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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended June 26, 2005



OR



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



For the transition period from  to



Commission file number: 1-6081



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COMFORCE Corporation

(Exact name of registrant as specified in its charter)



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





415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797

(Address of
principal executive offices) (Zip Code)



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



Not Applicable

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



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



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



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



|                             |  |                             
|---------------------------- |  | ----------------------------
|Class                        |  | Outstanding at July 28, 2005
|Common stock, $.01 par value |  | 16,909,513 shares           



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##### Table of Contents

COMFORCE Corporation



INDEX



|           |  |                                                                                                                      |  |            
|---------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -----------
|           |  |                                                                                                                      |  | Page Number
|PART I     |  | FINANCIAL INFORMATION                                                                                                |  | 3          
|           |  |                                                                                                                     
|Item 1.    |  | Financial Statements                                                                                                 |  | 3          
|           |  |                                                                                                                     
|           |  | Consolidated Balance Sheets at June 26, 2005 (unaudited) and December 26, 2004                                       |  | 3          
|           |  |                                                                                                                     
|           |  | Consolidated Statements of Operations for the three and six months ended June 26, 2005 and June 27, 2004 (unaudited) |  | 4          
|           |  |                                                                                                                     
|           |  | Consolidated Statements of Cash Flows for the six months ended June 26, 2005 and June 27, 2004 (unaudited)           |  | 5          
|           |  |                                                                                                                     
|           |  | Notes to Unaudited Consolidated Financial Statements                                                                 |  | 6          
|           |  |                                                                                                                     
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 14         
|           |  |                                                                                                                     
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                           |  | 20         
|           |  |                                                                                                                     
|Item 4.    |  | Controls and Procedures                                                                                              |  | 20         
|           |  |                                                                                                                     
|PART II    |  | OTHER INFORMATION                                                                                                    |  | 21         
|           |  |                                                                                                                     
|Item 1.    |  | Legal Proceedings                                                                                                    |  | 21         
|           |  |                                                                                                                     
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                          |  | 21         
|           |  |                                                                                                                     
|Item 3.    |  | Defaults Upon Senior Securities                                                                                      |  | 21         
|           |  |                                                                                                                     
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                  |  | 21         
|           |  |                                                                                                                     
|Item 5.    |  | Other Information                                                                                                    |  | 22         
|           |  |                                                                                                                     
|Item 6.    |  | Exhibits                                                                                                             |  | 22         
|           | 
|SIGNATURES |  | 22                                                                                                                  





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##### Table of Contents

PART I - FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



COMFORCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                        |  | June 26, 2005 |         |   | December 26,2004 |  
|                                                                                                                                                                                        |  | (unaudited)   |         |   |                  |  
|Assets                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|                                                                                                                                                                                        |  |              
|Current assets:                                                                                                                                                                         |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                               |  | $             | 6,506   |   |                  | $ | 15,233  |  
|Accounts receivable, net                                                                                                                                                                |  |               | 88,416  |   |                  |   | 70,322  |  
|Funding and service fees receivable, net                                                                                                                                                |  |               | 14,407  |   |                  |   | 21,822  |  
|Prepaid expenses and other current assets                                                                                                                                               |  |               | 3,864   |   |                  |   | 3,488   |  
|Deferred income taxes, net                                                                                                                                                              |  |               | 2,404   |   |                  |   | 2,404   |  
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                    |  |               | 115,597 |   |                  |   | 113,269 |  
|                                                                                                                                                                                        |  |              
|Deferred income taxes, net                                                                                                                                                              |  |               | 1,281   |   |                  |   | 1,281   |  
|Property and equipment, net                                                                                                                                                             |  |               | 5,728   |   |                  |   | 6,293   |  
|Intangible assets, net                                                                                                                                                                  |  |               | 60      |   |                  |   | 81      |  
|Goodwill, net                                                                                                                                                                           |  |               | 32,073  |   |                  |   | 32,073  |  
|Deferred financing costs, net                                                                                                                                                           |  |               | 1,165   |   |                  |   | 1,464   |  
|Other assets                                                                                                                                                                            |  |               | 145     |   |                  |   | 188     |  
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                            |  | $             | 156,049 |   |                  | $ | 154,649 |  
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Liabilities and Stockholders Deficit                                                                                                                                                   |  |               |         |   |                  |   |         |  
|                                                                                                                                                                                        |  |              
|Current liabilities:                                                                                                                                                                    |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                        |  | $             | 2,400   |   |                  | $ | 4,325   |  
|Accrued expenses                                                                                                                                                                        |  |               | 63,964  |   |                  |   | 62,926  |  
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                               |  |               | 66,364  |   |                  |   | 67,251  |  
|                                                                                                                                                                                        |  |              
|Long-term debt                                                                                                                                                                          |  |               | 118,868 |   |                  |   | 117,227 |  
|Other liabilities                                                                                                                                                                       |  |               |        |   |                  |   | 6       |  
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                       |  |               | 185,232 |   |                  |   | 184,484 |  
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                                           |  |               |         |   |                  |   |         |  
|                                                                                                                                                                                        |  |              
|Stockholders deficit:                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Common stock, $.01 par value; 100,000,000 shares authorized; 16,909,513 and 16,689,496 shares issued and outstanding at June 26, 2005 and
December 26, 2004, respectively               |  |               | 169     |   |                  |   | 167     |  
|Convertible preferred stock, $.01 par value:                                                                                                                                            |  |               |         |   |                  |   |         |  
|Series 2003A, 6,500 shares authorized; 6,148 shares issued and outstanding at June 26, 2005 and December 26, 2004, with an aggregate
liquidation preference of $7,236 at June 26, 2005  |  |               | 4,304   |   |                  |   | 4,304   |  
|Series 2003B, 3,500 shares authorized; 513 shares issued and outstanding at June 26, 2005 and December 26, 2004, with an aggregate liquidation
preference of $581 at June 26, 2005      |  |               | 513     |   |                  |   | 513     |  
|Series 2004A, 15,000 shares authorized; 6,737 shares issued and outstanding at June 26, 2005 and December 26, 2004, with an aggregate
liquidation preference of $7,021 at June 26, 2005 |  |               | 10,264  |   |                  |   | 10,264  |  
|Additional paid-in capital                                                                                                                                                              |  |               | 47,582  |   |                  |   | 47,193  |  
|Accumulated other comprehensive income                                                                                                                                                  |  |               | 155     |   |                  |   | 153     |  
|Accumulated deficit                                                                                                                                                                     |  |               | (92,170 | ) |                  |   | (92,429 | )
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total stockholders deficit                                                                                                                                                             |  |               | (29,183 | ) |                  |   | (29,835 | )
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders deficit                                                                                                                                             |  | $             | 156,049 |   |                  | $ | 154,649 |  
|                                                                                                                                                                                        |  |               |         |   |                  |   |         |  



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



3



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

(unaudited)



