**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 1,2006

Commission file number: 1-11997

**SPHERION CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **36-3536544**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |   | (I.R.S. Employer  Identification Number) |

 

**2050 Spectrum Boulevard,Fort Lauderdale, Florida 33309**

(Address of principalexecutive offices)        (Zip code)

**(954) 308-7600**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act:**

| **Title of each class**              | ** ** | **Name of  each exchange  on which registered** |
|--------------------------------------|------------|-------------------------------------------------|
| **COMMON STOCK—$.01 PAR VALUE** |       | New York Stock  Exchange                        |

 

**Securitiesregistered pursuant to Section 12(g) of the Act:**

**None**

(Title of class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer o |   | Accelerated filer  x |   | Non-accelerated filer o |
|---------------------------|--------|----------------------|--------|-------------------------|

 

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

The aggregate market valueof the voting stock held by non-affiliates of the Registrant, computed byreference to the closing price of the Registrant’s Common Stock, par value $.01per share (“Common Stock”), as of July 1, 2005 on the New York StockExchange, was $402,926,119.

Number of shares ofRegistrant’s Common Stock outstanding on January 27, 2006 was 58,712,517.

Documents Incorporated byReference:

Certainspecified portions of the registrant’s definitive proxy statement to be filedwithin 120 days after January 1, 2006, are incorporated herein byreference in response to Part III, Items 11, 13 and 14, inclusive, and tocertain portions of Part III, Items 10 and 12.

 

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**PART I**

**Item 1.**                        BUSINESS

As used in this report,the terms “we,” “us,” “our,” “Spherion” and the “Company” refer to SpherionCorporation and its consolidated subsidiaries, unless otherwise expresslystated or the context otherwise requires.

***Company Overview***

Spherion Corporation was founded in 1946 and providestemporary staffing, managed services and permanent placement services. We areheadquartered in Fort Lauderdale, Florida, and operate a network of over 650locations within North America. Spherion Corporation is incorporated under thelaws of the State of Delaware. As of January 1, 2006, we had 477company-owned offices, 94 licensed locations and 87 franchised locations.

We provide temporary staffing services, managedservices and permanent placement services within North America. Temporarystaffing services include personnel in the following skill categories:clerical, light industrial, information technology, finance and accounting,legal, engineering, sales and marketing, human resources, and administrative. Managedservices include services where we manage certain aspects of a customerfunction such as: recruiting, administrative services, data center or networkoperations. Permanent placement is a service where our employees locate talenton behalf of our customers, screen the candidates and assist in the recruitmentefforts.

During 2004, we announced our intention to sell ouroperations in the United Kingdom, The Netherlands and in the Asia/Pacificregion, as well as our court reporting operation and call center outsourcingbusiness in the United States. This decision was due to changes in clientdemand and is consistent with our strategy to focus on the North Americanstaffing and recruiting markets. The international operations, as well as thecourt reporting business, were all sold prior to December 31, 2004. Theremaining business unit, the call center outsourcing business, was comprised offour call centers, of which three were sold in 2005 and the fourth one isundergoing due diligence with a potential purchaser. As a result of ourdecision to dispose of these businesses, operating results for all periodspresented and the related assets and liabilities as of January 1, 2006 andDecember 31, 2004, have been reclassified as discontinued operations inthe accompanying consolidated statements of operations.

During 2003, in connection with a three-year oldagreement, we acquired 85% of our Canadian franchise operation forconsideration of $21.6 million, including $10.9 million of debtassumed. The results of this operation are included in the Staffing Servicesoperating segment and our consolidated results of operations as of theacquisition date.

During 2002, we adopted aplan to dispose of certain technology consulting businesses in the UnitedKingdom and The Netherlands and Saratoga, a human capital measurement businessin the United States. We completed the disposal of one of these subsidiariesprior to December 27, 2002 and disposed of the remaining two subsidiariesduring the first half of 2003.

***Industry Overview***

Spherion Corporation is a diversified staffing companyoperating in North America. The North American staffing market was estimated tobe approximately $108.3 billion in 2005. This market includes temporarystaffing, permanent placement and other services similar to those provided bySpherion. The North American staffing market in 2005 is estimated to have grownby approximately 6% to 11% and at a faster rate for high demand skill sets suchas legal, engineering, and finance and accounting due to a continued increasein regulatory and reporting requirements.

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Up to 50% of the staffing industry is estimated to beconcentrated in professional skills, including information technology, financeand accounting, legal, administrative and other skills that are consistent withthose offered within Spherion’s Professional Services operating segment. Thebalance of the North American staffing market is concentrated on services inthe clerical and light industrial skill sets, similar to those offered inSpherion’s Staffing Services operating segment.

Business conditions in thestaffing industry are economically sensitive. In 2001 and 2002, the industryexperienced a decline in revenues, but economic conditions began to changethrough 2003. In 2004 and 2005, Spherion and many of its peers benefited fromthe growth in revenues. Companies have continued to experience success in theusage of temporary help, which has facilitated rapid workforce adjustments aseconomic conditions improve. This practice has increased the demand fortemporary help in North America, which as of December 2005 was almost 2%of the total workforce, an increase from 1.0% in the early 1990’s. Demographicsof the labor force continue to indicate that the overall labor pool may shrinkover the next 10 years, creating a shortage of qualified job candidates,especially for certain professional workers. As unemployment continues todecrease, this shortage increases the need for companies to continue to use theservices of Spherion and other companies within the staffing industry. The 10-yearaverage growth rate for the North American staffing industry is estimated at7.6%.

***Operations Overview***

The Company isorganized around two basic operating segments—Staffing Services andProfessional Services. Within our Staffing Services operating segment, weprovide three primary services—temporary staffing, managed services, andpermanent placement. Within our Professional Services operating segment, weprovide temporary staffing and permanent placement services. These services arefurther described as follows:

·       Temporarystaffing—This is a service where our employees work at customer locations underthe supervision of customer personnel. The duration of the assignment can befrom a day or less to a period of several months. The number of our temporaryemployees at any given time is directly related to our customers’ requirementsand these employees are generally only paid when on assignment with a customer.We provide temporary employees with clerical, light industrial, informationtechnology, finance and accounting, legal, engineering, marketing andadministrative skill sets. We are responsible for all employment related taxesof these temporary employees, workers’ compensation and federal and stateunemployment (burden costs). Services are generally billed by the hour for thenumber of hours worked. Bill rates are often determined as a mark-up over payor a mark-up over pay plus burden.

·       Managedservices—This is a service where we manage aspects of the operation andmanagement of a customer function such as, recruiting, administrative services,data center or network operations and generally provide that service underlong-term contracts. Managed services are provided by our employees whotypically manage and staff aspects of the customer function. In certain caseswe may only manage the customer function which could be staffed by acombination of Spherion, customer or other third-party employees. We areresponsible for the operation of the customer function and generally arerequired to meet minimum service level agreements and provide customer drivenreporting. Fees are determined based on a combination of headcount, servicelevel provided and/or fixed fee per transaction/unit processed.

·       Permanentplacement—This is a service where we identify candidates on behalf of ourcustomers, screen the candidates and assist in the recruitment efforts. If thecustomer hires the candidate, our billing is generally a percentage of firstyear compensation for the candidate placed. Billing is contingent upon fillingthe assigned position.

