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 28, 2008




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)
      437-3300Registrant’s
      telephone number, including area codeNot
      ApplicableFormer
      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
o





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





Large
accelerated filer o     Accelerated
filer o     Non-accelerated
filer o     Smaller
reporting company  x





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





Yes o       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 November 3, 2008Common
      stock, $.01 par value
            
            17,387,560
      shares





1


COMFORCE
Corporation





INDEX











PageNumberPART
      I
            FINANCIAL
      INFORMATION
            3Item
      1.
            Financial
      Statements (unaudited)
            3Condensed
      Consolidated Balance Sheets at September 28, 2008 and December 30,
      2007
            3Condensed
      Consolidated Statements of Income for the three and nine months ended
      September 28, 2008 and September 30, 2007
            4Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      28, 2008 and September 30, 2007
            5Notes
      to Unaudited Condensed Consolidated Financial Statements
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            13Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            20Item
      4T.
            Controls
      and Procedures
            20PART
      II
            OTHER
      INFORMATION
            21Item
      1.
            Legal
      Proceedings
            21Item
      1A.
            Risk
      Factors
            21Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            22Item
      3.
            Defaults
      Upon Senior Securities
            22Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            22Item
      5.
            Other
      Information
            22Item
      6.
            Exhibits
            22SIGNATURES
            23





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
      28, 2008
            
            
            December
      30, 2007AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            11,045
            
            
            $
            6,654Accounts
      receivable, less allowance of $141 in 2008 and $129 in
2007
            
            
            125,300
            
            
            
            118,163Funding
      and service fees receivable, less allowance of $30 in 2008 and $44
      2007
            
            
            10,099
            
            
            
            13,101Prepaid
      expenses and other current assets
            
            
            3,395
            
            
            
            4,408Deferred
      income taxes, net
            
            
            399
            
            
            
            388Total
      current assets
            
            
            150,238
            
            
            
            142,714Deferred
      income taxes, net
            
            
            45
            
            
            
            164Property
      and equipment, net
            
            
            10,199
            
            
            
            7,723Deferred
      financing costs, net
            
            
            252
            
            
            
            480Goodwill
            
            
            32,073
            
            
            
            32,073Other
      assets, net
            
            
            187
            
            
            
            230Total
      assets
            
            $
            192,994
            
            
            $
            183,384Liabilities
      and Stockholders’ DeficitCurrent
      liabilities:Accounts
      payable
            
            $
            2,391
            
            
            $
            2,376Accrued
      expenses
            
            
            113,814
            
            
            
            105,825Total
      current liabilities
            
            
            116,205
            
            
            
            108,201Long-term
      debt (including related party debt of $1,710 in 2008 and $1,644 in
      2007)
            
            
            81,587
            
            
            
            83,858Other
      liabilities
            
            
            522
            
            
            
            828Total
      liabilities
            
            
            198,314
            
            
            
            192,887Commitments
      and contingencies (note 9)Stockholders’
      deficit:Common
      stock, $.01 par value; 100,000,000 shares authorized; 17,387,560 and
      17,387,553 shares issued and outstanding at September 28, 2008 and
      December 30, 2007, respectively
            
            
            174
            
            
            
            174Convertible
      preferred stock, $.01 par value:Series
      2003A, 6,500 shares authorized; 6,148 shares issued and outstanding at
      September 28, 2008 and December 30, 2007, with an aggregate liquidation
      preference of $8,734 at September 28, 2008 and $8,389 at December 30,
      2007
            
            
            4,304
            
            
            
            4,304Series
      2003B, 3,500 shares authorized; 513 shares issued and outstanding at
      September 28, 2008 and December 30, 2007, with an aggregate liquidation
      preference of $705 at September 28, 2008 and $676 at December 30,
      2007
            
            
            513
            
            
            
            513Series
      2004A, 15,000 shares authorized; 6,737 shares issued and outstanding at
      September 28, 2008 and December 30, 2007, with an aggregate liquidation
      preference of $8,664 at September 28, 2008 and $8,284 at December 30,
      2007
            
            
            10,264
            
            
            
            10,264Additional
      paid-in capital
            
            
            48,412
            
            
            
            48,356Accumulated
      other comprehensive income
            
            
            (67
            )
            
            
            (256
            )Accumulated
      deficit
            
            
            (68,920
            )
            
            
            (72,858
            )Total
      stockholders’ deficit
            
            
            (5,320
            )
            
            
            (9,503
            )Total
      liabilities and stockholders’ deficit
            
            $
            192,994
            
            
            $
            183,384







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




3




COMFORCE
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(in
thousands except per share amounts)


(unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSept.
      28, 2008
            
            
            Sept.
      30, 2007
            
            
            Sept.
      28, 2008
            
            
            Sept.
      30, 2007Net
      sales of services
            
            $
            149,435
            
            
            $
            150,667
            
            
            $
            452,401
            
            
            $
            441,966Costs
      and expenses:Cost
      of services
            
            
            125,884
            
            
            
            127,503
            
            
            
            380,651
            
            
            
            373,399Selling,
      general and administrative expenses
            
            
            18,727
            
            
            
            18,313
            
            
            
            57,978
            
            
            
            54,798Depreciation
      and amortization
            
            
            824
            
            
            
            679
            
            
            
            2,237
            
            
            
            2,018Total
      costs and expenses
            
            
            145,435
            
            
            
            146,495
            
            
            
            440,866
            
            
            
            430,215Operating
      income
            
            
            4,000
            
            
            
            4,172
            
            
            
            11,535
            
            
            
            11,751Other
      income (expense):Interest
      expense
            
            
            (963
            )
            
            
            (1,872
            )
            
            
            (3,531
            )
            
            
            (5,921
            )Loss
      on debt extinguishment
            
            
            (149
            )
            
            
            -
            
            
            
            (278
            )
            
            
            (424
            )Other
      (expense), income net
            
            
            (445
            )
            
            
            363
            
            
            
            (622
            )
            
            
            703(1,557
            )
            
            
            (1,509
            )
            
            
            (4,431
            )
            
            
            (5,642
            )Income
      before income taxes
            
            
            2,443
            
            
            
            2,663
            
            
            
            7,104
            
            
            
            6,109Provision
      for income taxes
            
            
            1,096
            
            
            
            874
            
            
            
            3,166
            
            
            
            2,332Net
      income
            
            $
            1,347
            
            
            $
            1,789
            
            
            $
            3,938
            
            
            $
            3,777Dividends
      on preferred stock
            
            
            252
            
            
            
            252
            
            
            
            754
            
            
            