|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                                              |  | Three Months Ended |         |   | Six Months Ended |  
|                                                                              |  | June 26,2005       |         |   | June 27,2004     |   |         | June 26,2005 |  |   | June 27,2004 |  
|Net sales of services                                                         |  | $                  | 134,909 |   |                  | $ | 117,558 |              |  | $ | 258,603      |   |  | $ | 224,999 |  
|                                                                              |  |                    |         |  
|Costs and expenses:                                                           |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Cost of services                                                              |  |                    | 115,116 |   |                  |   | 99,864  |              |  |   | 221,919      |   |  |   | 190,864 |  
|Selling, general and administrative expenses                                  |  |                    | 15,104  |   |                  |   | 13,543  |              |  |   | 28,808       |   |  |   | 26,211  |  
|Depreciation and amortization                                                 |  |                    | 878     |   |                  |   | 997     |              |  |   | 1,724        |   |  |   | 2,026   |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Total costs and expenses                                                      |  |                    | 131,098 |   |                  |   | 114,404 |              |  |   | 252,451      |   |  |   | 219,101 |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Operating income                                                              |  |                    | 3,811   |   |                  |   | 3,154   |              |  |   | 6,152        |   |  |   | 5,898   |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Other income (expense):                                                       |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Interest expense                                                              |  |                    | (2,738  | ) |                  |   | (3,014  | )            |  |   | (5,563       | ) |  |   | (6,170  | )
|(Loss) gain on debt extinguishment                                            |  |                    | (253    | ) |                  |   |        |              |  |   | (253         | ) |  |   | 1,971   |  
|Other expense, net                                                            |  |                    | (32     | ) |                  |   | (15     | )            |  |   | (7           | ) |  |   | (57     | )
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|                                                                              |  |                    | (3,023  | ) |                  |   | (3,029  | )            |  |   | (5,823       | ) |  |   | (4,256  | )
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income from continuing operations before income taxes                         |  |                    | 788     |   |                  |   | 125     |              |  |   | 329          |   |  |   | 1,642   |  
|Provision for income taxes                                                    |  |                    | 380     |   |                  |   | 60      |              |  |   | 171          |   |  |   | 773     |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income from continuing operations                                             |  |                    | 408     |   |                  |   | 65      |              |  |   | 158          |   |  |   | 869     |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from discontinued operations, net of tax benefit of $16 in 2004 |  |                    | 101     |   |                  |   |        |              |  |   | 101          |   |  |   | (17     | )
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income                                                                    |  | $                  | 509     |   |                  | $ | 65      |              |  | $ | 259          |   |  | $ | 852     |  
|                                                                              |  |                    |         |  
|Dividends on preferred stock                                                  |  |                    | 250     |   |                  |   | 125     |              |  |   | 500          |   |  |   | 250     |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss) available to common stockholders                            |  | $                  | 259     |   |                  | $ | (60     | )            |  | $ | (241         | ) |  | $ | 602     |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Basic income (loss) per common share:                                         |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations                                      |  | $                  | 0.01    |   |                  | $ | (0.00   | )            |  | $ | (0.02        | ) |  | $ | 0.04    |  
|Income (loss) from discontinued operations                                    |  |                    | 0.01    |   |                  |   |        |              |  |   | 0.01         |   |  |   | (0.00   | )
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss)                                                             |  | $                  | 0.02    |   |                  | $ | (0.00   | )            |  | $ | (0.01        | ) |  | $ | 0.04    |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Diluted income (loss) per common share:                                       |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations                                      |  | $                  | 0.01    |   |                  | $ | (0.00   | )            |  | $ | (0.02        | ) |  | $ | 0.04    |  
|Income (loss) from discontinued operations                                    |  |                    | 0.00    |   |                  |   |        |              |  |   | 0.01         |   |  |   | (0.00   | )
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss)                                                             |  | $                  | 0.01    |   |                  | $ | (0.00   | )            |  | $ | (0.01        | ) |  | $ | 0.04    |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Weighted average common shares outstanding, basic                             |  |                    | 16,910  |   |                  |   | 16,669  |              |  |   | 16,834       |   |  |   | 16,664  |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  
|Weighted average common shares outstanding, diluted                           |  |                    | 18,279  |   |                  |   | 16,669  |              |  |   | 16,834       |   |  |   | 17,953  |  
|                                                                              |  |                    |         |   |                  |   |         |              |  |   |              |   |  |   |         |  



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



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                 |  |                  |         |   |              |   |         |  
|-------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                 |  | Six months ended |        
|                                                                                 |  | June 26,2005     |         |   | June 27,2004 |  
|Cash flows from operating activities:                                            |  |                  |         |   |              |   |         |  
|Net income                                                                       |  | $                | 259     |   |              | $ | 852     |  
|(Income) loss from discontinued operations                                       |  |                  | (101    | ) |              |   | 17      |  
|                                                                                 |  |                  |         |   |              |   |         |  
|                                                                                 |  | $                | 158     |   |              | $ | 869     |  
|Adjustments to reconcile net income to net cash used in operating activities:    |  |                  |         |   |              |   |         |  
|Depreciation and amortization of property and equipment                          |  |                  | 1,704   |   |              |   | 1,996   |  
|Amortization of intangible assets                                                |  |                  | 21      |   |              |   | 30      |  
|Amortization of deferred financing fees                                          |  |                  | 269     |   |              |   | 284     |  
|Net recoveries of bad debts                                                      |  |                  | (213    | ) |              |   |        |  
|Interest expense paid by the issuance of convertible notes                       |  |                  | 52      |   |              |   | 297     |  
|Loss (gain) on repurchase of senior notes                                        |  |                  | 253     |   |              |   | (1,971  | )
|Equity-based consulting expense                                                  |  |                  | 30      |   |              |   |        |  
|Tax benefit from stock option exercises                                          |  |                  | 156     |   |              |   | 1       |  
|Changes in assets and liabilities, net of effects of dispositions of businesses: |  |                  |         |   |              |   |         |  
|Accounts, funding and service fees receivable                                    |  |                  | (10,465 | ) |              |   | (8,141  | )
|Prepaid expenses and other current assets                                        |  |                  | (626    | ) |              |   | 942     |  
|Accounts payable and accrued expenses                                            |  |                  | (801    | ) |              |   | 527     |  
|Income tax receivable                                                            |  |                  | 169     |   |              |   | 44      |  
|                                                                                 |  |                  |         |   |              |   |         |  
|Net cash used in continuing operations                                           |  |                  | (9,293  | ) |              |   | (5,122  | )
|Net cash used in discontinued operations                                         |  |                  |        |   |              |   | (421    | )
|                                                                                 |  |                  |         |   |              |   |         |  
|Net cash used in operating activities                                            |  |                  | (9,293  | ) |              |   | (5,543  | )
|                                                                                 |  |                  |         |   |              |   |         |  
|Cash flows from investing activities:                                            |  |                  |         |   |              |   |         |  
|Purchases of property and equipment                                              |  |                  | (1,139  | ) |              |   | (663    | )
|Cash proceeds from sale of niche telecom operations, net of cash transferred     |  |                  | 225     |   |              |   | 1,762   |  
|                                                                                 |  |                  |         |   |              |   |         |  
|Net cash (used in) provided by investing activities                              |  |                  | (914    | ) |              |   | 1,099   |  
|                                                                                 |  |                  |         |   |              |   |         |  
|Cash flows from financing activities:                                            |  |                  |         |   |              |   |         |  
|Net borrowings under line of credit agreements                                   |  |                  | 10,589  |   |              |   | 10,792  |  
|Repurchase of Senior Notes                                                       |  |                  | (9,154  | ) |              |   | (11,310 | )
|Debt financing costs                                                             |  |                  | (63     | ) |              |   | (24     | )
|Proceeds from exercise of stock options                                          |  |                  | 199     |   |              |   | 31      |  
|Net repayments under capital lease obligations                                   |  |                  | (91     | ) |              |   | (154    | )
|                                                                                 |  |                  |         |   |              |   |         |  
|Net cash provided by (used in) financing activities                              |  |                  | 1,480   |   |              |   | (665    | )
|                                                                                 |  |                  |         |   |              |   |         |  
|Net decrease in cash and cash equivalents                                        |  |                  | (8,727  | ) |              |   | (5,109  | )
|Cash and cash equivalents at beginning of period                                 |  |                  | 15,233  |   |              |   | 7,598   |  
|                                                                                 |  |                  |         |   |              |   |         |  
|Cash and cash equivalents at end of period                                       |  | $                | 6,506   |   |              | $ | 2,489   |  
|                                                                                 |  |                  |         |   |              |   |         |  
|Supplemental disclosures:                                                        |  |                  |         |   |              |   |         |  
|Cash paid for:                                                                   |  |                  |         |   |              |   |         |  
|Interest                                                                         |  | $                | 4,838   |   |              | $ | 5,052   |  
|Income taxes                                                                     |  |                  | 731     |   |              |   | 419     |  



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





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COMFORCE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



1. GENERAL



COMFORCE Corporation (COMFORCE or the Company) is a provider of specialty staffing, consulting and
outsourcing services primarily to Fortune 1000 companies and other large employers for their healthcare support, technical and engineering, information technology, telecommunications and other staffing services. The Companys outsourced
enterprise staffing management services enable its customers to consolidate, automate and manage staffing, compliance and oversight processes for their contingent workforce, including independent contractors, temporary workers, consultants,
freelancers and, in some cases, returning retirees. The Company also offers services for the selection, procurement, management and tracking of the contingent workforce.