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Thefollowing table represents the 2005 revenues derived from each of theseservices within our two operating segments (in thousands):

| ** **           | ** ** | **Staffing Services** | ** ** | **Professional Services** | ** ** |
|----------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **Amount**                 | ** ** | **%**                          | ** ** | **Amount** | ** ** | **%** | ** ** |
| Temporary  staffing  |       | $                          | 1,312,515  |                           |       | 86.2 | % |   | $ | 402,286 |   |   | 89.4 | % |   |
| Managed services     |       | 191,232                    |       |                           | 12.6       | % |   | — |   |   | — |   |   |
| Permanent  placement |       | 17,739                     |       |                           | 1.2        | % |   | 47,893 |   |   | 10.6 | % |   |
| Total                |       | $                          | 1,521,486  |                           |       | 100.0 | % |   | $ | 450,179 |   |   | 100.0 | % |   |

 

Within the servicesdescribed above, the Staffing Services operating segment concentrates onplacement and temporary staffing of individuals with administrative clericaland light industrial skill sets. Managed services are provided within theStaffing Services operating segment. The Professional Services operatingsegment concentrates on temporary staffing and placement of professional skillsets in the areas of information technology, finance and accounting, legal,engineering, sales and marketing, human resources, and administrative. SeeNote 15, Segment Information, in the accompanying consolidated financialstatements for additional information regarding the revenues, profits andlosses and total assets for both our Staffing Services and ProfessionalServices operating segments for 2005, 2004 and 2003.

***Location Structure***

Our locations are company-owned, licensed orfranchised. We believe that we can increase profitability and serve ourcustomer base through a combination of these locations. For 2005, 86.5% ofrevenues were derived from company-owned locations, with the remainingderived from franchised and licensed locations.

Thefollowing table details the number of locations:

| ** **                             | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Company-owned  locations               |       |                  | 477        |   |   |   | 531 |   |   |   | 550 |   |   |
| Licensed  locations                    |       |                  | 94         |   |   |   | 95 |   |   |   | 94 |   |   |
| Franchised  locations                  |       |                  | 87         |   |   |   | 86 |   |   |   | 91 |   |   |
| Discontinued  operations               |       |                  | 1          |   |   |   | 4 |   |   |   | 76 |   |   |
| Total                                  |       |                  | 659        |   |   |   | 716 |   |   |   | 811 |   |   |
| United States                          |       |                  | 626        |   |   |   | 680 |   |   |   | 703 |   |   |
| Canada                                 |       |                  | 32         |   |   |   | 32 |   |   |   | 32 |   |   |
| Discontinued  operations-International |       |                  | —     |   |   |   | — |   |   |   | 50 |   |   |
| Discontinued  operations-North America |       |                  | 1          |   |   |   | 4 |   |   |   | 26 |   |   |
| Total                                  |       |                  | 659        |   |   |   | 716 |   |   |   | 811 |   |   |

 

*Company-OwnedLocations*

We operate both company-ownedbranch and customer on-premise locations. A branch location is designed toserve multiple customers in a geographic market, while the customer on-premiselocation is established at the customer’s location to serve only that customer.As of January 1, 2006, we operated 477 company-owned branch andcustomer on-premise locations. Future new or closed locations are driven bysales success creating the need for new company-owned branches andcustomer on-premise locations. During 2005, the number of company-ownedlocations decreased primarily as a result of the loss of a large managed servicecontract.

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*Licensed Locations*

| ** **                                   | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Licensee revenues  (in thousands)            |       | $                     | 256,411    |   | $ | 238,140 |   | $ | 201,797 |   |
| Licensee  commissions as a % of gross profit |       | 70                    | %          | 68 | % | 68 | % |
| Number of  licensees                         |       | 52                    |       | 50 |   | 51 |   |
| Number of licensee locations                 |       | 94                    |       | 95 |   | 94 |   |
|                                              |            |                       |            |  |  |  |  |  |  |  |

 

We grant licenses, which give the licensee the rightto establish a recruitment business utilizing our trade names, service marks,advertising materials, sales programs, operating procedures, manuals and formswithin a designated territory. We typically grant licensees the exclusive rightto establish an office to market and provide light industrial and clericaltemporary personnel within a designated geographic area. We also assist ourlicensees in obtaining business from our national accounts and provide themwith national, regional and cooperative local advertising. License agreementsare generally for an initial term of 10 years and are renewable forsuccessive 5-year terms at our discretion. Our licensees operate in theStaffing Services operating segment.

Licensees operate within the framework of our policiesand standards. We provide workers’ compensation, general liability,professional liability, fidelity bonding and state unemployment coverage fortemporary employees. We bill all customers serviced by licensees in our nameand collect the remittances as Spherion owns the client contract. Licensees useour computer systems.

In our licensee arrangements, we act as the principalin customer transactions through direct contractual relationships with thecustomers, owning related customer receivables and being the legal employer ofthe temporary employee and the licensee acts as our agent providing certainsales and recruiting services. Sales by the licensed locations are included inour revenues and the direct costs of services (payroll for the temporaryemployees and related payroll taxes and employee benefits) are included in ourcost of services. We are responsible for paying the wages of the temporaryemployees and all related payroll taxes, employee benefits and insurance andcollecting accounts receivable. The licensee is responsible to reimburse us upto 100% of uncollected accounts receivable, but we bear the loss in cases wherethe licensee does not have sufficient financial wherewithal to reimburseuncollectible accounts.

The licensee is responsible for establishing itslocation and paying its related administrative and operating expenses, such asthe rent, utilities and salaries of their full-time office employees. The licenseereceives a commission from us, which averaged 70% of the licensed offices’gross profit for the year ended January 1, 2006. Our consolidatedstatements of operations reflect the licensee commission as an operatingexpense, but do not include the rent, utilities and salaries of the licensee’sfull-time office employees since these expenses are the responsibility of thelicensee. Our consolidated balance sheets include the accounts receivable,payroll liabilities for temporary employees and related employee benefitliabilities and the licensee commission payable. The only exception to thisfinancial statement presentation is the circumstance when we are required toconsolidate certain licensees. See Note 14, Variable Interest Entities, inthe accompanying consolidated financial statements for further discussion ofthese licensees.

From time to time, we mayfinance a portion of the purchase price of the license at market rates ofinterest or provide working capital loans to licensees. The outstanding principalbalance of such notes receivable was $0.6 million as of January 1,2006.

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*Franchised Locations*

| ** **                                   | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Franchisee  royalty revenues (in thousands)  |       | $                     | 8,976      |   | $ | 8,370 |   | $ | 7,267 |   |
| Royalty revenues  as a % of franchisee sales |       | 4.0                   | %          | 4.0 | % | 4.2 | % |
| Number of  franchisees                       |       | 23                    |       | 22 |   | 24 |   |
| Number of franchisee  locations              |       | 87                    |       | 86 |   | 91 |   |
|                                              |            |                       |            |  |  |  |  |  |  |  |

 

We have been granting franchises for approximately40 years. Most franchise agreements are 10 years in length andrenewable every 5 years thereafter. A number of franchisees are second-generationowners and most operate more than one franchise.

We grant franchisees the right to market and furnishstaffing services within a designated geographic area using our trade names,service marks, advertising materials, sales programs, operating procedures,manuals and forms. We provide franchisees with our national, regional and localadvertising. Franchisees operate their businesses autonomously within theframework of our policies and standards and recruit, employ and pay their ownfull-time and temporary employees. Franchisees are responsible for allemployment related taxes and workers’ compensation costs of their employees. Franchiseesdo not use our computer systems. We receive royalty fees from each franchise basedupon the franchisee’s revenues.

From time to time, we mayfinance a portion of the purchase price of the franchise at market rates ofinterest or provide working capital loans to franchisees. The outstandingprincipal balance of such notes receivable was $2.2 million as of January 1,2006.