            754Net
      income available to common stockholders
            
            $
            1,095
            
            
            $
            1,537
            
            
            $
            3,184
            
            
            $
            3,023Basic
      income per common share
            
            $
            0.06
            
            
            $
            0.09
            
            
            $
            0.18
            
            
            $
            0.17Diluted
      income per common share
            
            $
            0.04
            
            
            $
            0.06
            
            
            $
            0.12
            
            
            $
            0.12Weighted
      average common shares outstanding, basic
            
            
            17,388
            
            
            
            17,387
            
            
            
            17,388
            
            
            
            17,385Weighted
      average common shares outstanding, diluted
            
            
            33,021
            
            
            
            32,341
            
            
            
            32,612
            
            
            
            31,903









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
      28, 2008
            
            
            September
      30, 2007Cash
      flows from operating activities:
            
            $
            3,938
            
            
            $
            3,777Net
      incomeAdjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of property and equipment
            
            
            2,237
            
            
            
            2,018Amortization
      of deferred financing fees
            
            
            134
            
            
            
            155Net
      recoveries of bad debts
            
            
            (1
            )
            
            
            (5
            )Deferred
      income taxes
            
            
            (31
            )
            
            
            68Interest
      expense paid by the issuance of convertible notes
            
            
            66
            
            
            
            61Loss
      on repurchase/redemption of Senior Notes
            
            
            278
            
            
            
            424Excess
      tax benefit from stock option exercises
            
            
            -
            
            
            
            (5
            )Share-based
      payment compensation expense
            
            
            65
            
            
            
            90Changes
      in assets and liabilities:Accounts,
      funding and service fees receivable
            
            
            (4,496
            )
            
            
            (4,401
            )Prepaid
      expenses and other current assets
            
            
            1,053
            
            
            
            223Accounts
      payable and accrued expenses
            
            
            8,429
            
            
            
            757Income
      tax receivable
            
            
            (2
            )
            
            
            451Net
      cash provided by operating activities
            
            
            11,670
            
            
            
            3,613Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (4,713
            )
            
            
            (3,570
            )Net
      cash used in investing activities
            
            
            (4,713
            )
            
            
            (3,570
            )Cash
      flows from financing activities:Net
      repayments under capital lease obligations
            
            
            (175
            )
            
            
            (95
            )Net
      borrowings under line of credit agreements
            
            
            9,377
            
            
            
            10,640Repurchases/redemptions
      of Senior Notes
            
            
            (11,884
            )
            
            
            (10,300
            )Excess
      tax benefit from stock option exercises
            
            
            -
            
            
            
            5Debt
      financing costs
            
            
            -
            
            
            
            (13
            )Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            25Net
      cash (used in) provided by financing activities
            
            
            (2,682
            )
            
            
            262Net
      increase in cash and cash equivalents
            
            
            4,275
            
            
            
            305Effect
      of exchange rates on cash
            
            
            116
            
            
            
            113Cash
      and cash equivalents at beginning of period
            
            
            6,654
            
            
            
            3,782Cash
      and cash equivalents at end of period
            
            $
            11,045
            
            
            $
            4,200Supplemental
      disclosures:Cash
      paid for:Interest
            
            $
            3,619
            
            
            $
            5,225Income
      taxes
            
            
            896
            
            
            
            1,824Supplemental
      schedule of significant non-cash financing activities:Capital
      lease obligations incurred for the purchase of new
    equipment
            
            $
            -
            
            
            $
            724




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.




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




The
accompanying unaudited interim condensed consolidated financial statements of
the Company have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission.  Certain information and footnote
disclosures normally included in annual financial statements have been condensed
or omitted pursuant to those rules and regulations.  In the opinion of
management, all adjustments, consisting of normal recurring adjustments
considered necessary for a fair presentation, have been
included.  Management believes that the disclosures made are adequate
to ensure that the information presented is not misleading; however, these
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s annual report
on Form 10-K for the fiscal year ended December 30, 2007.  The results
for the three and nine month periods ended September 28, 2008 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.      SHARE-BASED
PAYMENTS




For the
nine months ended September 28, 2008, the Company recorded $65,100 of
compensation expense relating to the awarding of stock option grants in the
second quarter of 2008, which options immediately vested.  The
compensation expense has been recorded within selling, general and
administrative expenses.  In addition, the Company recorded an income
tax benefit of $26,000 in the accompanying statements of operations related to
these grants for the nine months ended September 28, 2008.  For the
nine months ended September 30, 2007, $89,600 of compensation expense has been
recorded within selling, general and administrative expense and the Company has
recorded an income tax benefit of $35,000 in the accompanying statements of
operations for options granted during the second quarter of 2007, which options
immediately vested.




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.






6




The per
share weighted average fair value of stock options granted were $0.93 during the
nine months ended September 28, 2008 and $1.28 during the nine months ended
September 30, 2007.  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:




Nine
      Months EndedSeptember
      28, 2008
            
            September
      30, 2007Expected
      dividend yield
            
            
            0.0
            %
            
            
            0.0
            %Expected
      volatility
            
            
            47.2
            %
            
            
            49.0
            %Risk-free
      interest rate
            
            
            3.49
            %
            
            
            5.18
            %Expected
      term (years)
            
            
            5
            
            
            
            5




The
Company estimates expected volatility based primarily on historical monthly
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 term of these awards was determined using the “simplified method”
prescribed in SEC Staff Accounting Bulletin (“SAB”) No. 107, as the Company
believes that there is insufficient historical option exercise information
available to make a reasonable estimate of the expected term.






4.      DEBT




Long-term
debt at September 28, 2008 and December 30, 2007, consisted of (in
thousands):




September
      28, 2008
            
            
            December
      30, 200712%
      Senior Notes, due December 1, 2010
            
            $
            -
            
            
            $
            11,7148%
      Subordinated Convertible Note, due December 2, 2009
            
            
            1,710
            
            
            
            1,644Revolving
      line of credit, due July 24, 2010, with interest payable at prime and/or
      LIBOR plus a stated percentage with a weighted average rates of 4.14% at
      September 28, 2008 (LIBOR plus 1.50%) and 6.9% at December 30, 2007(LIBOR
      plus 1.75%)
            
            
            79,877
            
            
            
            70,500Total
      long-term debt
            
            $
            81,587
            
            
            $
            83,858




Contractual
maturities of long-term debt as of September 28, 2008 are as follows (in
thousands):




2009
            
            $
            1,7102010
            
            
            79,877Total
            
            $
            81,587




Senior
Notes:  In November 1997,
COI issued $110 million of 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 provided for
semi-annual payments of interest at the rate of 12% per annum.  On
August 25, 2008, the Company redeemed all of its outstanding Senior Notes at a
redemption price equal to 102% of their outstanding principal amount ($5.2
million), plus accrued interest from June 1, 2008 to the redemption
date.  The total redemption price, including accrued interest and the
2% premium, was $5.5 million.  The Company used loan proceeds under
the Company’s revolving line of credit agreement to pay the redemption price
(see “Revolving Line of Credit,” below, in this note 4).




