 5.3% increase from the $397.7 million in net sales of
      services realized for the nine months ended September 25, 2005. Net sales of
      services in the Human Capital Management Services segment increased by $19.9
      million, or 8.7%, 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 $1.9 million, or 1.1%, is
      principally attributable to services provided to information technology and
      healthcare customers, partially offset by a reduction in services provided
      to
      telecom and technical services customers. The reduction in technical services
      provided by the Company was principally attributable to a significant reduction
      in domestic services provided under government-related subcontracts and a
      reduction in the services provided to other technical service customers. In
      addition, net sales of services in the telecom sector were lower due to a
      reduction in demand from our largest telecom client. Sales of services were
      lower by $621,000, or 18.4%, in the Financial Outsourcing Services segment,
      principally due to a reduction in the number of customers we
      service.




Cost
      of
      services for the nine months ended September 24, 2006 was 84.6% of net sales
      of
      services as compared to cost of services of 85.6% of net sales of services
      for
      the nine months ended September 25, 2005. The cost of services as a percentage
      of net sales for the first three 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, higher margins for healthcare support services in the Staff
      Augmentation segment and favorable workers compensation claims experience,
      partially offset by lower gross margins for telecom, technical and information
      technology services.




Selling,
      general and administrative expenses as a percentage of net sales of services
      were 12.0% for the nine months ended September 24, 2006, compared to 11.1%
      for
      the nine months ended September 25, 2005. The $6.1 million increase in selling,
      general and administrative expenses is primarily due to higher personnel costs
      incurred to support the increase in consultant consolidation services provided
      in the Human Capital Management Services segment discussed above and an increase
      of corporate expenses associated with personnel costs and professional fees.




Operating
      income for the nine months ended September 24, 2006 was $11.6 million, or 2.8%
      of net sales, as compared to operating income of $10.4 million, or 2.6% of
      net
      sales, for the nine months ended September 25, 2005. The Company’s higher
      operating income for the first three quarters of 2006 is principally due to
      an
      increase in net sales of services and gross margins in the Human Capital
      Management Services segment, partially offset by an increase in selling,
      general, and administrative expenses discussed above.




The
      Company’s interest expense for the nine months ended September 24, 2006 was
      principally attributable to interest recorded on the PNC Credit Facility, the
      Convertible Note and the Senior Notes. The interest expense of $7.2 million
      for
      the first three quarters of 2006 was lower as compared to the interest expense
      of $8.3 million for the first three quarters of 2005. This reduction was
      principally due to the repurchase of $18.1 million of Senior Notes in fiscal
      2005 and the repurchase and redemption of $23.4 million of Senior Notes in
      the
      second and third quarters of 2006. These decreases were partially offset by
      increased interest expense on the Company’s revolving line of credit due to
      higher average interest rates and borrowings in the first nine months of 2006.
      The Company also expects interest expense reductions in future periods due
      to
      the redemption of its Senior Notes. See note 5 to the Company’s condensed
      consolidated financial statements.




The
      income tax provision for the nine months ended September 24, 2006 was $2.3
      million (a rate of 50.0%) on income before income taxes of $4.5 million. In
      the
      third quarter ending September 25, 2005, the income tax provision included
      a tax
      benefit of $4.3 million from the resolution of certain federal and state income
      tax contingencies. Excluding this tax benefit, the income tax provision for
      the
      first nine months of 2005 was $968,000 (a rate of 51.0%) on income from
      continuing operations before income taxes of $1.9 million. 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.






20




**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
      the three and nine months ended September 24, 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
            
            ThereafterOperating
                Leases
            
            $
                654
            
            $
                2,112
            
            $
                1,726
            
            $
                1,556
            
            $
                1,323PNC
                Credit Facility*-- principal repayments
            
            --
            
            --
            
            --
            
            --
            
            67,110Senior
                Notes* - principal repayments
            
            --
            
            --
            
            --
            
            --
            
            22,890Convertible
                Note - principal repayments
            
            --
            
            --
            
            --
            
            1,462
            
            --Total
            
            $
                654
            
            $
                2,112
            
            $
                1,726
            
            $
                3,018
            
            $
                91,323


___________________________


*See
      note
      5 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 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 Developments” in this Item 2 and the
      discussion under “Revolving Line of Credit” in note 5 to the Company’s condensed
      consolidated financial statements for a discussion of the July 2006 amendments
      to the Credit Facility.




The
      obligations under the PNC Credit Facility are collateralized by a pledge of
      the
      capital stock of certain key operating subsidiaries of the Company and by
      security interests in substantially all of the assets of the Company. The PNC
      Credit Facility contains various financial and other covenants and conditions,
      including, but not limited to, a prohibition on paying cash dividends and
      limitations on engaging in affiliate transactions, making acquisitions and
      incurring additional indebtedness. The maturity date of the PNC Credit Facility
      is July 24, 2010. The Company was in compliance with all financial covenants
      under the PNC Credit Facility at September 24, 2006.




The
      Company also had standby letters of credit outstanding under the PNC Credit
      Facility at September 24, 2006 in the aggregate amount of $5.1 million.




During
      the nine months ended September 24, 2006, the Company’s primary sources of funds
      were $12.6 million of cash provided by operating activities due to the
      profitability of the Company and changes in working capital. Cash and cash
      equivalents decreased $3.9 million during the nine months ended September 24,
      2006.




At
      September 24, 2006, the Company had outstanding $67.1 million principal amount
      under the PNC Credit Facility bearing interest at a weighted average rate of
      7.15% per annum. At such date, the Company had remaining availability of $18.1
      million, as defined in the agreement, under the PNC Credit Facility.