***Acquisitions***

We currently have no specific plan to undertake anysignificant acquisitions. However, from time to time we evaluate variousacquisition opportunities and may acquire competitors to accelerate our growth.

In 2003, in connection with a three-year oldagreement, we acquired 85% of our Canadian franchise operation forconsideration of $21.6 million, including $10.9 million of debtassumed. We also entered into a put/call agreement with the minority interest holder,whereby the minority interest holder can put the remaining 15% interest in theCanadian operations back to us any time after December 31, 2005, or, asamended, we can call the remaining 15% interest any time after January 1,2008.

We are generally thepurchaser of choice when a Spherion franchisee or licensee decides to sell itsbusiness. We have a right of first refusal on any franchise or license sale atthe same terms and conditions as may be agreed with another purchaser (who ultimatelymust be approved by us, even if we waive our right of first refusal), and wehave a standard end of term purchase option on our licenses and our morerecently granted franchises, however we are not obligated in our standardagreements to repurchase either our franchised or licensed locations.

***Competition***

We operate in highly competitive and fragmentedmarkets in our operating segments. Within temporary staffing and permanentplacement services, there are low barriers to entry. Within managed services,there can be more significant barriers to entry as capital and systemsrequirements are higher.

The staffing industry is served by thousands ofcompetitors with most of them small, local operations. There are several verylarge national and international competitors who also directly compete with us.The local competitors are generally characterized as independent operatorsserving local marketplaces. The ability to fund working capital requirements isone of the key success factors for these competitors. Local competitors mayalso be more flexible in offering alternatives to their customers in eitherattracting 

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candidates or in servicingthe customer, but generally cannot service national customers due to a lack ofsystems or geographic coverage. We compete with local competitors in all of ourjurisdictions generally when the customer is a local or retail customer, and weexpect to continue to do so.

Many of the large national and internationalcompetitors are characterized by very broad geographic coverage, large andcomplex information systems that can handle numerous legal and regulatoryrequirements and substantial financial resources. We compete against thesecompanies for the largest customers (primarily Fortune 500 companies) where thecustomer requires broad geographic coverage, competitive national pricing andtypically consolidated reporting to assist it in better controlling costs. Sincemost national customers use a central procurement department, the industry hasmoved towards consolidated competitive bidding with these customers withpricing as one of the key selection criteria in obtaining the contract. Thishas led to intense price competition within the staffing and recruitmentindustry and a focus on reducing back office processing costs, primarily byinstalling enterprise-wide information systems. To keep pace with our majornational and international competitors, we have implemented an enterprise-wideinformation system to reduce our back office processing costs and increase ourreporting capabilities. We anticipate that price competition with these largercompetitors will continue.

We believe that our customers primarily focus on thefollowing key factors in selecting a service provider: location or geographiccoverage, price and service delivery. Geographic coverage is important from thecustomer and candidate standpoint. Customers require that their providers beable to service most, if not all, of their locations. Location is important tothe candidate because many candidates are unwilling to travel outside of theirparticular geographic market for a position. We have over 650 locations inNorth America and believe that our coverage is adequate in the markets we serve.During 2004, we sold all of our international operations with the exception ofCanada; our lack of international coverage could put us at a disadvantagecompared to our larger competitors in obtaining new business from multinationalcustomers. However, we do not believe our North American focus to be asignificant disadvantage in competing for business in our targeted small andmid-sized customer segments. Service delivery is understanding the customers’specific job requirements through consultative assessments, the ability toprovide the right candidate for the right job and the ability to measure thequality of job performance. Factors in obtaining qualified candidates foremployment assignments with customers include the quality of availableopportunities, wages, responsiveness to work schedules and the number ofavailable work hours. No single customer accounted for 10 percent or moreof our consolidated revenues in 2005.

Within the StaffingServices operating segment, some of our largest competitors are Adecco S.A.,Manpower Inc. and Kelly Services, Inc. Within the ProfessionalServices operating segment, we compete with Robert HalfInternational Inc., MPS Group, Inc. and Kforce Inc., amongothers.

***Trademarks***

Through our subsidiaries, we maintain a number oftrademarks, trade names and service marks in the United States and certainother countries. We believe that many of these marks and trade names, includingSPHERION®,NORRELL®, ON-PREMISE® and THE MERGIS GROUP® areimportant to our business. In addition, we maintain other intangible propertyrights including  registered trademarkson the following: MAKING THE WORKPLACE WORK BETTER®, EMERGING WORKFORCE® andSALESFIT®.

Our United States trademark registration for SPHERION® expires October 9, 2011, but is renewableindefinitely for successive ten-year terms. Our United States trademark registration for NORRELL® expires on March 8, 2013, but is renewableindefinitely for successive ten-year terms. Our United States trademark registration for INTERIM® expires April 6, 2013, but is renewableindefinitely for successive ten-year terms.

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***Governmental Regulation***

Staffing firms are generally subject to one or more ofthe following types of government regulations: (i) regulation of theemployer/employee relationship between a firm and its flexible staff, (ii) registration,licensing, record keeping and reporting requirements and (iii) substantivelimitations on its operations. Staffing firms are the legal employers of theirtemporary workers. Therefore, staffing firms are governed by laws regulatingthe employer/employee relationship such as tax withholding or reporting, socialsecurity or retirement, anti-discrimination and workers’ compensation.

We also have operations in Canada. In this country,there is significant national, provincial or local regulations of staffingservices. These laws may require that part-time, temporary and contract workersreceive benefits similar to full-time workers, such as vacation, welfare plancontributions, notice prior to termination and severance pay. In some cases,hours of work and the duration of assignments are limited and workers may notbe assigned to certain industries. We do not anticipate that these legalstructures and requirements will have a material effect on our growth orprospects. However, any material change in national, provincial or localregulation of staffing services could have a material adverse effect on us.

Our sale of franchises andlicenses is regulated by the Federal Trade Commission and by authorities inapproximately 14 states and is subject to statutory requirements in certainCanadian provinces. Under these laws, we must deliver a franchise offeringcircular or disclosure document (similar to a prospectus) to prospectivefranchisees and licensees. These and other state laws may also applysubstantive standards that govern the relationship between franchisors andfranchisees. In states where we are selling franchises or licenses, we havefiled either the appropriate registration or obtained an exemption fromregistration. We do not anticipate that these requirements or other state lawswill have a material effect on our ability to sell franchises or licenses oroperate our business through franchised or licensed offices.

***Employees***

We estimate that weemployed approximately 302,000 people in 2005. On average, approximately 59,000billable personnel were assigned with our customers, at any given time.

***Seasonality and Cyclical Nature of Business***

*Seasonality—**Our*businesses areseasonal in nature with customer related demand generally at its highest pointduring the third and fourth quarters and lowest during the first quarter. Thethird and fourth quarters are normally higher as our customers increase theirtemporary workforces for the holiday season. We typically experience a decreaseof approximately 6 to 12% in our first quarter revenues in comparison withfourth quarter revenues. The decrease in first quarter revenues in comparisonwith the preceding fourth quarters for 2005, 2004 and 2003 was 12%, 0%, and 8%,respectively. First quarter revenues of 2005 in comparison with the precedingfourth quarter growth decreased partially due to the fact that first quarter2005 was comprised of thirteen weeks, whereas fourth quarter 2004 was comprisedof fourteen. First quarter revenues of 2004 in comparison with the precedingfourth quarter growth remained stable due to a higher volume of contract-basedwork in managed services and increased demand experienced from the economicrecovery. The fluctuation of first quarter revenues of 2003 was usual to theseasonality of the business.