The
Senior Notes were governed by an indenture (the “Indenture”) under which
Wilmington Trust Company served as the trustee.  The Indenture
included various covenants and restrictions on COI and its operating
subsidiaries, including limitations on COI’s ability to upstream funds to its
parent, COMFORCE.  Although the Company’s revolving line of credit
agreement includes significant restrictions and covenants that continue to be
binding on the Company, including many that are comparable to or more
restrictive than those that were applicable under the Indenture, the
restrictions and covenants under the Indenture are no longer binding on the
Company.




As a
result of this redemption, the Company recognized a loss on debt extinguishment
of $149,000 in the third quarter of 2008, including the write-off of $44,000 of
deferred financing costs.






7




Previously,
in April 2008, the Company repurchased $6.5 million principal amount of Senior
Notes at a price equal to 101% of the principal amount, plus accrued
interest.  The total repurchase price, including accrued interest, was
$6.9 million.  The Company repurchased the Senior Notes from an
unrelated party utilizing available funds under the PNC Credit
Facility.  As a result of this repurchase, the Company recognized a
loss on debt extinguishment of $129,000 in the second quarter of 2008, including
the write-off of $64,000 of deferred financing costs.




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




Under the
terms of the Convertible Note, interest is payable either in cash or in-kind at
the Company’s election.  Debt service costs associated with the
Convertible Note have been satisfied through additions to principal through June
1, 2008 (the most recent semi-annual interest payment
date).  Additional principal is convertible into common stock on the
same basis as other amounts outstanding under the Convertible Note, which
provides for conversion into common stock at the rate of $1.70 per
share.  As a result of its election to pay interest in-kind under the
Convertible Note, the Company recognized beneficial conversion features of
$14,000 during the first nine months of 2008 and $43,000 during fiscal 2007,
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.  The holder has 10 days to convert the
Convertible Note following notice of prepayment.  The holder of the
Convertible Note is a related party.




Revolving Line of
Credit:  At September 28,
2008, COMFORCE, COI and various of their operating subsidiaries, as co-borrowers
and guarantors, were parties to a $110.0 million Revolving Credit and Security
Agreement (the “PNC Credit Facility”) with PNC Bank, National Association, as a
lender and administrative agent (“PNC”), and other financial institutions
participating as lenders to provide for a revolving line of credit with
available borrowings based, generally, on 87.0% of the Company’s accounts
receivable aged 90 days or less, subject to specified limitations and
exceptions.




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




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




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




The PNC
Credit Facility was amended effective as of June 6, 2008 to provide for a
temporary reduction in the required availability under the facility for the
purpose of enabling the Company to redeem all of the Senior Notes that remained
outstanding ($5.2 million principal amount), which were redeemed on August 25,
2008 (see “Senior Notes,” above, in this note 4).  The PNC Credit
Facility permitted the Company to use loan proceeds to repurchase its Senior
Notes subject to the Company’s obligation to restore excess availability under
the facility to $5.0 million, which the Company has done.




Under the
PNC Credit Facility, the Company had outstanding $4.2 million of standby letters
of credit and had remaining availability of $11.8 million as of September 28,
2008.  The Company was in compliance with all financial covenants
under the PNC Credit Facility at September 28, 2008.






8




5.      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 EndedSept.
      28, 2008
            
            Sept.
      30, 2007
            
            Sept.
      28, 2008
            
            Sept.
      30, 2007Basic
      income per common share:Net
      income
            $   1,347
            
            $   1,789
            
            $   3,938
            
            $   3,777Deduct
      dividends on preferred stock:Series
      2003A
            115
            
            115
            
            345
            
            345Series
      2003B
            10
            
            10
            
            29
            
            29Series
      2004A
            127
            
            127
            
            380
            
            380252
            
            252
            
            754
            
            754Income
      available to common stockholders
            $   1,095
            
            $   1,537
            
            $    3,184
            
            $   3,023Weighted
      average common shares outstanding
            17,388
            
            17,387
            
            17,388
            
            17,385Basic
      income per common share
            $     0.06
            
            $     0.09
            
            $      0.18
            
            $     0.17Diluted
      income per common share:Income
      available to common stockholders
            $   1,095
            
            $   1,537
            
            $    3,184
            
            $   3,023Add
      dividends on preferred stock:Series
      2003A
            115
            
            115
            
            345
            
            345Series
      2003B
            10
            
            10
            
            29
            
            29Series
      2004A
            127
            
            127
            
            380
            
            380252
            
            252
            
            754
            
            754Add
      after tax equivalent of interest expense on 8% Subordinated Convertible
      Note
            20
            
            19
            
            61
            
            57Income
      for purposes of computing diluted income per common share
            $   1,367
            
            $   1,808
            
            $    3,999
            
            $   3,834Weighted
      average common shares outstanding
            17,388
            
            17,387
            
            17,388
            
            17,385Dilutive
      stock options
            101
            
            317
            
            135
            
            311Assumed
      conversion of 8% Subordinated Convertible Note
            1,013
            
            924
            
            974
            
            900Assumed
      conversion of Preferred Stock:Series
      2003A
            8,209
            
            7,771
            
            7,989
            
            7,549Series
      2003B
            1,289
            
            1,218
            
            1,253
            
            1,182Series
      2004A
            5,021
            
            4,724
            
            4,873
            
            4,576Weighted
      average common shares outstanding for purposes of computing diluted income
      per share
            33,021
            
            32,341
            
            32,612
            
            31,903Diluted
      income per common share
            $     0.04
            
            $     0.06
            
            $     0.12
            
            $     0.12




Options
and warrants to purchase 1.9 million and 1.4 million shares of common stock were
outstanding as of September 28, 2008 and September 30, 2007, respectively, but
were not included in the computation of diluted income per share because their
effect would be anti-dilutive.