The accompanying unaudited interim consolidated financial statements of COMFORCE and its subsidiaries, including COMFORCE
Operating, Inc. (COI) (collectively, the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual
financial statements have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included.
Although management believes that the disclosures made are adequate to ensure that the information presented is not misleading, these financial statements should be read in conjunction with the financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended December 26, 2004. The results for the three and six month periods ended June 26, 2005 are not necessarily indicative of the results of operations for the entire year.



2. ESTIMATES



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America 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, 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. STOCK COMPENSATION PLANS



The Company applies APB Opinion 25 and related interpretations in accounting for stock options; accordingly, no compensation cost has been recognized in
the statements of operations for any options granted to employees, officers or directors since the exercise price of options was equal to or greater than the market value of the common stock on the date of grant. Had compensation cost been
determined based upon the fair value of the stock options at grant date, consistent with the method in Statement No. 123, Accounting for Stock-Based Compensation(SFAS 123), the Companys net income (loss) and net income
(loss) per share would have been the pro forma amounts indicated below (in thousands):





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|                                                                                                                                 |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |     
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ----
|                                                                                                                                 |  | Three Months Ended |       |   | Six Months Ended
|                                                                                                                                 |  | June 26,2005       |       |   | June 27,2004     |   |       | June 26,2005 |  |   | June 27,2004
|Net income (loss) available to common stockholders as reported                                                                   |  | $                  | 259   |   |                  | $ | (60   | )            |  | $ | (241         | ) |  | $ | 602 
|Deduct: Total stock-based employee compensation expense determined under the fair value based method, net of related tax
effects |  |                    | 385   |   |                  |   | 7     |              |  |   | 502          |   |  |   | 14  
|                                                                                                                                 |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |     
|Pro forma net (loss) income                                                                                                      |  | $                  | (126  | ) |                  | $ | (67   | )            |  | $ | (743         | ) |  | $ | 588 
|                                                                                                                                 |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |     
|Income (loss) per share:                                                                                                         |  |                    |       |   |                  |   |       |              |  |   |              |   |  |   |     
|Basic - as reported                                                                                                              |  | $                  | 0.02  |   |                  | $ | (0.00 | )            |  | $ | (0.01        | ) |  | $ | 0.04
|Basic - pro forma                                                                                                                |  |                    | (0.01 | ) |                  |   | (0.00 | )            |  |   | (0.04        | ) |  |   | 0.04
|                                                                                                                                 |  |                    |       |  
|Diluted - as reported                                                                                                            |  | $                  | 0.01  |   |                  | $ | (0.00 | )            |  | $ | (0.01        | ) |  | $ | 0.04
|Diluted - pro forma                                                                                                              |  |                    | (0.01 | ) |                  |   | (0.00 | )            |  |   | (0.04        | ) |  |   | 0.04



4. DEBT



Long-term debt at June 26, 2005 and December 26, 2004 consisted of (in
thousands):



|                                                                                                                                                                                      |  |              |         |                  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                                                                                                                                                                                      |  | June 26,2005 |         | December 26,2004
|12% Senior Notes, due 2007                                                                                                                                                            |  | $            | 55,410  |                  | $ | 64,410 
|8% Subordinated Convertible Note, due 2009                                                                                                                                            |  |              | 1,351   |                  |   | 1,299  
|Revolving line of credit, due June 24, 2007, with interest payable at prime and LIBOR plus 2.0% with a weighted average rate of 5.52% at June
26, 2005 and 4.93% at December 26, 2004 |  |              | 62,107  |                  |   | 51,518 
|                                                                                                                                                                                      |  |              |         |                  |   |        
|Total long-term debt                                                                                                                                                                  |  | $            | 118,868 |                  | $ | 117,227
|                                                                                                                                                                                      |  |              |         |                  |   |        



Required principal
payments of long-term debt are as follows (in thousands):



|      |  |   |        
|----- |  | - | -------
|2007  |  | $ | 117,517
|2009  |  |   | 1,351  
|      |  |   |        
|Total |  | $ | 118,868
|      |  |   |        



PNC Credit
Facility: COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, entered into an $85.0 million Revolving Credit and Security Agreement (the PNC Credit Facility) with PNC Bank, National Association,
as a lender and administrative agent (PNC) and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based, generally, on 85.0% of the Companys accounts receivable
aged 90 days or less, subject to specified limitations and exceptions. The Company entered into the PNC Credit Facility in June 2003 and it has been subject to various amendments. At June 26, 2005, the Company had remaining availability, as defined
in the agreement, under the PNC Credit Facility of $10.6 million.



On May 13, 2005, the PNC Credit Facility was amended to lower the interest rates calculated in reference to LIBOR. As amended, borrowings under the PNC Credit Facility bear interest, at the Companys option, at a per



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annum rate equal to either (1) 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
(2) LIBOR plus a specified margin, determined as follows:



|                                    |  |           
|----------------------------------- |  | ----------
|Fixed charge coverage ratio         |  | Margin (%)
|greater than 1.50:1.00              |  | 1.75      
|greater than 1.30:1.00 to 1.50:1.00 |  | 2.00      
|greater than 1.05:1.00 to 1.30:1.00 |  | 2.25      
|equal to or less than 1.05:1.00     |  | 2.50      



The PNC Credit
Facility also provides for a commitment fee of 0.375% 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 key operating subsidiaries of the Company and
by security interests in substantially all of the assets of the Company. The May 13, 2005 amendment also reduced the lenders audits of the Company at the Companys expense from three to two per calendar year, subject to specified
exceptions. The agreements evidencing the PNC Credit Facility contain 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 June 24, 2007. The Company was in compliance with all financial covenants under the PNC Credit Facility at June 26, 2005.



The PNC Credit Facility was previously amended in September 2004 to increase
the Companys flexibility to draw funds to repurchase its 12% Senior Notes due December 1, 2007 (the Senior Notes). As amended, the Company is permitted to repurchase or prepay Senior Notes so long as the remaining availability
under the PNC Credit Facility, as defined in the agreement, is at least $7.5 million for the specified measurement period. In addition, the annual $15.0 million limit on repurchases of Senior Notes was modified to permit the carryover from any prior
calendar year of any unused portion of this amount, so long as the other criteria for borrowing are then satisfied.



As of June 26, 2005, the Company had outstanding $5.1 million of standby letters of credit under the PNC Credit Facility.



Senior Notes: The indenture governing the Senior Notes contains a
number of significant restrictions and covenants that require the Company to ensure among other things that:



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



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



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



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



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



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In February and March 2004, the Company repurchased an aggregate of $13.5 million principal amount of its
Senior Notes for $11.3 million in transactions with unrelated parties. As a result of these repurchases, the Company recognized a gain on debt extinguishment of $2.0 million in the first quarter of 2004, including a reduction of $219,000 of deferred
financing costs.



In April and May 2005, the Company
repurchased an aggregate of $9.0 million principal amount of its Senior Notes for $9.2 million, utilizing available funds under the PNC Credit Facility. The Senior Notes were purchased from unrelated parties. As a result of these repurchases, the
Company recognized a loss on debt extinguishment of $253,000 in the second quarter of 2005, including a reduction of $99,000 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.



On December 8, 2004, the
Company issued 6,737 shares of its Series 2004A Convertible Preferred Stock in exchange for $6,726,385 of its Convertible Note, plus accrued interest of $10,463, in a transaction with the Fanning CPD Assets, LP (the Fanning Partnership).
This exchange eliminated $6.7 million of long-term debt while maintaining, under the terms of the 2004A Series Preferred Stock, the same common stock conversion rights as existed for the Convertible Note. As part of the transaction, the Convertible
Note was restated at the principal amount of $1,299,402, and the terms were modified to permit the Company to pay interest in cash or kind, at its election, for the balance of the term of the Convertible Note. Under the terms of the Convertible Note
prior to this amendment, interest was to be payable only in cash beginning with the interest payment due on June 1, 2005. The debt service costs associated with the Convertible Notes have been satisfied through additions to principal through June 1,
2005 (the most recent semi-annual interest payment date). During 2004 and the six months ended June 26, 2005, $605,000 and $50,000, respectively, of the Convertible Notes were issued at a conversion rate of $1.70 per share of common stock for
payment of interest, which resulted in a beneficial conversion feature of $180,000 and $6,000, respectively, that increased deferred financing costs and paid-in capital. The Convertible Note may be prepaid in whole or in part, provided that the
market value of the Companys common stock exceeds $2.13 for a specified period of time and, for any prepayment prior to December 1, 2005, a prepayment premium must be paid of 2%, which decreases to 1% on December 1, 2005 and is eliminated for
any period after November 30, 2006. Upon notice of prepayment, the holder has 10 days to convert the Convertible Notes.