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*Cyclical Nature of theBusiness—**The*staffing industry hashistorically been considered to be cyclical, often acting as an indicator ofboth economic downswings and upswings. Staffing customers tend to use temporarystaffing to supplement their existing workforces and generally hire permanentworkers when long term demand is expected to increase. As a consequence ofthis, our revenues tend to increase quickly when the economy begins to grow.Conversely, our revenues also tend to decrease quickly when the economy beginsto weaken as our customers reduce temporary workers before terminating theirown employees. While we have longer-term managed service contracts which arenot as directly dependent upon the economic cycle, these revenues are notsignificant enough to offset the impact of cyclical economic activity in ourlarger service offerings.

***Executive Officers of the Registrant***

Ourexecutive officers are:

| **Name and Age**       | ** ** | **Position**                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Roy G. Krause, 59      |       | President and Chief  Executive Officer since October 2004; President and Chief Operating  Officer from July 2003 to October 2004; Executive Vice President  and Chief Financial Officer from October 1995 to July 2003.                                                                                                                                                              |
| William J. Grubbs, 48  |       | Chief Marketing  and Corporate Development Officer since November 2005. From March 2002  to September 2005, Chief Operating Officer, Spring Group plc. From  April 2001 to February 2002, CEO Spring Technology Staffing  Services, Spring Group plc. From October 2000 to March 2001, CEO  Spring ASP, Spring Group plc.                                                  |
| William G. Halnon, 47  |       | Senior Vice  President and Chief Information Officer since January 2005. From  April 1997 to December 2004, Vice President-Chief Information  Officer for DIMON Incorporated.                                                                                                                                                                                                                  |
| Lisa G. Iglesias, 40   |       | Senior Vice  President, General Counsel and Secretary since August 2003; General  Counsel, Vice President and Secretary from July 1999 to  August 2003.                                                                                                                                                                                                                                        |
| Richard A. Lamond, 59  |       | Senior Vice  President and Chief Human Resources Officer since November 2002. From  1973 to 2002, Senior Vice President—Human Resources and Administration for  Millennium Chemicals Inc.                                                                                                                                                                                                           |
| Byrne K. Mulrooney, 45 |       | President,  Staffing Services since September 2003. President, Operations  Solutions—Midwest Region of Electronic Data Systems (“EDS”) from  July 2001 to August 2003; Vice President, Portfolio Management of  EDS from January 2000 to July 2001; Vice President, Distributed  Systems Services of EDS from May 1999 to January 2000.                     |
| Mark W. Smith, 43      |       | Senior Vice President  and Chief Financial Officer since July 2003; Vice President, Business  Services from September 2002 to July 2003; Vice President, Business  Services and Controller from August 2001 to September 2002; Vice  President, Finance and Administration from June 2000 to  August 2001; Vice President, Finance from June 1997 to  June 2000. |

 

***Availability ofReports and Other Information***

Our corporate website is *http://www.spherion.com.*We make availableon this website, free of charge, access to our Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,Proxy Statement on Schedule 14A and amendments to those materials filed orfurnished 

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pursuantto Section 13(a) or 15(d) of the Securities and Exchange Act of1934 as soon as reasonably practicable after we electronically submit suchmaterials to the Securities and Exchange Commission. Also available on ourwebsite, or in print to any shareholder that requests it, are Spherion’sCorporate Governance Principles, Code of Business Conduct and Ethics, as wellas charters for the Audit Committee, Compensation Committee, CorporateGovernance Committee, Executive Committee and Nominating Committee. Inaddition, the Commission’s website is *http://www.sec.gov.*The Commission makes available on its website, free of charge,reports, proxy and information statements, and other information regardingissuers, such as us, that file electronically with the Commission. Informationprovided on our website or on the Commission’s website is not part of thisAnnual Report on Form 10-K.

**Item 1A.**                RISKFACTORS

We are affected by a widerange of factors which could materially affect future developments andperformance. In addition to the factors affecting specific business operationsidentified in connection with the description of these operations and thefinancial results of these operations elsewhere in this report, the followingare some of the factors that could affect our operations:

*Weoperate in highly competitive markets with low barriers to entry, and may beunable to compete successfully against existing or new competitors.*

We operate in highlycompetitive and fragmented markets in both of our operating segments. There arelow barriers to entry by potential competitors at the local level. We facesignificant competition in the markets we serve and will continue to facesignificant competition in any geographic markets or industry sectors that wemay enter. The majority of competitors are significantly smaller than us. However,certain of our competitors are larger, have greater marketing, technical andfinancial resources, and have stronger brand name recognition than us. As aresult, some of our competitors may be in a better position to capitalize onnew technologies and changes in customer requirements, and to devote moreresources than we can to the development, promotion and sale of their serviceofferings. Some of our competitors can provide broader geographic coverage thanus and this can limit our ability to service large customers who wish toconsolidate services.

There has been asignificant increase in the number of customers consolidating their staffingservices purchases with a single provider or with a small number of providers. Thetrend to consolidate purchases has in some cases made it more difficult for usto obtain or retain customers. In the first quarter of 2005, we were notifiedof a customer non-renewal representing approximately $75 million in annualrevenues. We also face the risk that certain of our current and prospectivecustomers may decide to provide similar services internally. Additionally,pricing pressures have intensified as customers have continued to competitivelybid new contracts. This trend is expected to continue for the foreseeablefuture. As a result, we cannot assure you that we will not encounter increasedcompetition in the future.

*Any significant economic downturn could result in lowerrevenues.*

Because demand forpersonnel services and recruitment services is sensitive to changes in thelevel of economic activity, our business may suffer during economic downturns. Aseconomic activity slows down, companies tend to reduce their use of temporaryemployees and recruitment services before undertaking layoffs of their regularemployees, resulting in decreased demand for our personnel. Also, as businessesreduce their hiring of permanent employees, revenues from our recruitmentservices is adversely affected. As a result, any significant economic downturncould have a material adverse effect on our business, financial condition orresults of operations. During 2001 and 2002, the slowdown in the U.S. economysignificantly impacted the staffing market, which in turn reduced our revenuessignificantly. Economic conditions improved in 2004 and 2005; however, there isno assurance that this will continue in 2006 or that our revenues willincrease.

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*A significant reduction in demand from our customersmay result in a material impact on the results of our operations. A materialimpact may also result from the loss of customers or a deterioration of theirfinancial condition.*

We may experience areduction in business from a significant customer or a number of customers fromone of our operating segments, or we may lose such customers.  We cannot guarantee that we will be able toretain long-term relationships or secure renewals of short-term relationshipswith our more substantial customers in the future. Our customers may experiencea deterioration in their current financial condition or future prospects, ormay experience a bankruptcy. A significant reduction in demand from ourcustomers may result in an adverse impact on our business and results ofoperations in future periods.

*We may not achieve the intended effects of ourbusiness strategy.*

Our business strategy isprimarily based on profitable growth in our North American operations. We areimplementing steps to continue increasing our growth rates by concentrating inlocal markets with small and mid-sized clients through relationship selling,targeting new accounts by providing integrated services, and continuing toimprove operating leverage. We also plan to grow within our Professional Servicessegment by providing more services to existing staffing group segment customers.If we are not successful in achieving these objectives with our customers, ourrevenues, costs and overall profitability could be negatively affected. If weare unable to leverage our investment in technology effectively, ourproductivity and costs’ competitiveness could be negatively affected.