9




6.      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 28, 2008 and
September 30, 2007, and items which reconcile segment operating contribution to
COMFORCE’s reported income before income taxes (in thousands):




Three
      Months Ended
            
            
            Nine
      Months EndedSept.
      28, 2008
            
            
            Sept.
      30, 2007
            
            
            Sept.
      28, 2008
            
            
            Sept.
      30, 2007Net
      sales of services:Human
      Capital Management Services
            
            $
            96,925
            
            
            $
            93,170
            
            
            $
            290,214
            
            
            $
            274,168Staff
      Augmentation
            
            
            51,524
            
            
            
            56,676
            
            
            
            159,567
            
            
            
            165,318Financial
      Outsourcing Services
            
            
            986
            
            
            
            821
            
            
            
            2,620
            
            
            
            2,480$
            149,435
            
            
            $
            150,667
            
            
            $
            452,401
            
            
            $
            441,966Operating
      contribution:Human
      Capital Management Services
            
            $
            4,272
            
            
            $
            4,187
            
            
            $
            11,978
            
            
            $
            12,368Staff
      Augmentation
            
            
            4,280
            
            
            
            4,455
            
            
            
            13,834
            
            
            
            13,370Financial
      Outsourcing Services
            
            
            936
            
            
            
            724
            
            
            
            2,469
            
            
            
            2,0999,488
            
            
            
            9,366
            
            
            
            28,281
            
            
            
            27,837Consolidated
      expenses:Corporate
      general and administrative expenses
            
            
            4,664
            
            
            
            4,515
            
            
            
            14,509
            
            
            
            14,068Depreciation
      and amortization
            
            
            824
            
            
            
            679
            
            
            
            2,237
            
            
            
            2,018Interest
      and other, net
            
            
            1,408
            
            
            
            1,509
            
            
            
            4,153
            
            
            
            5,218Loss
      on debt extinguishment
            
            
            149
            
            
            
            -
            
            
            
            278
            
            
            
            4247,045
            
            
            
            6,703
            
            
            
            21,177
            
            
            
            21,728Income
      before income taxes
            
            $
            2,443
            
            
            $
            2,663
            
            
            $
            7,104
            
            
            $
            6,109






Total
assets:




At
      Sept. 28, 2008
            
            
            At
      Dec. 30, 2007Human
      Capital Management Services
            
            $
            100,649
            
            
            $
            96,120Staff
      Augmentation
            
            
            56,724
            
            
            
            54,116Financial
      Outsourcing Services
            
            
            10,099
            
            
            
            13,101Corporate
            
            
            25,522
            
            
            
            20,047$
            192,994
            
            
            $
            183,384








10




7.      COMPREHENSIVE
INCOME




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




Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      28, 2008
            
            
            September
      30, 2007
            
            
            September
      28, 2008
            
            
            September
      30, 2007Net
      income
            
            $
            1,347
            
            
            $
            1,789
            
            
            $
            3,938
            
            
            $
            3,777Foreign
      currency translation adjustment, net of tax
            
            
            90
            
            
            
            (115
            )
            
            
            189
            
            
            
            (277
            )Total
      comprehensive income
            
            $
            1,437
            
            
            $
            1,674
            
            
            $
            4,127
            
            
            $
            3,500






8.      ACCRUED
EXPENSES




Accrued
expenses as of September 28, 2008 and December 30, 2007 consisted of (in
thousands):




September
      28, 2008
            
            
            December
      30, 2007Payroll,
      payroll taxes and sub-vendor payments
            
            $
            96,383
            
            
            $
            85,043Book
      overdrafts
            
            
            5,826
            
            
            
            11,322Other
            
            
            11,605
            
            
            
            9,460$
            113,814
            
            
            $
            105,825






9.      CONTINGENCIES




Tax Contingencies
under FIN 48:  As of September 28, 2008, the Company’s
total gross unrecognized tax benefits of approximately $516,000 were recorded in
accordance with Financial
Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109, “Accounting for Income Taxes,”
effective January 1, 2007 (“FIN 48”)related to various tax
jurisdictions, including $26,000 of interest and penalties.  As of
December 30, 2007, the Company had gross unrecognized tax benefits of
$83,000, including $6,000 of interest and penalties. The September 28, 2008
net amount of $485,000 would favorably affect the effective tax rate if
recognized. The Company does not expect its unrecognized tax benefits to change
significantly over the next 12 months.




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




The
contract does not directly address taxes payable to each of the foreign
jurisdictions, but the contracting officer advised CTS by letter in June 2006
that CTS should not make tax payments or withholdings in the host countries
because the Agency had negotiated or would negotiate with the host countries and
expected these discussions to lead to bilateral agreements exempting contractors
and contractor personnel from all tax liability.  The contract
provides that CTS will be reimbursed for “all fines, penalties, and reasonable
litigation expenses incurred as a result of compliance with specific contract
terms and conditions or written instructions from the Contracting
Officer.”  The contracting officer’s June 2006 letter states that any
fines, penalties, interest or costs of legal proceedings incurred in honoring
these instructions will be reimbursable.  As described below, the
Agency purported to withdraw the June 2006 letter on a prospective basis
effective October 27, 2008.






11




At a June
2008 meeting, the Agency confirmed that the United States had entered into
bilateral agreements with, or confirmed the availability of exemptions in 35 of
the host countries served by CTS under the contract, but advised CTS that it had
not entered into and would not continue to pursue bilateral agreements having
retroactive effect with 22 of the host countries served under the contract, and
advised and encouraged CTS to pursue its own agreements with these host
countries.  The Agency confirmed, however, that the United States
planned to pursue bilateral agreements having prospective effect with these 22
host countries, which management believes will have a favorable impact on CTS’s
own pursuit of agreements having both prospective and retroactive
effect.  In response, CTS has engaged a firm to provide mitigation
services with respect to these 22 host countries.  Initially, that
firm will approach the authorities in the host countries and seek to negotiate
agreements to exempt CTS from all taxes, penalties and interest (“wage taxes” or
“wage tax costs”), prospectively and retroactively, in connection with engaging
employees in the host countries.




Management
believes that the host countries have the same strong interest in entering into
agreements with CTS that they would have in entering into bilateral agreements
with the Agency, and that many, if not all, of the host countries will not wish
to impose, or ultimately enforce, payment of wage taxes on CTS and will be
willing to enter into agreements with CTS.  Management believes that
it is reasonably possible that each of the host countries will waive or decline
to assess or to enforce payment of wage tax costs against
CTS.  However, since CTS cannot be assured that it will be successful
in reaching agreements with all host countries to exempt it from wage tax costs,
CTS has continued discussions with the Agency to address this
contingency.