5. INCOME (LOSS) PER SHARE



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



|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|--------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------ | ---------------- | ------ | ------------ |  | - | ------------ | - |  | - | ------
|                                                                                              |  | Three months ended |        |              | Six months ended
|                                                                                              |  | June 26,2005       |        | June 27,2004 |                  |        | June 26,2005 |  |   | June 27,2004
|Basic income (loss) per common share:                                                         |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|                                                                                              |  |                    |        |             
|Income from continuing operations                                                             |  | $                  | 408    |              | $                | 65     |              |  | $ | 158          |   |  | $ | 869   
|                                                                                              |  |                    |        |             
|Dividends on preferred stock:                                                                 |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Series 2003A                                                                                  |  |                    | 115    |              |                  | 115    |              |  |   | 231          |   |  |   | 231   
|Series 2003B                                                                                  |  |                    | 10     |              |                  | 10     |              |  |   | 19           |   |  |   | 19    
|Series 2004A                                                                                  |  |                    | 125    |              |                  |       |              |  |   | 250          |   |  |   |      
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|                                                                                              |  |                    | 250    |              |                  | 125    |              |  |   | 500          |   |  |   | 250   
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Income (loss) available to common stockholders from continuing operations                     |  | $                  | 158    |              | $                | (60    | )            |  | $ | (342         | ) |  | $ | 619   
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Weighted average common shares outstanding                                                    |  |                    | 16,910 |              |                  | 16,669 |              |  |   | 16,834       |   |  |   | 16,664
|Basic income (loss) per common share from continuing operations                               |  | $                  | 0.01   |              | $                | (0.00  | )            |  | $ | (0.02        | ) |  | $ | 0.04  
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Diluted income (loss) per common share:                                                       |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Income (loss) available to common stockholders from continuing operations                     |  | $                  | 158    |              | $                | (60    | )            |  | $ | (342         | ) |  | $ | 619   
|Dividends on preferred stock :                                                                |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Series 2003B                                                                                  |  |                    | 10     |              |                  |       |              |  |   |             |   |  |   | 19    
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Income (loss) for purposes of computing diluted income per share from continuing operations   |  | $                  | 168    |              | $                | (60    | )            |  | $ | (342         | ) |  | $ | 638   
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Weighted average common shares outstanding                                                    |  |                    | 16,910 |              |                  | 16,669 |              |  |   | 16,834       |   |  |   | 16,664
|Dilutive stock options                                                                        |  |                    | 312    |              |                  |       |              |  |   |             |   |  |   | 312   
|                                                                                              |  |                    |        |             
|Assumed conversion of Preferred                                                               |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|StockSeries 2003B                                                                            |  |                    | 1,057  |              |                  |       |              |  |   |             |   |  |   | 977   
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Weighted average common shares outstanding for purposes of computing diluted income per share |  |                    | 18,279 |              |                  | 16,669 |              |  |   | 16,834       |   |  |   | 17,953
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       
|Diluted income (loss) per common share from continuing operations                             |  | $                  | 0.01   |              | $                | (0.00  | )            |  | $ | (0.02        | ) |  | $ | 0.04  
|                                                                                              |  |                    |        |              |                  |        |              |  |   |              |   |  |   |       



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The following shares of common stock were excluded from the above calculations as their effect would have
been anti-dilutive: As of June 26, 2005, 795,000 shares of common stock issuable upon conversion of the Convertible Note; 6,891,000 shares issuable upon conversion of the Series 2003A Preferred Stock; and 4,130,000 shares issuable upon the
conversion of the Series 2004A Preferred Stock. Options and warrants to purchase 4.3 million and 2.0 million shares of common stock were outstanding as of June 26, 2005 and June 27, 2004, respectively, but were not included in the computation of
diluted income (loss) per share because their effect would be anti-dilutive.



6. INDUSTRY SEGMENT INFORMATION



COMFORCE has
determined that its reportable segments can be distinguished principally by the types of services offered to the Companys clients. 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 contingent workforce management services. The Staff Augmentation segment provides healthcare support, technical and engineering,
information technology (IT), telecommunications and other staffing services. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.



The accounting policies of the segments are described in the Summary of
Significant Accounting Policies in note 2 to the Companys consolidated financial statements for the fiscal year ended December 26, 2004. COMFORCE evaluates the performance of its segments and allocates resources to them based on
operating contribution, which represents segment revenues less direct costs of operations, excluding the allocation of corporate general and administrative expenses. Assets of the operating segments reflect primarily net accounts receivable and



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goodwill associated with segment activities; all other assets are included as corporate assets. The Company does not
evaluate or account for expenditures for long-lived assets on a segment basis.



The table below presents information on the revenues and operating contribution for each segment for the three and six months ended June 26, 2005 and June 27, 2004, and items which reconcile segment operating
contribution to COMFORCEs reported income (loss) from continuing operations before income taxes (in thousands):



|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|----------------------------------------------------- |  | ------------------ | ------- | ---------------- | - | ------------ |  | ------------ | ------- |  | - | ------- | -
|                                                      |  | Three Months Ended |         | Six Months Ended |  
|                                                      |  | June 26,2005       |         | June 27,2004     |   | June 26,2005 |  | June 27,2004 |        
|Net sales of services:                                |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|Human Capital Management Services                     |  | $                  | 77,640  |                  | $ | 65,605       |  | $            | 149,326 |  | $ | 123,332 |  
|Staff Augmentation                                    |  |                    | 56,148  |                  |   | 49,588       |  |              | 106,962 |  |   | 97,665  |  
|Financial Outsourcing Services                        |  |                    | 1,121   |                  |   | 2,365        |  |              | 2,315   |  |   | 4,002   |  
|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|                                                      |  | $                  | 134,909 |                  | $ | 117,558      |  | $            | 258,603 |  | $ | 224,999 |  
|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|Operating contribution:                               |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|Human Capital Management Services                     |  | $                  | 3,040   |                  | $ | 2,589        |  | $            | 5,577   |  | $ | 5,190   |  
|Staff Augmentation                                    |  |                    | 5,407   |                  |   | 3,885        |  |              | 8,771   |  |   | 7,558   |  
|Financial Outsourcing Services                        |  |                    | 799     |                  |   | 1,773        |  |              | 1,889   |  |   | 3,002   |  
|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|                                                      |  |                    | 9,246   |                  |   | 8,247        |  |              | 16,237  |  |   | 15,750  |  
|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|Consolidated expenses:                                |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|Corporate general and administrative expenses         |  |                    | 4,557   |                  |   | 4,096        |  |              | 8,361   |  |   | 7,826   |  
|Depreciation and amortization                         |  |                    | 878     |                  |   | 997          |  |              | 1,724   |  |   | 2,026   |  
|Interest and other, net                               |  |                    | 2,770   |                  |   | 3,029        |  |              | 5,570   |  |   | 6,227   |  
|Loss (gain) on debt extinguishment                    |  |                    | 253     |                  |   |             |  |              | 253     |  |   | (1,971  | )
|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|                                                      |  |                    | 8,458   |                  |   | 8,122        |  |              | 15,908  |  |   | 14,108  |  
|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  
|Income from continuing operations before income taxes |  | $                  | 788     |                  | $ | 125          |  | $            | 329     |  | $ | 1,642   |  
|                                                      |  |                    |         |                  |   |              |  |              |         |  |   |         |  



|                                  |  |               |         |                  |   |        
|--------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                  |  | June 26, 2005 |         | December 26,2004
|Total assets:                     |  |               |         |                  |   |        
|Staff Augmentation                |  | $             | 60,127  |                  | $ | 59,399 
|Human Capital Management Services |  |               | 60,362  |                  |   | 42,996 
|Financial Outsourcing Services    |  |               | 14,407  |                  |   | 21,822 
|Corporate                         |  |               | 21,153  |                  |   | 30,432 
|                                  |  |               |         |                  |   |        
|                                  |  | $             | 156,049 |                  | $ | 154,649
|                                  |  |               |         |                  |   |        