*Our contracts contain termination provisions andpricing risks that could decrease our revenues, profitability and cash flow.*

Some of our customercontracts permit termination in the event our performance is not consistentwith service levels specified in those contracts. Our customers’ ability toterminate contracts creates uncertain revenue streams. In addition, ifcustomers are not satisfied with our level of performance, our reputation inthe industry may suffer, which could materially and adversely affect ourbusiness, financial condition, results of operations and cash flow. Some of ourcontracts contain pricing provisions that allow customers to pay a set fee forour services regardless of whether our costs to perform these services exceedthe amount of the set fee. Some of our contracts provide for credits to ourcustomers if we fail to achieve specific contract standards. Some of ourcontracts contain re-pricing provisions that can result in reductions of ourfees for performing our services. In these situations, we could incursignificant unforeseen costs or financial penalties in performance under thecontracts.

The termination of acustomer contract or the deterioration of the financial condition or prospectsof a customer may result in an impairment of the net book value of the assetswe use in connection with that contract.

*Our failure or inability to perform under customercontracts could result in damage to our reputation and give rise to legalclaims against us.*

Certain areas of ourbusiness require us to assume a greater level of responsibility for developingor maintaining processes on behalf of our customers. Many of these processesare critical to the operation of our customers’ businesses. Our failure orinability to complete these engagements satisfactorily could have a materialadverse effect on our customers’ operations and consequently may give rise toclaims against us for actual or consequential damages or otherwise damage ourreputation. Any of these claims could have a material adverse effect on ourbusiness, financial condition or results of operations.

*Thedisposition of businesses previously sold, or in the process of being sold, maycreate contractual liabilities associated with indemnifications provided.*

We have disposed ofseveral business units over the past four years. The disposition of thesebusinesses usually requires that we indemnify the purchaser for liabilitiesthat arose prior to the disposition 

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date. Theseliabilities are typically related to audits of tax liabilities by localauthorities and other pre-existing liabilities such as lease obligations. Additionally,in the contracts we make a number of representations and warranties and fromtime to time claims are made against us related to these items. During 2005, werecorded $5.7 million as part of discontinued operations for these matters. Thefair value of these indemnifications are recorded at the time of the sale. Subsequentlyif any liabilities become known and are both probable and reasonably estimable,they are recorded as an expense. For some of the dispositions, we have or mayhave future claims which are not yet probable and reasonably estimable and havenot been recorded as an expense. Future earnings from discontinued operationscould be materially adversely affected if we are not successful in defendingour positions with the purchasers of these discontinued operations. Additionally,if we are required to make cash payments for any of these liabilities, ourfinancial condition could be materially adversely affected.

*Regulatory challenges to our tax filing positionscould result in additional taxes.*

In 2002, we engaged intransactions that generally had the effect of accelerating certain futureprojected tax deductions and losses, resulting in an increase in the amount ofnet operating losses and capital losses available for carry back into prior taxyears. As a result of these transactions, our tax refund for the 2002 filingyear was increased by approximately $60 million. We believe that we haveappropriately reported these transactions in our tax returns, and that we haveestablished adequate reserves with respect to any tax liabilities that mayarise in relation to these transactions should our position be successfullychallenged by tax authorities. However, an unfavorable settlement or adverseresolution could result in the repayment of some or all of the refund received.

*Governmentregulation may significantly increase our costs, including payroll-relatedcosts and unemployment taxes.*

In conducting ourbusiness, we are required to pay a number of payroll and related costs andexpenses, including unemployment taxes, workers’ compensation and medicalinsurance for our personnel. Unemployment insurance premiums paid by employerstypically increase during periods of increased levels of unemployment. Workers’compensation costs may increase in the future if states have raised benefitlevels and liberalized allowable claims. Future earnings could be adverselyaffected if we are not able to increase the fees charged to customers to absorbthe increased costs related to unemployment insurance or workers’ compensationbenefits. Future earnings could also be adversely affected if state governmentssuccessfully challenge prior year unemployment experience ratings.

*We are subject to business risks associated withinternational operations in Canada, which could make our internationaloperations significantly more costly.*

**Operationin this market is subject to risks inherent in international businessactivities, including,**

·       fluctuationsin currency exchange rates;

·       varyingeconomic and political conditions;

·       overlappingor differing tax structures; and

·       multipleregulations concerning pay rates, benefits, vacation, statutory holiday pay,workers’ compensation, union membership, termination pay and the termination ofemployment.

*Wemay be exposed to employment-related claims and costs that could have amaterial adverse affect on our business, financial condition and results ofoperations.*

Weemploy and place people in the workplaces of other businesses. Attendant risksof such activity that could increase our cost of doing business include:

·       possibleclaims of discrimination and harassment;

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·       errorsand omissions by the personnel we place, particularly for the acts of temporaryprofessionals (e.g., accountants, attorneys and information technology consultants);

·       misuseor misappropriation of customer funds or proprietary information; and

·       paymentof workers’ compensation and other similar claims.

Although we maintaininsurance coverage for general and professional liability, errors and omissionsand employee theft, such insurance coverage may not be adequate in scope oramount to cover any such liability. A failure of any of our personnel toobserve our policies and guidelines intended to reduce exposure to these riskscould have a material adverse effect upon us. We cannot assure that we will notexperience such problems in the future.

We retain a portion of therisk under our workers’ compensation, general liability/professional liability,employment practices liability insurance programs and health insurance benefitsprograms. Changes in the estimates of these accruals are charged or credited toearnings in the period determined, and therefore a large fluctuation in anygiven quarter could materially adversely affect earnings in that period.

*We are dependent upon availability of qualifiedpersonnel, and may not be able to attract and retain sufficient numbers ofqualified personnel necessary to succeed.*

We depend upon our abilityto attract qualified personnel who possess the skills and experience necessaryto meet the staffing requirements of our customers or to successfully bid fornew customer projects. We must continually evaluate and upgrade our base ofavailable qualified personnel to keep pace with changing customer needs andemerging technologies. Competition for individuals with proven professional ortechnical skills always exists. We could have difficulty attracting andretaining sufficient numbers of qualified personnel necessary for our businessto succeed.

*We may lose our key personnel, and therefore, ourbusiness may suffer.*

Our operations aredependent on the continued efforts of our officers and executive management. Inaddition, we are dependent on the performance and productivity of our localmanagers and field personnel. Our ability to attract and retain business issignificantly affected by local relationships and the quality of servicerendered. The loss of those key officers and members of executive managementwho have acquired significant experience in our industry may cause asignificant disruption to our business. Moreover, the loss of our key managersand field personnel may jeopardize existing customer relationships withbusinesses that continue to use our services based upon past relationships withthese local managers and field personnel. The loss of such key personnel couldmaterially adversely affect our operations, because it may result in aninability to establish and maintain customer relationships and otherwiseoperate our business.

*Managing or integrating any future acquisitions maystrain our resources.*

In the future, we mayacquire other businesses to expand our service offerings, broaden our customerbase or expand our geographic presence. Acquisitions involve a number of additionalrisks, including the diversion of management’s attention from our existingoperations, the failure to retain key personnel or customers of an acquiredbusiness, the assumption of unknown liabilities of the acquired business forwhich there are inadequate reserves, the potential impairment of acquiredintangible assets and the ability to successfully integrate the business. Wecould experience financial or other setbacks if any of the businesses that weacquire have liabilities or problems of which we are not aware. Further, wecannot assure you that any future acquired businesses will generate anticipatedrevenues or earnings. As a result, the anticipated benefits from futureacquisitions may not be achieved. 