In
addressing alternative solutions to the wage tax issue prospectively and
retroactively as part of its ongoing discussions with CTS, the Agency sent a
letter to CTS in October 2008 under which the Agency withdrew the June 2006
letter as to future task orders and modifications.  In this letter,
the Agency advised that CTS would be required to develop a proposal that would
place a ceiling on allowable wage tax costs for all CTS task orders, stating
that under applicable regulations the Agency could not guarantee reimbursement
of CTS’s wage tax costs in “an undetermined, unlimited”
amount.  Management subsequently met with the key representatives of
the Agency to better understand the Agency’s position and the processes and
procedures CTS will need to follow to ensure reimbursement for prior wage tax
costs that are identified as part of CTS’s mitigation efforts as described
above.  Although CTS will seek to reach agreements or other
accommodations with all host countries that are not subject to bilateral
agreements with the United States, in the event CTS is unable to do so, it
intends to take the following actions in an effort to minimize any impact on its
balance sheet and cash flows:




·
            seek
      to identify and withhold applicable host country wage taxes against
      taxable employees;




·
            ask
      PNC to make a special advance to the CTS to fund any wage tax costs
      pending reimbursement from the
Agency;




·
            develop
      a mechanism to facilitate the Agency’s expedited reimbursement to CTS of
      any wage tax costs; and




·
            seek
      to stagger any payments of wage tax costs due in respect of the Company’s
      operations in any host countries.




Depending
on the results of its negotiations with the host countries and the Agency, the
Company may be required to recognize liabilities for these wage tax costs of CTS
in future periods.  Although not anticipated, wage tax costs assessed
by host countries could potentially exceed the amount available to the Company
from its own resources or under the PNC Credit Facility.  Management
is currently unable to estimate its liabilities, if any, or the high end of a
range of potential liabilities for potential wage tax costs, but expects to be
in a position to do so as its mitigation efforts reach a more developed
stage.






12




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




The
Illinois EPA took control of the site and began to construct a cap on the
site.  In 2008, the Company received a demand from the US EPA for more
than $2.0 million in past costs and a demand from the Illinois Environmental
Protection Agency (“IEPA”) for over $14 million in IEPA's past costs for its
partial work on the cap.  The agencies are also demanding that the
parties complete construction of the cap and investigate whether a groundwater
remedy is required.  Cost estimates for that work have not yet been
made and a final allocation of costs among the potentially responsible parties
have not yet been made and a group has not yet, but will likely form to address
these demands.  The Company's share is expected to be less than 1%
assuming that the level of participation remains at least as high as it has been
in the past.  The group believes that it has some defenses and
challenges to the government's past cost claims and will likely try to negotiate
a reduction in the amount of the claims.  Furthermore, the Company has
made inquiries of the insurance carriers for Apeco to determine if it has
coverage under old insurance policies.




Except as
described above or in note 12 of our consolidated financial statements for the
year ended December 30, 2007, there are no other pending matters, individually
or in the aggregate, that, if adversely determined, are believed by management
to be material to the business or financial condition of the Company. The
Company expenses legal costs associated with contingencies when
incurred.  The Company maintains general liability insurance, property
insurance, automobile insurance, fidelity insurance, errors and omissions
insurance, professional/medical malpractice insurance, cyber risk liability
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 accompanying
condensed consolidated financial statements and related notes of COMFORCE
Corporation (“COMFORCE”) and its wholly-owned subsidiaries, including COMFORCE
Operating, Inc. (“COI”) (collectively, the “Company”).




Overview
and Recent Developments




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






13




Management
has been closely monitoring United States and worldwide economic conditions
that, particularly since September 2008, have resulted in an extraordinary
tightening of credit markets coupled with volatile commercial interest
rates.  These economic conditions have resulted in unprecedented
intervention in financial institutions and markets by governments throughout the
world, including the enactment in the United States of the Emergency Economic
Stabilization Act of 2008.  These conditions have been characterized
in news reports as a global economic crisis.  While the impact on the
Company’s interest expense during the third quarter was limited, we expect our
interest expense in future periods to increase unless the current economic
problems abate.  In addition, our customers are also facing the
tightening in the availability of credit, including more restrictive lending
standards and higher interest rates.  Management has observed a
weakening in the labor markets that has resulted in declines in revenues in our
Staff Augmentation segment during the third quarter of 2008 as compared to the
third quarter of 2007.  While these conditions have not had a
significant negative impact on our operations through the end of the third
quarter of 2008, if these conditions persist or deteriorate, they could
potentially have a more significant adverse impact on our operations in future
periods.




On August
25, 2008, the Company redeemed all of its outstanding Senior Notes at a
redemption price equal to 102% of their outstanding principal amount ($5.2
million), plus accrued interest from June 1, 2008 to the redemption
date.  The total redemption price, including accrued interest and the
2% premium, was $5.5 million.  The Company used loan proceeds under
the PNC Credit Facility to pay the redemption price.  The Indenture
governing the Senior Notes included various covenants and restrictions on COI
and its operating subsidiaries, including limitations on COI’s ability to
upstream funds to its parent, COMFORCE.  Although the PNC Credit
Facility includes significant restrictions and covenants that continue to be
binding on the Company, including many that are comparable to or more
restrictive than those that were applicable under the Indenture, the
restrictions and covenants under the Indenture are no longer binding on the
Company.   As a result of this redemption, the Company recognized
a loss on debt extinguishment of $149,000 in the third quarter of 2008,
including the write-off of $44,000 of deferred financing costs.






Results
of Operations




Three
Months Ended September 28, 2008 compared to September 30, 2007




Net sales
of services for the three months ended September 28, 2008 were $149.4 million,
which represents a 0.8% decrease from the $150.7 million in net sales of
services recorded for the three months ended September 30, 2007.  Net
sales of services in the Human Capital Management Services segment increased by
$3.8 million, or 4.0%, due to an increase in services provided to new
clients.  While management believes such increases are reflective of a
trend over the past decade for companies to rely increasingly on providers of
human capital management services, such as those provided by the Company’s PrO
Unlimited subsidiary, the current economic environment (see “Overview and Recent
Developments” in this Item 2) has impacted this trend.  Management has
observed over the last two quarters that PrO’s customers generally have not
sought to expand the scope of services they engage PrO to
perform.   In the Staff Augmentation segment, the sales decrease
of $5.2 million, or 9.1%, is principally attributable to the decrease of
services provided to technical services customers, partially offset by an
increase in services provided to information technology, telecom and healthcare
support customers.




Cost of
services for the three months ended September 28, 2008 was 84.2% of net sales of
services as compared to cost of services of 84.6% net sales of services for the
three months ended September 30, 2007.  Cost of services in the Human
Capital Management Services segment for the three months ended September 28,
2008 decreased slightly to 86.8% of net sales of services as compared to cost of
services of 87.0% net sales of services in this segment for the three months
ended September 30, 2007.  In the Staff Augmentation segment, cost of
services for the three months ended September 28, 2008 was 81.0% of net sales of
services as compared to cost of services of 82.0% net sales of services in this
segment for the three months ended September 30, 2007 principally due to a
reduction of lower margin business during the third quarter of
2008.