7. NEW ACCOUNTING STANDARDS



In December 2004, the Financial Accounting Standards
Board (the FASB) issued SFAS No. 123(R), Share Based Payment (SFAS 123(R)). This statement replaces SFAS No. 123, Accounting for Stock Based Compensation and supercedes APB No. 25, Accounting for Stock Issued
to Employees. SFAS 123(R) requires all stock based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the grant date fair value of the stock options or other equity instruments.
SFAS 123(R) will be effective for annual periods beginning after June 15, 2005. While the Company currently provides the pro forma disclosures required by SFAS No. 148, Accounting for Stock Based CompensationTransition and Disclosure,
on a quarterly basis it is currently evaluating the impact this statement will have on its consolidated financial statements.



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In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 154). SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting
principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior
periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15,
2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. The Company does not believe that the adoption of SFAS 154 will have a material effect on its consolidated financial position, results
of operations or cash flows.



8. RECLASSIFICATIONS



Certain reclassifications have been made to conform prior period amounts to
the current period presentation.



9. COMPREHENSIVE INCOME



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



|                                        |  |                    |     |   |                  |   |     |              |  |              |     |  |   |     |  
|--------------------------------------- |  | ------------------ | --- | - | ---------------- | - | --- | ------------ |  | ------------ | --- |  | - | --- | -
|                                        |  | Three months ended |     |   | Six months ended |  
|                                        |  | June 26,2005       |     |   | June 27,2004     |   |     | June 26,2005 |  | June 27,2004 |    
|Net income, as reported                 |  | $                  | 509 |   |                  | $ | 65  |              |  | $            | 259 |  | $ | 852 |  
|Foreign currency translation adjustment |  |                    | (7  | ) |                  |   | (17 | )            |  |              | 2   |  |   | (26 | )
|                                        |  |                    |     |   |                  |   |     |              |  |              |     |  |   |     |  
|Total comprehensive income              |  | $                  | 502 |   |                  | $ | 48  |              |  | $            | 261 |  | $ | 826 |  
|                                        |  |                    |     |   |                  |   |     |              |  |              |     |  |   |     |  



10. CONTINGENCIES



One of the Companys significant Staff Augmentation customers (with
revenues from the contract with this customer representing approximately 6% of consolidated revenues for fiscal 2004 and approximately 3.6 % of revenues for the first six months of fiscal 2005) is evaluating whether the use of contingent labor is
consistent with its business model. This customer subsequently advised the Company that it would significantly reduce its utilization of contract labor, including the Companys employees, beginning in the fourth quarter of 2004 and continuing
through the end of the first quarter 2005. However, the proposed reductions have not been fully implemented as of the end of the second fiscal quarter of 2005, and management of the Company does not currently believe that any further significant
reductions in staffing under this arrangement will be made at least until the first quarter of 2006.



In addition, in accordance with the terms of the contract, this customer is auditing the payments made under the contract with the Company for 2003.
Management does not believe any adjustment to the Companys fees under this contract is warranted; however, any future adjustment is not estimable.



11. SALE OF NICHE TELECOM OPERATIONS



Effective as of March 1, 2004, COMFORCE sold an 80% interest in two telecom subsidiaries in the Staff Augmentation segment and sold its remaining 20%
minority interest in these companies by June 29, 2004. These subsidiaries operated in the customer premise equipment services niche of the telecom sector, a niche that was outside of the Companys core competency in telecom. The buyer, Spears
Holding Company, Inc. (Spears), is controlled by an individual who was one of the principals of these companies when they were sold to COMFORCE in 1998. Revenues for the subsidiaries that were sold represented less than 3.5% of the
Companys consolidated



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##### Table of Contents

revenues in fiscal 2003. All cash proceeds received by the Company to date from this sale have been used to pay down bank debt. The total consideration was a
combination of cash, short-term promissory notes and long-term promissory notes, as follows:



| |  |  | In respect of the 80% interest, $500,000 was received in cash at closing with $1,150,000 evidenced by the buyers short-term promissory notes providing for the payment of
$950,000 by March 31, 2004 and $200,000 by April 30, 2004, which amounts were paid timely. The balance of the purchase price for the 80% interest is payable under the terms of the buyers long-term promissory note due on March 1, 2009 in the
principal amount of $2,960,000, which provided for monthly payments of interest only in the first year, with principal and interest payable monthly in arrears thereafter, with interest computed at the prime rate plus 1.25% and principal amortizing
on a seven-year schedule with a balloon payment of the remaining principal due at maturity.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company sold an additional 8% interest on May 30, 2004 for $304,000 in cash and an additional long-term promissory note due March 1, 2009 in the principal amount of $296,000
under the same terms of the long-term promissory note received in exchange for the 80% interest above.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company sold the remaining 12% interest on June 29, 2004 in exchange for $644,000 in cash as well as an additional buyers long-term promissory note due March 1, 2009 in
the principal amount of $444,000 under the same terms of the long-term note received in exchange for the 80% interest above.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These long-term notes in the total principal amount of $3.7 million ($3.6 million as of July 1, 2005), were valued at $1.4 million by an independent
valuation firm. The sale resulted in a gain of $1,102,000, which represented the excess of the net proceeds (cash and short-term notes of $2,598,000 plus the fair value of the long-term notes of $1,400,000, less transaction costs of $144,000), over
the net book value of the net assets of the business sold of $2,752,000. The Company did not recognize a gain on this transaction until the cash payments it received exceeded its investment ($2,896,000) in the business sold. The cash received under
the sale agreement, including principal and interest on the notes, was recorded as a reduction of, and, during the second quarter of 2005, has eliminated the balance in net assets held for sale. The cash received in excess of net assets held for
sale has been recorded as a gain from the sale of discontinued operations that resulted in income from discontinued operations for the three and six months ended June 26, 2005 of $101,000. Additional cash received by the Company in future periods,
if any, will be recorded as an additional gain from the sale of discontinued operations up to the amount of the $1,102,000 gain. If and when the entire gain has been recognized, additional cash receipts, if any, will be recorded as interest income
within other income from continuing operations. The deferred gain has been reflected as an offset to the related notes receivable in the accompanying balance sheets.



In accordance with SFAS 144, the results of operations from the sale of the Companys niche telecom operations have
been recorded as discontinued operations. The net loss from discontinued operations was $17,000 for the six month period ended June 27, 2004.



On or about June 29, 2005 the Company received a copy of a notice to Spears from Spears senior lender. The notice stated that defaults had occurred
and were continuing under Spears credit agreement with the senior lender. Spears subsequently failed to make the payments of principal and interest that were due and payable on July 1, 2005 under the long-term notes it issued to the Company as
part of the consideration for the telecom businesses.



The
long-term notes from Spears to the Company are subject to a subordination agreement between the Company, Spears and Spears senior lender. Under that agreement, among other things, the Company cannot accept payments under the long-term notes
from Spears if there is a default under the senior lenders credit agreement with Spears, subject to a 180-day standstill period after which the Company can take action to enforce its rights under these long-term notes. On July 5, 2005, the
Company gave notice of the default under Spears credit agreement with the senior lender, commencing the running of the 180-day standstill period. The Company also has the right to enforce a keep well agreement between the individual who
controls Spears, and the senior lender and is in the process of taking action to enforce that right. There can be no assurance that any of these actions will result in the cure of Spears defaults to its senior lender or the Company, or any
further payments to the Company.



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12. SUBSEQUENT EVENTS



See note 11 for a discussion of a default under the long-term promissory notes payable to the Company by Spears.