21




As
      described under “Recent Developments” in this Item 2 and under “Senior Notes” in
      note 5 to the Company’s condensed consolidated financial statements, in the
      third quarter of 2006, the Company amended the Indenture to, among other things,
      extend the maturity date of the Senior Notes to December 1, 2010, and redeemed
      $21.4 million principal amount of Senior Notes. The Company has made significant
      progress in improving its capital structure through the elimination of long-term
      debt through the purchase, redemption 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 $22.9 million and its total long-term debt from
      $195.3 million to $91.5 million during the same period. The Company has reduced
      its annualized interest expense by borrowing at the lower rates available under
      the PNC Credit Facility to effectuate the repurchase or redemption of long-term
      debt (including the August 2006 redemption of $21.4 million principal amount
      of
      Senior Notes) and by exchanging preferred stock and lower interest rate
      Convertible Notes for public debt.




At
      September 24, 2006, the Company also had outstanding (i) $22.9 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
      August 16, 2006, the Company redeemed $21.4 million principal amount of Senior
      Notes. See “Recent Developments” in this Item 2 and note 5 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 $10.3 million. However, COMFORCE has approximately $2.0 million
      available at September 24, 2006 from proceeds it has generated from the sale
      of
      stock, principally upon the exercise of options and warrants. This $2.0 million
      may be used by COMFORCE to pay interest and principal on the Convertible Notes
      or for other business purposes.




The
      Company’s Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of
      7.5% per annum and, at September 24, 2006 there were cumulated, unpaid and
      undeclared dividends of $1.7 million on the Series 2003A Preferred Stock,
      $116,000 on the Series 2003B Preferred Stock and $914,000 on the Series 2004A
      Preferred Stock. If such dividends and underlying instruments were converted
      to
      voting or non-voting common stock, the aggregate amount would equal 13.1 million
      shares.




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 September 24, 2006 and
      expects to remain in compliance for the next 12 months.




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.






22




**Impact
      of Recently Issued Accounting Standards**




On
      September 13, 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108 (“SAB No. 108”) which provides interpretive guidance
      on how the effects of the carryover or reversal of prior year misstatements
      should be considered in quantifying a current year misstatement. If the effect
      of initial adoption is determined to be material, the cumulative effect may
      be
      reported as an adjustment to the beginning of the reporting company’s retained
      earnings with disclosure of the nature and amount of each individual error
      being
      corrected in the cumulative adjustment. This guidance is applicable for the
      Company beginning in fiscal year 2007. The Company is in the process of
      assessing the effect SAB No. 108 may have on its consolidated financial
      statements.




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 nine months ended September 24, 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
      June
      2006, the FASB issued Financial Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      No. 48”). FIN No. 48 establishes a recognition threshold and measurement for
      income tax positions recognized in an enterprise’s financial statements in
      accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      FIN No.
      48 also prescribes a two-step evaluation process for tax positions. The first
      step is recognition and the second is measurement. For recognition, an
      enterprise judgmentally determines whether it is more-likely-than-not that
      a tax
      position will be sustained upon examination, including resolution of related
      appeals or litigation processes, based on the technical merits of the position.
      If the tax position meets the more-likely-than-not recognition threshold, it
      is
      measured and recognized in the financial statements as the largest amount of
      tax
      benefit that is greater than 50% likely of being realized. If a tax position
      does not meet the more-likely-than-not recognition threshold, the benefit of
      that position is not recognized in the financial statements.




Tax
      positions that meet the more-likely-than-not recognition threshold at the
      effective date of FIN No. 48 may be recognized, or continue to be recognized,
      upon adoption of FIN No. 48. The cumulative effect of applying the provisions
      of
      FIN No. 48 shall be reported as an adjustment to the opening balance of retained
      earnings for the year of adoption. FIN No. 48 is effective for the Company
      beginning in fiscal year 2007, with earlier adoption permitted. The Company
      is
      in the process of assessing the effect FIN No. 48 may have on its consolidated
      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.






23




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.




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 PROCE** **D** **URES**




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.






24


**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.**




Not
      applicable.






**ITEM
      5.**  **OTHER
      INFORMATION.**




On
      August
      7, 2006, 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.






25




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
      annual 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.** ****





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 (included as an exhibit to COMFORCE
                Corporation’s Current Report on Form 8-K filed August 18, 2006 and
                incorporated herein by reference).4.2
            Fourth
                Supplemental Indenture dated as of August 16, 2006 between COMFORCE
                Operating, Inc. and Wilmington Trust Company, as trustee, to Indenture
                dated as of November 26, 1997, as supplemented (included as an exhibit
                to
                COMFORCE Corporation’s Current Report on Form 8-K filed August 18, 2006
                and incorporated herein by reference).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 (included as an
                exhibit
                to COMFORCE Corporation’s Quarterly Report on Form 10-Q for the quarter
                ended June 25, 2006 and incorporated herein by reference).10.3
            Restated
                Deferred Compensation Plan approved as of November 1,
                2006.10.4
            Restated
                Deferred Vacation Plan approved as of November 1, 2006.31.1
            Rule
                13a-14(a) certification of chief executive officer in accordance
                with
                section 302 of the Sarbanes-Oxley Act of
                2002.






26




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.













**SIGNATURES**




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







COMFORCE
                Corporation/s/
                Harry V. MaccarroneHarry
                V. MaccarroneExecutive
                Vice President and Chief Financial OfficerDate:  November
                2, 2006