Selling,
general and administrative expenses as a percentage of net sales of services
were 12.5% for the three months ended September 28, 2008, compared to 12.2% for
the three months ended September 30, 2007.  The $414,000 increase in
selling, general and administrative expenses is primarily due to higher
personnel costs incurred to support the increase in services provided in the
Human Capital Management Services segment discussed above.






14




Operating
income for the three months ended September 28, 2008 of $4.0 million, or 2.7% of
net sales, as compared to operating income of $4.2 million, or 2.8% of net
sales, for the three months ended September 30, 2007.  The Company’s
operating income for the third quarter of 2008 is slightly lower than for the
third quarter of 2007 principally due to an increase in selling, general, and
administrative expenses discussed above, partially offset by an increase in net
sales of services and related gross margins in Human Capital Management
Services.




The
Company’s interest expense for the three months ended September 28, 2008 was
principally attributable to interest recorded on the PNC Credit Facility, the
Convertible Note and, prior to their redemption, the Senior Notes. The interest
expense of $1.0 million for the third quarter of 2008 was lower as compared to
the interest expense of $1.9 million for the third quarter of
2007.  This decrease in interest expense was principally due to the
repurchases and redemptions of $22.9 million of Senior Notes since the beginning
of 2007, including the redemption of the remaining $5.2 million principal amount
of Senior Notes in August 2008, and to lower interest rates under the PNC Credit
Facility, partially offset by higher borrowings under the PNC Credit Facility in
the third quarter of 2008 as compared to the year ago period.




As a
result of its final redemption of Senior Notes in August 2008, the Company
recognized a loss on debt extinguishment of $149,000 in the third quarter of
2008, including the write-off of $44,000 of deferred financing
costs.




Other
expense, net, for the three months ended September 28, 2008 of $445,000
principally consists of losses on foreign currency exchanges, as compared to
other income, net, for the three months ended September 30, 2007 of $363,000
principally consisting of gains on foreign currency exchanges.




The
Company’s income tax provision consists of U.S. federal, state, local and
foreign taxes in amounts necessary to align the Company’s year-to-date income
tax provision with the effective tax rate that the Company expects to achieve
for the full year.  The Company’s annual effective tax rate for 2008
is estimated to be 45.9% based upon the Company’s anticipated earnings both in
the U.S. and in foreign jurisdictions.  The income tax provision for
the three months ended September 28, 2008 was $1.1 million (a rate of 44.9%) on
income before income taxes of $2.4 million.  Included in the income
tax provision for the three months ended September 28, 2008 are discrete items
related to an income tax benefit for certain return-to-provision items based on
the filing of the Company’s 2007 tax return, partially offset by the accrual of
interest pursuant to FIN 48.  The income tax provision for the three
months ended September 30, 2007 was $874,000 (a rate of 32.8%) on income before
income taxes of $2.7 million.  Included in the income tax provision
for the three months ended September 30, 2007 is an income tax benefit related
to certain tax deductions realized upon the dissolution of a subsidiary that
operated one branch office that has been closed.




The
Company’s total unrecognized tax benefit as of September 28, 2008 was
approximately $485,000, which, if recognized would affect the Company’s
effective tax rate.  As of September 28, 2008, the Company had
approximately $26,000 of accrued interest and penalties.  The Company
does not expect its unrecognized tax benefits to change significantly over the
next 12 months.






Nine
Months Ended September 28, 2008 compared to September 30, 2007




Net sales
of services for the nine months ended September 28, 2008 were $452.4 million,
which represents a 2.4% increase from the $442.0 million in net sales of
services recorded for the nine months ended September 30, 2007.  Net
sales of services in the Human Capital Management Services segment increased by
$16.0 million, or 5.9%, due to an increase in services provided to new
clients.  While management believes that such increase is reflective
of a trend over the past decade for companies to rely increasingly on providers
of human capital management services, such as those provided by the Company’s
PrO Unlimited subsidiary, the current economic environment (see “Overview and
Recent Developments” in this Item 2) has impacted this
trend.  Management has observed over the last two quarters that PrO’s
customers generally have not sought to expand the scope of services they engage
PrO to perform.   In the Staff Augmentation segment, the sales
decrease of $5.8 million, or 3.5%, is principally attributable to the decrease
of services provided to technical services customers, partially offset by an
increase in services provided to healthcare support services and information
technology customers.






15




Cost of
services for the nine months ended September 28, 2008 was 84.1% of net sales of
services as compared to cost of services of 84.5% net sales of services for the
nine months ended September 30, 2007.  Cost of services in the Human
Capital Management Services segment for each of the nine months ended September
28, 2008 and September 30, 2007 was 86.9%.  In the Staff Augmentation
segment, cost of services for the nine months ended September 28, 2008 was 80.5%
of net sales of services as compared to cost of services of 81.7% net sales of
services in this segment for the nine months ended September 30, 2007
principally due to a reduction in lower margin business during the 2008
period.




Selling,
general and administrative expenses as a percentage of net sales of services
were 12.8% for the nine months ended September 28, 2008, compared to 12.4% for
the nine months ended September 30, 2007.  The $3.2 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.




Operating
income for the nine months ended September 28, 2008 was $11.5 million, or 2.6%
of net sales, as compared to operating income of $11.8 million, or 2.7% of net
sales, for the nine months ended September 30, 2007.  The Company’s
operating income for the first nine months of 2008 is slightly lower than for
the first nine months of 2007 principally due to an increase in selling,
general, and administrative expenses discussed above, partially offset by an
increase in net sales of services and related gross margins in Human Capital
Management Services and healthcare support services.




The
Company’s interest expense for the nine months ended September 28, 2008 was
principally attributable to interest recorded on the PNC Credit Facility, the
Convertible Note and, prior to their redemption, the Senior Notes. The interest
expense of $3.5 million for the first nine months of 2008 was lower as compared
to the interest expense of $5.9 million for the first nine months of
2007.  This decrease in interest expense was principally due to the
repurchases and redemptions of $22.9 million of Senior Notes since the beginning
of 2007, including the redemption of the remaining $5.2 million principal amount
of Senior Notes in August 2008, and to lower interest rates under the PNC Credit
Facility, partially offset by higher borrowings under the PNC Credit Facility in
the first nine months of 2008 as compared to the year ago nine-month
period.




As a
result of its repurchase of $6.5 million principal amount of Senior Notes April
2008 and its final redemption of $5.2 million principal amount of Senior Notes
in August 2008, the Company recognized a loss on debt extinguishment of $278,000
in the nine months ended September 28, 2008, including the write-off of $108,000
of deferred financing costs.  As a result of its redemption of $10.0
million of Senior Notes during the nine months ended September 30, 2007, the
Company recognized a loss on debt extinguishment of $424,000, including a
reduction of $124,000 of deferred financing costs.