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*Failure to meet certain covenantrequirements under our revolving lines of credit could impact part or all ofour availability to borrow under our revolving lines of credit.*

Our revolving lines ofcredit provide for certain affirmative and negative covenants which may limitthe total availability under this line of credit based upon our ability to meetthese covenants. These covenants include, but are not limited to: a fixedcharge coverage ratio; limitations on capital expenditures, additional debtincurred, mergers, consolidations or sales; and transactions with subsidiariesand related parties. Failure to meet compliance with one or more of thesecovenants in the future could affect the amount of availability we have toborrow against and as a result, our liquidity and financial condition may beadversely affected. While we currently have not drawn on these revolving linesof credit, we may need to if we grow as planned. Any limitation on our abilityto borrow in this situation could inhibit our growth.

*We are a defendant in a variety of litigation andother actions from time to time, which may have a material adverse effect onour business, financial condition and results of operations.*

We and our subsidiariesare regularly involved in a variety of litigation arising out of our business. Occasionally,this litigation can be material. We cannot assure you that our insurance willcover all claims that may be asserted against us. Should the ultimate judgmentsor settlements exceed our insurance coverage, they could have a materialadverse effect on our results of operations, financial position and cash flows.We also cannot assure you that we will be able to obtain appropriate types orlevels of insurance in the future or that adequate replacement policies will beavailable on acceptable terms, if at all. See Part I, Item 3, LegalProceedings for more information.

*The price of our common stock may fluctuatesignificantly, which may result in losses for our investors.*

Themarket price for our common stock has been and may continue to be volatile. Forexample, during the fiscal year ended January 1, 2006, the prices of ourcommon stock as reported on the New York Stock Exchange ranged from a high of$10.53 to a low of $5.00. Our stock price can fluctuate as a result of avariety of factors, including factors listed in these “Risk Factors” andothers, many of which are beyond our control. These factors include:

·                    actual oranticipated variations in our quarterly operating results; 

·                    announcementof new services by us or our competitors; 

·                    announcementsrelating to strategic relationships or acquisitions; 

·                    changes infinancial estimates or other statements by securities analysts; and 

·                    changes ingeneral economic conditions. 

Because of thisvolatility, we may fail to meet the expectations of our shareholders or ofsecurities analysts, and our stock price could decline as a result.

**Item1B.**               UNRESOLVED STAFFCOMMENTS

We have not received anywritten comments regarding our periodic or current reports from the staff ofthe Securities and Exchange Commission that were issued 180 days or morepreceding the end of our fiscal year ended January 1, 2006, as a result,no issues remain unresolved.

**Item 2.**                        PROPERTIES

Our corporate headquartersare located at 2050 Spectrum Boulevard, Fort Lauderdale, Florida, in a 125,000square-foot building owned by us, plus a leased annex of 30,000 square feet ofadditional space in the immediate vicinity. In addition, we lease approximately70,000 square feet in Alpharetta, Georgia for operating functions. All otherfield locations operate in space held primarily under three to five year leasesproviding fixed monthly rentals. Our corporate headquarters and our fieldlocations are used by both our 

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StaffingServices and our Professional Services operating segments. We believe that ourfacilities are adequate for our needs.

**Item 3.**                        LEGALPROCEEDINGS

In the ordinary course ofour business, we are or may be threatened with or named as a defendant invarious lawsuits. We maintain insurance in such amounts and with such coveragesand deductibles as we believe are reasonable and prudent. The principal risksthat we insure against are workers’ compensation, personal injury, bodilyinjury, property damage, professional malpractice, errors and omissions,employment practices and fidelity losses. Our management does not expect thatthe outcome of any pending lawsuits relating to such matters, individually orcollectively, will have a material adverse effect on our financial condition,results of operations or cash flows.

Interim HealthCare Inc., CatamaranAcquisition Corp. and Cornerstone Equity Investors IV, L.P. filed an actionagainst Spherion in the Delaware Court of Chancery in 2001 related to thedivestiture of Interim HealthCare (the “Healthcare Divestiture”). They soughtdamages of approximately $10.0 million for breach of contract, reformation ofthe purchase agreement to reduce the purchase price by approximately $24.0million, or rescission of the contract. The same parties also sought damagesagainst Spherion in an action in Delaware Superior Court alleging multiplebreach of contract claims arising out of the Healthcare Divestiture. Our motionfor summary judgment was granted for the reformation claim. The cases went totrial in December 2003 and the court issued its opinion in February 2005.The opinion provided that we did not have to pay damages on any of the claims,except for one breach of contract claim for which the damages awarded to theplaintiffs total approximately $1.1 million plus pre- and post-judgmentinterest and attorneys’ fees. After the parties stipulated to the amount ofpre-judgment interest and attorneys’ fees, the judge entered an order ofjudgment in June 2005 directing us to pay a total of approximately $1.7million, and in August 2005 this amount was paid to the plaintiffs. In June 2005,the plaintiffs filed a notice of appeal and oral argument was heard in theDelaware Supreme Court in October 2005. On October 31, 2005, theDelaware Supreme Court issued its opinion affirming the trial court’s ruling inall respects.

On December 13, 2004,and as amended on January 13, 2005 and October 31, 2005, GlidepathHolding B.V. and Jeimon Holdings N.V. filed an action against Spherion in theU.S. District Court of the Southern District of New York. Glidepath and JeimonHoldings, investors in the entity that acquired the Cyber Center business ofSpherion Technology (UK) Limited, a subsidiary of Spherion, in 2002, suedSpherion for fraud, negligent misrepresentation, aiding and abetting breach offiduciary duty and unjust enrichment and seek $32.0 million in damages, andtreble for punitive damages, plus attorneys’ fees, expert fees and costs. Glidepathand Jeimon Holdings allege that an individual who was an officer of SpherionTechnology (UK), fraudulently induced them to invest in a corporation formed topurchase the Cyber Center business, while he remained in the employ of SpherionTechnology (UK) and was to be paid an incentive bonus for the sale by us. Theyallege that he misled them as to his employment status at the time, as to theprospects for the Cyber Center, and as to whether the newly formed corporationwas assuming the indebtedness of Spherion Technology (UK) associated with theCyber Center business. They allege that in doing so, he was acting as our agent.We intend to vigorously defend this matter. Although this claim is in thepreliminary stages, we have a reserve of $0.1 million related to this matter. Wedo not have insurance coverage for this claim.

**Item4.**                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submittedto a vote of security holders during the fourth quarter of the fiscal yearended January 1, 2006.

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**PART II**

**Item 5.**                        MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

***Market for the Registrant’s Common Equity***

Ourcommon stock is traded on The New York Stock Exchange under the symbol “SFN.”The following table sets forth, for the periods indicated, the high and lowprices per share of the common stock as reported on The New York StockExchange:

| **2005**       | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $          | 8.41       |     | $          | 7.21    |       |
| Second Quarter |       | 7.66       |       | 5.00     |       |
| Third Quarter  |       | 8.23       |       | 6.40     |       |
| Fourth Quarter |       | 10.53      |       | 6.62     |       |
|                |            |            |            |          |            |         |            |  |  |

 

| **2004**       | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $          | 10.98      |     | $          | 8.18    |       |
| Second Quarter |       | 11.18      |       | 8.82     |       |
| Third Quarter  |       | 10.37      |       | 7.00     |       |
| Fourth Quarter |       | 8.50       |       | 6.80     |       |
|                |            |            |            |          |            |         |            |  |  |

 

On January 27, 2006, there were approximately2,300 holders of record of our common stock.