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 unaudited 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



Staffing personnel placed by the Company are employees of the Company. The Company is responsible for employment related expenses for its employees,
including workers compensation, unemployment compensation insurance, Medicare and Social Security taxes and general payroll expenses. The Company offers health, dental, 401(k), disability and life insurance to its eligible billable employees.
Staffing and consulting companies, including the Company, typically pay their billable employees for their services before receiving payment from their customers, often resulting in significant outstanding receivables. To the extent the Company
grows, these receivables will increase and there will be greater requirements for borrowing availability under its credit facility to fund current operations.



The Company reports its results through three operating segments  Human Capital Management Services, Staff Augmentation and Financial Outsourcing
Services. The Human Capital Management Services segment primarily provides consulting services for managing the contingent workforce. The Staff Augmentation segment provides healthcare support, technical and engineering, information technology (IT),
telecommunications and other staffing services. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.



Management of the Company has observed improvement in the business
environment for staffing companies beginning in the first quarter of 2003. Recent industry statistics have generally supported managements observations including, since the beginning of 2004, improvement in the rate of job creation in the
United States; however management is unsure if these trends will continue in the remainder of 2005.



As previously reported in its periodic reports, one of the Companys significant Staff Augmentation customers (with revenues from the contract with
this customer representing approximately 6% of consolidated revenues for fiscal 2004 and approximately 3.6% of revenues for the first six months of fiscal 2005) is evaluating whether the use of contingent labor is consistent with its business model.
This customer subsequently advised the Company that it would significantly reduce its utilization of contract labor, including the Companys employees, beginning in the fourth quarter of 2004 and continuing through the end of the first quarter
2005. However, the proposed reductions have not been fully implemented as of the end of the second fiscal quarter of 2005, and management of the Company does not currently believe that any further significant reductions in staffing under this
arrangement will be made at least until the first quarter of 2006.



In addition, in accordance with the terms of the contract, this customer is auditing the payments made under the contract with the Company for 2003. Management does not believe any adjustment to the Companys fees under this contract
is warranted; however, any future adjustment is not estimable.



Critical
Accounting Policies and Estimates



As disclosed in the
annual report on Form 10-K for the fiscal year ended December 26, 2004, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity
with accounting principles generally accepted in the United



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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 26, 2004, there have been no changes in our critical accounting policies and no other significant changes to the methods used in the assumptions
and estimates related to them.



Results of Operations



Three Months ended June 26, 2005 compared to Three Months ended June 27, 2004



Net sales of services for the three months ended June
26, 2005 were $134.9 million, which represents a 14.8% increase from the $117.6 million in net sales of services realized for the three months ended June 27, 2004. Net sales of services in the Human Capital Management Services segment increased by
$12.0 million or 18.3%, due to an increase in services provided to existing clients. Management believes such increase is reflective of a trend for companies to rely increasingly on providers of human capital management services, such as those
provided by the Companys PrO Unlimited subsidiary. In the Staff Augmentation segment, the increase of $6.6 million or 13.2% is principally attributable to services provided to information technology, technical and telecom customers. Net sales
of services were lower by $1.2 million or 52.6% in the Financial Outsourcing Services segment, principally due to a reduction in the number of customers, in addition to non-recurring items included in 2004, which included liquidated damages paid by
a customer to the Company for early termination of that customers contract with the Company.



Cost of services for the three months ended June 26, 2005 was 85.3% of net sales of services as compared to cost of services of 84.9% of net sales of
services for the three months ended June 27, 2004. The cost of services as a percentage of net sales for the second quarter of fiscal 2005 increased from the second quarter of fiscal 2004 principally as a result of higher growth in Human Capital
Management Services which have a higher cost of services as a percentage of net sales of services and a reduction in the number of clients serviced under the Financial Outsourcing Services segment, partially offset by a reduction in accrued workers
compensation liabilities based upon favorable claims experience.



Selling, general and administrative expenses as a percentage of net sales of services were 11.2% for the three months ended June 26, 2005, compared to 11.5% for the three months ended June 27, 2004. Since the first quarter of 2003,
managements on-going initiatives to contain selling, general and administrative costs and improve back office efficiencies have enabled the Company to increase sales at a rate greater than the rate of the increase in selling, general and
administrative expenses, which has contributed to the Companys overall improvement in selling, general and administrative expenses as a percentage of net sales. The $1.6 million increase in selling, general and administrative expenses is
primarily due to an increase in variable costs, primarily personnel costs and commissions, associated with the increase of sales discussed above.



Operating income for the three months ended June 26, 2005 was $3.8 million as compared to operating income of $3.2 million for the three months ended June
27, 2004. The Companys higher operating income for the 2005 period is principally due to an increase in net sales of services, partially offset by an increase in cost of services and selling, general and administrative expenses discussed
above.



The Companys interest expense for the three
months ended June 26, 2005 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Note and the Senior Notes. The interest expense of $2.7 million for the second quarter of 2005 was lower as compared to the
interest expense of $3.0 million for the second quarter of 2004. This reduction was principally due to the exchange and repurchase of $6.7 million of Convertible Notes and $18.1 million of Senior Notes during 2004, and the repurchase of $9.0 million
of Senior Notes in the second quarter of 2005. These decreases were partially offset by increased interest expense on the Companys revolving line of credit due to higher average outstanding balances and interest rates in the second quarter of
2005. See Financial Condition, Liquidity and Capital Resources in this Item 2.



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As a result of the Companys repurchase of Senior Notes during the second quarter of 2005, the
Company recognized a loss on debt extinguishment of $253,000, including a reduction of $99,000 of deferred financing costs. The purpose of these transactions was to improve the Companys balance sheet through the elimination of higher interest
rate debt.



The income tax provision for the second quarter of
2005 was $380,000 (a rate of 48.2%) on income from continuing operations before income taxes of $788,000. The income tax provision for the second quarter of 2004 was $60,000 (a rate of 48.0%) on income from continuing operations before income taxes
of $125,000. The difference between income taxes at the federal statutory income tax rate and the Companys tax provision for the respective periods relates primarily to state income taxes and a disallowance for non-deductible expenses.



In accordance with SFAS 144, the results of operations from
the sale of the Companys niche telecom operations (as described in note 11 to the consolidated financial statements) have been recorded as discontinued operations. The net income from discontinued operations was $101,000 for the quarter ended
June 26, 2005, which represented the gain from the sale of discontinued operations for the excess of the cash received from the sale through June 26, 2005 over the carrying value of the net assets sold.



Six Months ended June 26, 2005 compared to Six Months ended June 27, 2004



Net sales of services for the six months ended June
26, 2005 were $258.6 million, which represents a 14.9% increase from the $225.0 million in net sales of services realized for the six months ended June 27, 2004. Net sales of services in the Human Capital Management Services segment increased by
$26.0 million or 21.1%, due to an increase in services provided to existing clients. Management believes such increase is reflective of a trend for companies to rely increasingly on providers of human capital management services, such as those
provided by the Companys PrO Unlimited subsidiary. In the Staff Augmentation segment, the increase of $9.3 million, or 9.5%, is principally attributable to services provided to information technology and technical customers, partially offset
by a decline in services provided to telecom customers. Sales of services were lower by $1.7 million, or 42.2% in the Financial Outsourcing Services segment, principally due to a reduction in the number of customers.



Cost of services for the six months ended June 26, 2005 was 85.8% of net
sales of services as compared to cost of services of 84.8% of net sales of services for the six months ended June 27, 2004. The cost of services as a percentage of net sales for the first six months of fiscal 2005 increased from the first six months
of fiscal 2004 principally as a result of increased competitive pricing, higher growth in Human Capital Management Services which have a higher cost of services as a percentage of net sales of services and a reduction in the number of clients
serviced under the Financial Outsourcing Services segment, partially offset by a reduction in accrued workers compensation liabilities based upon favorable claims experience.



Selling, general and administrative expenses as a percentage of net sales of services were 11.1% for the six months ended
June 26, 2005, compared to 11.6% for the six months ended June 27, 2004. Since the first quarter of 2003, managements on-going initiatives to contain selling, general and administrative costs and improve back office efficiencies have enabled
the Company to increase sales at a rate greater than the rate of the increase in selling, general and administrative expenses, which has contributed to the Companys overall improvement in selling, general and administrative expenses as a
percentage of net sales. The $2.6 million increase in selling, general and administrative expenses is primarily due to an increase in variable costs, primarily personnel costs and commissions, associated with the increase of sales discussed above.