Other
expense, net, for the nine months ended September 28, 2008 of $622,000
principally consists of losses on foreign currency exchanges as compared to
other income, net, for the nine months ended September 30, 2007 of $703,000
principally consisting of gains on foreign currency exchanges.




The
Company’s income tax provision consists of U.S. federal, state and local and
foreign taxes in amounts necessary to align the Company’s year-to-date income
tax provision with the effective tax rate that the Company expects to achieve
for the full year.  The Company’s annual effective tax rate for 2008
is estimated to be 45.9% based upon the Company’s anticipated earnings both in
the U.S. and in foreign jurisdictions.




The
income tax provision for the nine months ended September 28, 2008 was $3.2
million (a rate of 44.6%) on income before income taxes of $7.1
million.  Included in the income tax provision for the nine months
ended September 28, 2008 are discrete items related to an income tax benefit for
certain return-to-provision items based on the filing of the Company’s 2007 tax
return, partially offset by the accrual of interest pursuant to FIN
48.  The income tax provision for the nine months ended September 30,
2007 was $2.3 million (a rate of 38.2%) on income before income taxes of $6.1
million.  Included in the income tax provision for the nine months
ended September 30, 2007 is an income tax benefit related to certain tax
deductions realized upon the dissolution of a subsidiary that operated one
branch office that has been closed.




The
Company’s total unrecognized tax benefit as of September 28, 2008 was
approximately $485,000, which, if recognized would affect the Company’s
effective tax rate.  As of September 28, 2008, the Company had
approximately $26,000 of accrued interest and penalties.  The Company
does not expect its unrecognized tax benefits to change significantly over the
next 12 months.






16




Financial
Condition, Liquidity and Capital Resources




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




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




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




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




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




Staffing
personnel placed by the Company are employees of the Company. The Company is
responsible for employment related expenses for its employees, including workers
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and general payroll expenses.  The Company offers health,
dental, 401(k), disability and life insurance to its eligible employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
customers, resulting in significant outstanding receivables.  To the
extent the Company grows, these receivables will increase and there will be
greater need for borrowing availability under the PNC Credit
Facility.  At October 26, 2008, the Company had outstanding $78.5
million principal amount under the PNC Credit Facility with remaining
availability of up to $16.6 million, as defined under the PNC Credit Facility
agreement, to fund operations.




Off-Balance
Sheet and Contractual Obligations: As of September 28, 2008, we had no
off-balance sheet arrangements other than operating leases entered into in the
normal course of business, as indicated in the table below.  The
following table represents contractual commitments associated with operating
lease agreements, employment agreements and principal repayments on debt
obligations (excluding interest):




Payments
      due by fiscal year (in thousands)2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            ThereafterOperating
      Leases
            
            $
            757
            
            
            $
            2,734
            
            
            $
            1,737
            
            
            $
            1,054
            
            
            $
            708Employment
      Agreements
            
            
            247
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -PNC
      Credit Facility(1)-
      principal repayments
            
            
            -
            
            
            
            -
            
            
            
            79,877
            
            
            
            -
            
            
            
            -Convertible
      Note(1)
      - principal repayments
            
            
            -
            
            
            
            1,710
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            1,004
            
            
            $
            4,444
            
            
            $
            81,614
            
            
            $
            1,054
            
            
            $
            708





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




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




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




The
Company also had standby letters of credit outstanding under the PNC Credit
Facility at September 28, 2008 in the aggregate amount of $4.2
million.






17




As
reported in the accompanying cash flow statement, during the first nine months
of 2008, the Company’s primary sources of funds were $11.7 million provided by
its operating activities due significantly to the continued profitability of the
Company.  The Company also used cash of $4.7 million in investing
activities due to the purchases of property and equipment.  In
addition, the cash used in financing activities of $2.7 million is primarily a
result of the repurchase and redemption of $11.9 million aggregate principal
amount of Senior Notes, partially offset by increased borrowings of $9.4 million
under the PNC Credit Facility to facilitate the repurchase and
redemption.




At
September 28, 2008, the Company had outstanding $79.9 million principal amount
under the PNC Credit Facility bearing interest at a weighted average rate of
4.14% per annum.  At such date, the Company had remaining availability
of up to $11.8 million, as defined in the agreement, under the PNC Credit
Facility.




At
September 28, 2008, the Company also had outstanding $1.7 million principal
amount of Convertible Notes bearing interest at 8% per annum.




The
Company has made significant progress in improving its capital structure and
reducing interest expenses through the elimination of long-term debt through the
repurchase, redemption or exchange of Senior Notes, Convertible Notes and other
instruments.  Since June 2000 and through the date of this Report, the
Company has eliminated $138.8 million of public debt and reduced its total
long-term debt from $195.3 million to $81.6 million.  The Company has
reduced its annualized interest expense principally by borrowing at the lower
rates available under the PNC Credit Facility to effectuate the repurchase or
redemption of long-term debt and by exchanging preferred stock and lower
interest rate Convertible Notes for public debt.




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.  Prior to the redemption of the remaining Senior
Notes in August 2008 (as described under “Overview and Recent Developments” in
this Item 2), these assets and any cumulated net income were restricted as to
their use by COMFORCE.  The Indenture imposed restrictions on COI
making specified payments, which were referred to as “restricted payments,”
including making distributions or paying dividends (referred to as upstreaming
funds) to COMFORCE.  Upon the completion of the redemption of the
Senior Notes, these restrictions were eliminated.  However, the PNC
Credit Facility includes significant restrictions and covenants that continue to
be binding on the Company, including many that are comparable to or more
restrictive than those that were applicable under the Indenture (see note 4 to
our condensed consolidated financial statements).




The
Company’s Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of
7.5% per annum and, at September 28, 2008 there were cumulated, unpaid and
undeclared dividends of $2.6 million on the Series 2003A Preferred Stock,
$193,000 on the Series 2003B Preferred Stock and $1.9 million on the Series
2004A Preferred Stock.  If such dividends and underlying instruments
were converted to voting or non-voting common stock, the aggregate amount would
equal 14.7 million shares at September 28, 2008 (as compared to 13.9 million
shares at September 30, 2007).




Management
of the Company believes that cash flow from operations and funds anticipated to
be available under the PNC Credit Facility will be sufficient to service the
Company’s indebtedness and to meet currently anticipated working capital
requirements for the next 12 months.  The Company was in compliance
with all covenants under the PNC Credit Facility at September 28, 2008 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.