We did not pay cash dividends in 2005 and 2004, and donot intend to pay cash dividends in the foreseeable future. Our U.S. revolvingline of credit provides for certain covenants which restrict our ability to paycash dividends in the event of default or under certain circumstances. OurCanadian revolving line of credit covenants do not allow us to pay cashdividends.

The information requiredby Item 201(d) of Regulation S-K is set forth in Part III, Item12 of this Annual Report on Form 10-K.

***Issuer Purchases ofEquity Securities***

| ** **                                               | ** ** | ** **            | ** ** | **Average**   | ** ** | **Total Number of**   | ** ** | ** **                            | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|---------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | ** **            | ** ** | **Price**     | ** ** | **Shares Purchased**       | ** ** | **Maximum Number**               | ** ** |
| ** **                                               | ** ** | **Total Number** | ** ** | **Paid**      | ** ** | **as Part of a** | ** ** | **of Shares that May** | ** ** |
| ** **                                               | ** ** | **of Shares**    | ** ** | **per**       | ** ** | **Publicly Announced**     | ** ** | **Yet Be Purchased**        | ** ** |
| **Period**                                               | ** ** | ** **            | ** ** | **Purchased** | ** ** | **Share**                       | ** ** | **Program**                           | ** ** | **Under the Program** | ** ** |
| October 3,  2005 through October 30, 2005 | ** ** |                  | 260,300    | ** **    |       |                            | $          | 7.50                                  | ** ** |   |   | 260,300 | ** ** |   |   | 3,872,400 | ** ** |   |
| October 31,  2005 through November 27, 2005    |       |                  | 428,300    | ** **    |       |                            | 9.01       | ** **                            |       |   | 428,300 | ** ** |   |   | 3,444,100 | ** ** |   |
| November 28,  2005 through January 1, 2006     |       |                  | 484,600    | ** **    |       |                            | 9.94       | ** **                            |       |   | 484,600 | ** ** |   |   | 2,959,500 | ** ** |   |
|                                                     |       |                  | 1,173,200  | ** **    |       |                            | $          | 9.06                                  | ** ** |   |   | 1,173,200 | ** ** |   |   | 2,959,500 | ** ** |   |
|                                                          |            |                       |            |               |            |                                 |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |

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(a)           The program wasannounced on May 24, 2005.

(b)          The repurchase programapproved by the Board of Directors is for six million shares.

(c)           Thereis no expiration date on the repurchase program.

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**Item 6.**                        SELECTEDFINANCIAL DATA

Thefollowing table summarizes selected financial information for each of the mostrecent five fiscal years and should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe accompanying consolidated financial statements included in this AnnualReport on Form 10-K. We sold our court reporting business andstaffing operations in the United Kingdom, the Asia/Pacific region and TheNetherlands during 2004. The remaining business unit, the call centeroutsourcing business, is comprised of four call centers, of which three weresold in 2005 and the fourth one is undergoing due diligence with a potentialpurchaser. If that sale cannot be completed we will report this unit incontinuing operations. 

| ** **                                    | ** ** | **Fiscal Years**                                             | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **(in thousands, except per share data** | ** ** |
| ** **                                    | ** ** | **and operating information)**                          | ** ** |
| ** **                                    | ** ** | **2005(3)**                                                       | ** ** | **2004(1,4)** | ** ** | **2003(5)** | ** ** | **2002(6)** | ** ** | **2001(7)** | ** ** |
| **Statement of Operation Data:**              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Revenues  excluding Michael Page              |       | $                                                                 | 1,971,665  |   | $ | 2,032,715 |   | $ | 1,733,761 |   | $ | 1,771,119 |   | $ | 2,151,576 |   |
| Michael Page(2)                               |       | —                                                            |       | — |   | — |   | — |   | 179,642 |   |
| Total revenues                                |       | 1,971,665                                                         |       | 2,032,715 |   | 1,733,761 |   | 1,771,119 |   | 2,331,218 |   |
| Gross profit                                  |       | 434,290                                                           |       | 425,611 |   | 388,128 |   | 419,453 |   | 649,621 |   |
| Earnings (loss) from  continuing operations   |       | 19,346                                                            |       | 15,196 |   | (1,585 | ) | (219,172 | ) | 117,506 |   |
| Net earnings  (loss)                          |       | 12,029                                                            |       | 35,829 |   | (13,913 | ) | (903,272 | ) | 106,961 |   |
| Earnings (loss) per  share—Basic:        |       |                                                              |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations    |       | $                                                                 | 0.32       |   | $ | 0.25 |   | $ | (0.03 | ) | $ | (3.69 | ) | $ | 1.97 |   |
| Net earnings (loss) per share                 |       | 0.20                                                              |       | 0.59 |   | (0.23 | ) | (15.20 | ) | 1.80 |   |
| Earnings (loss) per  share—Diluted:      |       |                                                              |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations    |       | $                                                                 | 0.31       |   | $ | 0.24 |   | $ | (0.03 | ) | $ | (3.69 | ) | $ | 1.88 |   |
| Net earnings (loss) per share                 |       | 0.20                                                              |       | 0.58 |   | (0.23 | ) | (15.20 | ) | 1.72 |   |
| **Weighted Average Shares:**                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                         |       | 60,938                                                            |       | 61,036 |   | 59,951 |   | 59,417 |   | 59,502 |   |
| Diluted                                       |       | 61,430                                                            |       | 62,313 |   | 59,951 |   | 59,417 |   | 65,934 |   |
| **Balance Sheet Data(8):**                    |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total assets                                  |       | $                                                                 | 742,644    |   | $ | 830,266 |   | $ | 864,834 |   | $ | 863,695 |   | $ | 1,876,299 |   |
| Long-term debt,  net of current portion  |       | 3,735                                                             |       | 4,766 |   | 98,073 |   | 105,250 |   | 215,751 |   |
| Working capital                               |       | 129,909                                                           |       | 119,828 |   | 225,489 |   | 280,583 |   | 410,131 |   |
| **Operating Information(8):**                 |       |                                                              |       |   |   |   |   |   |   |   |   |
| Operating locations                           |       | 659                                                               |       | 716 |   | 811 |   | 822 |   | 941 |   |

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(1)          The 2004 fiscal yearcontains 53 weeks. All other years contain 52 weeks.

(2)          Operating results forMichael Page are included through the date of disposition in April 2001.

(3)          The 2005 results includepre-tax restructuring charges of $1.8 million and a net loss from discontinuedoperations of $7.3 million.

(4)          The 2004 resultsincluded pre-tax restructuring and other charges of $8.4 million and earningsfrom discontinued operations of $20.6 million, which includes the recognitionof a previously deferred tax benefit of $25.3 million.

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(5)          The 2003 results includethe Canadian results of operations from the date of acquisition (April 4,2003); pre-tax restructuring charges of $4.2 million; and a net loss fromdiscontinued operations of $12.3 million.

(6)          The 2002 results includea pre-tax goodwill impairment charge of $230.7 million; pre-taxrestructuring, and other charges of $10.4 million; and a pre-tax gain onthe retirement of a portion of our convertible subordinated notes of$10.5 million. The 2002 results also include a net loss from discontinuedoperations of $68.5 million and the cumulative effect of a change inaccounting principle to adopt SFAS No. 142, “Goodwill and OtherIntangibles” of $615.6 million after-tax.

(7)          The 2001 results includea pre-tax gain on the sale of Michael Page of $305.7 million($186.3 million after-tax); pre-tax restructuring, asset impairment andother charges of $130.8 million; and a pre-tax gain on the sale ofmarketable securities of $2.4 million. The 2001 results also include a netloss from discontinued operations of $9.4 million and the cumulativeeffect of a change in accounting principle to adopt SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” of $1.1 millionafter-tax.