Operating income for the six months ended June 26, 2005 was
$6.2 million as compared to operating income of $5.9 million for the six months ended June 27, 2004. The Companys higher operating income for the 2005 period is principally due to an increase in net sales of services, partially offset by an
increase in the cost of services and selling, general, and administrative expenses discussed above .



The Companys interest expense for the six months ended June 26, 2005 was principally attributable to interest recorded on the PNC Credit Facility,
the Convertible Note and the Senior Notes. The interest expense of $5.6 million for the first six months of 2005 was lower as compared to the interest expense of $6.2 million for the



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first six months of 2004. This reduction was principally due to the exchange and repurchase of $6.7 million of Convertible Notes and $18.1 million of Senior
Notes during 2004, and the repurchase of $9.0 million of Senior Notes in the second quarter of 2005. These decreases were partially offset by increased interest expense on the Companys revolving line of credit due to higher average outstanding
balances and interest rates in the first six months of 2005. See Financial Condition, Liquidity and Capital Resources in this Item 2.



As a result of the Companys repurchase of Senior Notes during the second quarter of 2005, the Company recognized a loss on debt extinguishment of
$253,000, including a reduction of $99,000 of deferred financing costs. The Companys repurchase of Senior Notes during the first six months of 2004, resulted in a gain on debt extinguishment of $2.0 million, including a reduction of $219,000
of deferred financing costs. The purpose of these transactions was to improve the Companys balance sheet through the elimination of higher interest rate debt.



The income tax provision for the first six months of 2005 was $171,000 (a rate of 52.0%) on income from continuing
operations before income taxes of $329,000. The income tax provision for the first six months of 2004 was $773,000 (a rate of 47.1 %) on income from continuing operations before income taxes of $1.6 million. The difference between income taxes at
the federal statutory income tax rate and the Companys tax provision for the respective periods relates primarily to state income taxes and a disallowance for non-deductible expenses.



In accordance with SFAS 144, the results of operations from the sale of the
Companys niche telecom operations (as described in note 11 to the consolidated financial statements) have been recorded as discontinued operations. The net income from discontinued operations was $101,000 for the six months ended June 26,
2005, which represented the gain from the sale of discontinued operations for the excess of the cash received from the sale through June 26, 2005 over the carrying value of the net assets sold, and the net loss from discontinued operations was
($17,000) for the six months ended June 27, 2004.



Financial Condition,
Liquidity and Capital Resources



The Company generally
pays its billable employees weekly or bi-weekly for their services, and remits certain statutory payroll and related taxes as well as other fringe benefits. Invoices are generated to reflect these costs plus the Companys markup. These bills
are typically paid within 35 days. Increases in the Companys net sales of services, resulting from expansion of existing offices or establishment of new offices, will require additional cash resources.



Off-Balance Sheet and Contractual Obligations: During the six months
ended June 26, 2005, the Company had no off-balance sheet arrangements other than operating leases entered into in the normal course of business, as indicated in the table below. The following table represents contractual commitments associated with
operating lease agreements and principal repayments on debt obligations (excluding interest):



|                                         |  |                                            |       |      |   |       |  |      |         |            |   |       |  |   |      
|---------------------------------------- |  | ------------------------------------------ | ----- | ---- | - | ----- |  | ---- | ------- | ---------- | - | ----- |  | - | -----
|                                         |  | Payments due by fiscal year (in thousands)
|                                         |  | 2005                                       |       | 2006 |   | 2007  |  | 2008 |         | Thereafter
|Operating Leases                         |  | $                                          | 1,375 |      | $ | 2,052 |  | $    | 1,507   |            | $ | 1,212 |  | $ | 1,621
|PNC Credit Facilityprincipal repayments |  |                                            |      |      |   |      |  |      | 62,107  |            |   |      |  |   |     
|Senior Notes - principal repayments      |  |                                            |      |      |   |      |  |      | 55,410  |            |   |      |  |   |     
|Convertible Note - principal repayments  |  |                                            |      |      |   |      |  |      |        |            |   |      |  |   | 1,351
|                                         |  |                                            |       |      |   |       |  |      |         |            |   |       |  |   |      
|Total                                    |  | $                                          | 1,375 |      | $ | 2,052 |  | $    | 119,024 |            | $ | 1,212 |  | $ | 2,972
|                                         |  |                                            |       |      |   |       |  |      |         |            |   |       |  |   |      



The Company also had
standby letters of credit outstanding at June 26, 2005 in the aggregate amount of $5.1 million.



COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, entered into



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an $85.0 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 85.0% 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 various amendments. At June 26, 2005, the Company had remaining availability, as defined in the agreement, of $10.6 million.



On May 13, 2005, the PNC Credit Facility was amended to lower the interest rates calculated in reference to LIBOR. As amended, borrowings under the PNC
Credit Facility bear interest, at the Companys option, at a per annum rate equal to either (1) 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 (2) LIBOR plus a
specified margin, determined as follows:



|                                    |  |           
|----------------------------------- |  | ----------
|Fixed charge coverage ratio         |  | Margin (%)
|greater than 1.50:1.00              |  | 1.75      
|greater than 1.30:1.00 to 1.50:1.00 |  | 2.00      
|greater than 1.05:1.00 to 1.30:1.00 |  | 2.25      
|equal to or less than 1.05:1.00     |  | 2.50      



The PNC Credit
Facility also provides for a commitment fee of 0.375% 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 key operating subsidiaries of the Company and
by security interests in substantially all of the assets of the Company. The May 13, 2005 amendment also reduced the lenders audits of the Company at the Companys expense from three to two per calendar year, subject to specified
exceptions. The agreements evidencing the PNC Credit Facility contain 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 June 24, 2007. The Company was in compliance with all financial covenants under the PNC Credit Facility at June 26, 2005.



During the six months ended June 26, 2005, the Company used $9.3 million of
cash in continuing operations. Cash and cash equivalents decreased $8.7 million during the six months ended June 26, 2005. The reduction of cash primarily resulted from a $10.5 million increase in accounts receivable, $1.1 million of capital
expenditures and the repurchase of $9.2 million of Senior Notes which was partially offset by an increase of $10.6 million of cash from net borrowings under the PNC Credit Facility. The increase in accounts receivable resulted from the increase in
net sales of services.



At June 26, 2005, the Company had
outstanding $62.1 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 5.52% per annum. At such date, the Company had remaining availability of $10.6 million, as defined in the agreement, under the
PNC Credit Facility.



At June 26, 2005, the Company also had
outstanding (i) $55.4 million principal amount of Senior Notes bearing interest at 12% per annum and (ii) $1.4 million principal amount of Convertible Notes bearing interest at 8% per annum.



Substantially all of the consolidated net assets of the Company are assets of
COI and all of the net income that had been generated by the Company was attributable to the operations of COI. Except for permitted distributions, these assets and any cumulated net income are restricted as to their use by COMFORCE. The indenture
governing the Senior Notes imposes restrictions on COI making specified payments, which are referred to as restricted payments, including making distributions or paying dividends (referred to as upstreaming funds) to COMFORCE. Under the
indenture, COI is not permitted to make cash distributions to COMFORCE other than to upstream $2.0 million annually to pay public company expenses, and to upstream funds to the extent COI meets the restricted payments test under the indenture, the
most significant component of which is based upon 50% of net income generated by COI since January 1, 1998 on a cumulative basis, less prior distributions made in reliance on this provision. In calculating net income for this purpose, under the
terms of the indenture, the Company must apply generally accepted accounting principles as in effect at the time the indenture was entered into in 1997. Principally as a result of distributions made, and losses incurred by COI in prior years, COI
can make no distributions to



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COMFORCE based upon the cumulative net income provisions of the indenture until COI generates net income of approximately $11.2 million. However, COMFORCE
has approximately $1.6 million available at June 26, 2005 from proceeds it has generated from the sale of stock, principally upon the exercise of options and warrants. This $1.6 million may be used by COMFORCE to pay interest and principal on the
Convertible Notes or for other business purposes.