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






18




Critical
Accounting Policies and Estimates




As
disclosed in the annual report on Form 10-K for the year ended December 30,
2007, the discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States.  The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses reported in those financial
statements.  These judgments can be subjective and complex, and
consequently actual results could differ from those estimates.  Our
most critical accounting policies relate to allowance for doubtful accounts,
accrued workers compensation liability, goodwill impairment, and income
taxes.  Since December 30, 2007, 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.






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




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




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;






19




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




·
            increases
      in interest rates, which could significantly increase our interest expense
      under the PNC Credit Facility;




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




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




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




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




·
            any
      of the other factors described under “Risk Factors” in Item 1A of the
      Company’s Annual Report on Form 10-K for the year ended December 30, 2007
      and below in Part II, Item 1A of this
Report.






ITEM
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




The
information required under Item 3 has been disclosed in Item 7A of the Company’s
annual report on Form 10-K for the year ended December 30,
2007.  Since December 30, 2007, the Company has reduced fixed rate
interest obligations to $1.7 million through the repurchase or redemption of
$11.7 million principal amount of its Senior Notes bearing interest at the rate
of 12% per annum, primarily using variable rate borrowings under the PNC Credit
Facility.   At September 28, 2008, we had $79.9 million
outstanding under the PNC Credit Facility bearing variable rate interest at the
weighted average rate of 4.14% per annum as compared to $70.5 million
outstanding at December 30, 2007 at a weighted average rate of 6.9% per
annum.  Despite the turmoil in the U.S. and global credit markets and
increases in LIBOR, we have reduced our weighted average rate for borrowings
under the PNC Credit Facility by electing to price our loans at the prime rate,
as permitted under the terms of the PNC Credit Facility (see note 4 to our
condensed consolidated financial statements).  Assuming an immediate
25% increase in the weighted average interest rate of 4.14% on variable rate
obligations of $79.9 million, the impact to the Company in annualized interest
expense would be approximately $827,000.




The
Company has not entered into any swap agreements or other hedging transactions
as a means of limiting exposure to interest rate or foreign currency
fluctuations.  Although the Company provides its services in several
countries, based upon the current level of investments in these countries, it
does not believe that even a 25% change in foreign currency rates would have a
material impact to the Company’s financial position.




Accordingly,
since December 30, 2007, there has been no material change in the Company’s
market risks from those reported in the Company’s annual report on Form 10-K for
the year ended December 30, 2007.






ITEM
4T.   CONTROLS AND PROCEDURES




Our
management has evaluated, with the participation of our chief executive officer
and chief financial officer, the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”) as of September 28, 2008
based upon the procedures required under paragraph (b) of Rule 13a-15 under the
Exchange Act.   On the basis of this evaluation, our management
has concluded that as of September 28, 2008 our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in the reports that
we file or submit under the Exchange Act.  Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required
disclosure.






20




There has
been no change in the Company’s internal controls over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 under the Exchange Act that occurred during the quarter ended September
28, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.









PART
II - OTHER INFORMATION




ITEM
1.   LEGAL PROCEEDINGS.




Since the
date of the filing of the Company’s annual report on Form 10-K for the year
ended December 30, 2007, there have been no material new legal proceedings
involving the Company or any material developments to the proceedings described
in such Form 10-K.






ITEM
1A.   RISK FACTORS.




Since the
date of the filing of the Company’s annual report on Form 10-K for the year
ended December 30, 2007, there have been no material changes to the risk factors
described under Item 1A in such Form 10-K, except as follows:




The risks
described under Item 1A in our Annual Report on Form 10-K under the caption
“Restrictions and covenants in our indenture and other financing agreements
limit our ability to take actions and impose consequences in the event of a
compliance failure” have been eliminated due to our redemption of all remaining
Senior Notes (as described under “Overview and Recent Developments” in Part I,
Item 2).




We have
added the following risk factor to address the current global economic crisis
(as described under “Overview and Recent Developments” in Part I, Item
2):




Current
global economic conditions have created turmoil in credit and labor markets
that, if they persist or deteriorate, could have a significant adverse impact on
our operations.




Current
United States and worldwide economic conditions have resulted in an
extraordinary tightening of credit markets coupled with higher interest rates,
particularly since September 2008.  These economic conditions have
resulted in unprecedented intervention in financial institutions and markets by
governments throughout the world, including the enactment in the United States
of the Emergency Economic Stabilization Act of 2008.  These conditions
have been characterized in news reports as a global economic crisis that has
been marked by dramatic and rapid shifts in market conditions and government
responses.  If these conditions persist or deteriorate, they could
have a significant adverse impact on our operations by:




·
            creating
      uncertainty in the business environment, which uncertainty would act as a
      disincentive for businesses to expand their
  operations;




·
            decreasing
      our customers demand for contingent staff in our Staff Augmentation
      segment and management services in our Human Capital Management Services
      segment;




·
            adversely
      affecting our customers’ ability to obtain credit to fund operations,
      which in turn would affect their ability to timely make payment on our
      invoices;




·
            increasing
      our interest expense and, unless these conditions abate, making it more
      difficult for us to refinance or extend the PNC Credit Facility at its
      maturity on July 24, 2010; and




·
            creating
      greater risks to us in providing Financial Outsourcing Services to our
      customers as well as  increasing our costs of providing funding
      to these customers.


We have revised the discussion of the
risks described under Item 1A in our Annual Report on Form 10-K under the
caption “Our inability to repay or refinance our Senior Notes or the PNC Credit
Facility, both of which mature in 2010, would have a material adverse effect on
our financial condition” due to the redemption of all remaining Senior Notes (as
described under “Overview and Recent Developments” in Part I, Item
2).  We have restated the risks as follows:


Our
inability to repay or refinance the PNC Credit Facility, which matures in 2010
would have a material adverse effect on our financial condition.






21




The PNC
Credit Facility, under which we had $78.5 million in borrowings outstanding at
October 26, 2008, matures on July 24, 2010.  Unless we find a source
of capital to repay or refinance this obligation, we will be unable to repay the
PNC Credit Facility at maturity, which would have a material adverse effect on
our financial condition.  The credit markets have tightened
significantly since the second quarter of 2008.  We cannot predict
whether capital will be available to us on interest rates and terms acceptable
to us, if at all, when these obligations mature in 2010.






ITEM
2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.




Not
applicable.






ITEM
3.   DEFAULTS UPON SENIOR SECURITIES.




Not
applicable.






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




None.






ITEM
5.   OTHER INFORMATION.




None.






ITEM
6.   EXHIBITS.


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







22


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
      5, 2008









23