The Company
has made significant progress in improving its capital structure through the elimination of long-term debt through the purchase or exchange of Senior Notes, Convertible Notes and other instruments. Since June 2000, the Company has reduced its public
debt from $138.8 million to $55.4 million. As a result, COMFORCE has reduced its annualized interest expense by approximately $9.2 million, including by borrowing at the lower rates available under the PNC Credit Facility to effectuate repurchases
of long-term debt and by exchanging preferred stock and lower interest rate Convertible Notes for public debt.



The Companys Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at June 26, 2005 there were cumulated,
unpaid and undeclared dividends of $1.1 million on the Series 2003A Preferred Stock, $68,000 on the Series 2003B Preferred Stock and $284,000 on the Series 2004A Preferred Stock.



Management of the Company believes that cash flow from operations and funds anticipated to be available under the PNC Credit
Facility will be sufficient to service the Companys indebtedness and to meet currently anticipated working capital requirements through the end of 2005. Thereafter, if the Company experiences further growth in its businesses, it would then
consider increasing the availability under the PNC Credit Facility or pursuing other financing alternatives. The Company was in compliance with all financial covenants under the PNC Credit Facility at June 26, 2005 and expects to remain in
compliance for the next 12 months. In the event that the Company is unable to meet any of such covenants, it will request a modification (or waiver) of such covenants.



Impact of Recently Issued Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (R), Share Based Payment (SFAS 123(R)). This statement
replaces SFAS No. 123, Accounting for Stock Based Compensationand supercedes APB No. 25, Accounting for Stock Issued to Employees.SFAS 123 (R) requires all stock based compensation to be recognized as an expense in the financial
statements and that such cost be measured according to the grant date fair value of the stock options or other equity instruments. SFAS 123 (R) will be effective for annual periods beginning after June 15, 2005. While the Company currently provides
the pro forma disclosures required by SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosure, on a quarterly basis (see Note 3Stock Compensation Plans), it is currently evaluating the impact this
statement will have on its consolidated financial statements.



In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS
154). SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect
adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. The Company does
not believe that the adoption of SFAS 154 will have a material effect on its consolidated financial position, results of operations or cash flows.



Seasonality



The Companys quarterly operating results are affected primarily by the number of billing days in the quarter and the seasonality of its
customers businesses. Demand for technical and engineering services, IT and telecom staffing services has historically been lower during the second half of the fourth quarter through the following first quarter, and, generally, shows gradual
improvement until the second half of the fourth quarter.



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Forward Looking Statements



Various statements made in this Report concerning the manner in which the Company intends to conduct its future operations,
and potential trends that may impact future results of operations, are forward looking statements. The Company may be unable to realize its plans and objectives due to various important factors, including, but not limited to the following: the loss
of key customers, weakness in job growth, a reduction in corporate or government spending, adverse economic conditions generally or in key industries served by the Company, or a reduction in the demand for outsourcing services generally which could
heighten competition among staffing companies and negatively impact revenues and margins; the Companys significant leverage may leave it with a diminished ability to obtain additional financing for working capital or other capital
expenditures, for retiring higher interest rate debt or for otherwise improving the Companys competitiveness and capital structure or expanding its operations; SFAS 142, which requires the Company to evaluate at least annually the
recoverability of goodwill on its books, could cause the Company to write-off goodwill in future periods, which could have a material adverse impact on the Companys financial condition and results of operations; or, if COI fails to generate
sufficient consolidated net income in future periods or to have other funds available to upstream to COMFORCE under the restricted payments test of the Senior Notes indenture.



Additional important factors that could cause the Company to be unable to realize its plans and objectives are described
under Risk Factors in the Registration Statement on Form S-8 of the Company filed with the Securities and Exchange Commission on April 24, 2003 (Registration No. 333-104730). The disclosure under Risk Factors in the
Registration Statement may be accessed through the Web site maintained by the Securities and Exchange Commission at www.sec.gov. In addition, the Company will provide, without charge, a copy of such Risk Factors disclosure to
each stockholder of the Company who requests such information. Requests for copies should be directed to the attention of Linda Annicelli, Vice President, Administration at COMFORCE Corporation, 415 Crossways Park Drive, P.O. Box 9006, Woodbury, New
York 11797, telephone 516-437-3300.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The information required by Item 3 has been disclosed in Item 7A of the Companys Annual Report on Form 10-K for the year ended December 26, 2004.
There has been no material change in the disclosure regarding market risk.



ITEM 4. CONTROLS AND PROCEDURES



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





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PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS.



Since
the date of the filing of the Companys Annual Report on Form 10-K for the year ended December 26, 2004, 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.



Not applicable.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



Not applicable.



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



On June 9, 2004, the annual meeting of the stockholders of the Company was held. At this meeting, the stockholders voted (1) to elect directors for a term of one year, (2) to amend the COMFORCE Corporation 2002 Stock
Option Plan to increase the number of option shares available for issuance to officers, directors, key employees and agents from 1,000,000 to 2,000,000, and (3) to ratify the appointment of KPMG LLP as the Companys independent certified public
accountants for the fiscal year ending December 25, 2005.



In
the election of directors, the following individuals were elected to the board of directors upon the vote shown below. Voting in the election of directors is considered to be a routine matter on which the street name holders are permitted to cast
votes without instruction from the beneficial owners of the shares.



|                    |  |            |  |         
|------------------- |  | ---------- |  | --------
|Nominee             |  | For        |  | Withheld
|John C. Fanning     |  | 16,189,505 |  | 452,144 
|Harry V. Maccarrone |  | 16,079,444 |  | 562,205 
|Rosemary Maniscalco |  | 15,960,514 |  | 681,135 
|Kenneth J. Daley    |  | 16,086,224 |  | 555,425 
|Daniel Raynor       |  | 16,195,409 |  | 446,240 
|Gordon Robinett     |  | 15,991,739 |  | 649,910 
|Pierce J. Flynn     |  | 16,195,272 |  | 446,377 



The proposal to amend
the COMFORCE Corporation 2002 Stock Option Plan was not approved because the Company has historically treated broker non-votes and abstentions as if they were votes against a proposal. A significant number of broker non-votes were received in
respect of this non-routine proposal due to the failure of beneficial owners of the shares to instruct their brokers (the street name holders) on how to vote their shares. In the future, the Company intends to disregard broker non-votes as permitted
under Delaware law in the view that this approach will better reflect the wishes of the Companys stockholders. The votes on this proposal were cast as follows:



|          |  |         |  |             |  |                 
|--------- |  | ------- |  | ----------- |  | ----------------
|For       |  | Against |  | Abstentions |  | Broker Non-Votes
|8,239,918 |  | 657,175 |  | 8,122       |  | 7,837,214       



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##### Table of Contents

The proposal to ratify the appointment of KPMG LLP as the Companys independent certified public
accountants was approved. Voting to ratify the appointment of auditors is considered to be a routine matter on which the street name holders are permitted to cast votes without instruction from the beneficial owners of the shares. The votes on this
proposal were cast as follows:



|           |  |         |  |            
|---------- |  | ------- |  | -----------
|For        |  | Against |  | Abstentions
|16,481,468 |  | 154,811 |  | 5,370      



ITEM 5. OTHER INFORMATION.



Not
applicable.



ITEM 6. EXHIBITS.



| | 10.1 | Amendment No. 4 to Revolving Credit and Security Agreement dated as of May 13, 2005 among the Registrant and certain of its operating subsidiaries, as borrowers, and PNC Bank,
National Association, as agent and lender, and other participating lenders (included as an exhibit to COMFORCE Corporations Current Report on Form 8-K filed May 18, 2005).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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.
| | ---- | -----------------------------------------------------------------------------------------------------------------------



SIGNATURES



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



|                                                    
|----------------------------------------------------
|COMFORCE Corporation                                
|                                                    
|/s/ Harry V. Maccarrone                             
|Harry V. Maccarrone                                 
|Executive Vice President and Chief Financial Officer



Date: August 4, 2005



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