(8)          At end of period.

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

***Organization of Information***

Management’sdiscussion and Analysis provides a narrative on our financial performance thatshould be read in conjunction with the accompanying consolidated financialstatements. It includes the following sections:

·       CompanyOverview

·       ExecutiveSummary

·       OperatingResults

·       Liquidityand Capital Resources

·       ContractualObligations and Commitments

·       Off-BalanceSheet Arrangements

·       CriticalAccounting Policies

·       NewAccounting Pronouncements

·       Inflation

·       Seasonalityand Cyclical Nature of Business

·       Forward-LookingStatements-Safe Harbor 

***Company Overview***

Spherion Corporation provides temporary staffingservices, managed services and permanent placement services. Founded in 1946,we are headquartered in Fort Lauderdale, Florida, and operate a network of over650 locations within North America. Our locations are company-owned,licensed or franchised. As of January 1, 2006, we had 477 company-ownedoffices, 94 licensed locations and 87 franchised locations. 

The Company is organizedaround two basic operating segments—Staffing Services and Professional Services.The Staffing Services segment provides temporary staffing, managed services andpermanent placement of employees with primarily clerical and light industrialskills. The Professional Services segment provides temporary staffing andpermanent placement of employees with professional-level skill sets, suchas information technology, finance and accounting, legal, engineering,marketing and administrative. See the *OperationsOverview* section of Part I of this Annual Report on Form 10-Kfor a further description of our operating segments. 

***Executive Summary***

The staffing industry experienced three years ofdeclining revenues prior to 2004; however, economic conditions began to improvesignificantly in 2004 and continued to improve in 2005. Even though in 2004 and2005, the staffing industry’s growth in jobs improved significantly, the industryremains economically sensitive and continues to operate within a highlycompetitive environment. We are anticipating continued industry revenue growthin 2006; however, we expect to continue experiencing intense pricing pressures,increased state unemployment costs as well as increased employee benefit costs.

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The following is abrief summary of our primary 2005 objectives and accomplishments:

·       *Building our business through targeted growth.*Overall,revenue decreased 3.0% during 2005 compared with the prior year or 1.7% afterconsidering the impact of the 53rd week in 2004. Revenue growth in temporarystaffing and permanent placement were more than offset by the loss of a largemanaged service contract in early 2005, the loss of other managed service businessand the decline in demand for outplacement services. Revenue from temporarystaffing and permanent placement increased 2.1% and 18.2%, respectively. Revenuesfrom small and mid-sized customers, targeted customer segments, increased 9.3%.

·       *Gross profit margin expansion.*Overall, gross profit marginwas 22.0%, an increase of 110 basis points compared with the prior year. Grossprofit margin expansion is primarily due to lower employee benefit costs,particularly workers’ compensation, pricing increases, and a higher proportionof permanent placement revenue (3.3% of our 2005 revenue, an increase of 60basis points from the same prior year period). 

·       *Operationaleffectiveness.*During 2005, we leveraged the technologyinfrastructure investments and reinvested some of the savings from theimplementation of our enterprise-wide information system into extending ourtechnology to better serve our clients and candidates. Our operating marginincreased to 1.5% of revenues compared with 1.2% in the prior year.

·       *Financialdiscipline.*We generated $72.3 million in operating cash flowcompared with $6.1 million in the prior year. Cash flow was primarily providedby higher earnings from continuing operations, depreciation and a reduction inworking capital due mostly to lower accounts receivable. We were able to reduceDSO (Days Sales Outstanding, a measure of how quickly we collect receivables),by 6 days from 60 days at the end of 2004 to 54 days at the end of 2005.

In 2006 we plan tofocus on three key operating objectives:

·       First,to accelerate our growth rates by expanding the depth and breadth of ourservices with existing accounts:

-          Through rigorous accountplanning and sales management, we plan to leverage existing clientrelationships to increase total sales to these companies, especiallyprofessional services. 

-          During 2005, our localstaffing sales efforts were concentrated on small and mid-sized clients whichgenerated more growth than the growth rate on our larger accounts. Growth ratescontinue to be strong in this area as we strive to continue changing ouroverall revenue mix through increased business development in the localbranches where pricing pressures tend to be less severe.

·       Second,to target new accounts by providing integrated services:

-          We have specifictargeting criteria that focus on high growth, mid-market companies andcompanies undergoing significant change. We have determined that a certainrange of volume deals require lower cost delivery by maximizing the utilizationof new technology introduced in 2005 which centralizes sourcing and screeningactivities.

·       Third,to continue improving operating leverage:

-          During 2005, grossprofit margins increased primarily as a result of pricing increases and loweremployee benefit costs. We have a sales focus on small and mid-sized clientswhere pricing pressures tend to be less severe.

-          During 2005, weincreased sales and recruiter headcount by 8.1%. We expect to capitalize onincreased recruiter productivity as new sales personnel continue to gainexperience. 

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-          During2005, we implemented new technology which centralizes sourcing and screeningactivities. Our operations and delivery teams will focus on migrating mid-sizedclients to a lower cost centralized delivery model.

***Operating Results***

***Consolidated Operating Results***

***Fiscal 2005 compared with 2004***

·       Revenue in 2005 was$1,971.7 million, a decrease of 3.0% compared with the prior year or 1.7% afterconsidering the impact of the 53rd week in 2004. Temporary staffing revenue grew2.1%, which was slower than the Bureau of Labor Statistics estimated 6.6%increase in the number of temporary employees compared with the prior year. Demandfor permanent placement services, particularly within Professional Services,remained strong with total year over year growth of 18.2%. The loss of thelarge managed services contract and intentional exit of certain staffingclients who did not meet minimum thresholds at the start of the second quarterof 2005 affected year over year comparisons.

·       Gross profits in 2005 were$434.3 million, an increase of 2.0% from the prior year despite lower revenues.Gross profit margin increased to 22.0% in 2005 compared with 20.9% last year. Grossprofit margins were positively impacted by (i) lower workers’ compensationcosts of $8.1 million due to improvements in prior year loss estimates (20basis points), lower costs for current year losses (20 basis points) and loweremployee benefits (30 basis points), (ii) higher temporary staffingpricing within Staffing Services (40 basis points), and (iii) a shift inrevenue mix toward permanent placement services (15 basis points). The increasein gross profit margin was partially offset by higher state unemployment taxes(15 basis points). 

·       Selling,general and administrative expenses were $404.4 million, an increase of 0.7%from the prior year. As a percentage of revenues, these costs increased due tohigher recruiter costs in the Professional Services segment and higheradvertising expense. Unallocated corporate costs decreased by $6.8 million, adecrease of 33.0% from the prior year due primarily to the completion of theimplementation of our enterprise-wide information system late in 2004. 

·       Interestexpense was $3.2 million, a decrease of 44.4% from the prior year. The decreasein interest expense relates primarily to the retirement of convertible notes inOctober 2005 and August 2004. 

·       Restructuringand other charges decreased by $6.6 million to $1.8 million in 2005 versus $8.4million in 2004. The 2004 costs include the termination of an employmentcontract with our former chief executive officer.

·       Oureffective tax rate from continuing operations was 33.3% and was lower than theUS Federal Statutory tax rate of 35.0% due primarily to (i) the impact ofwork opportunity and other employment tax credits, (ii) the recognition ofpreviously unrecognized net operating loss benefits and (iii) thereduction of state tax reserves due to the favorable resolution of severalstate income tax audits.

·       Earningsfrom continuing operations were $0.31 per diluted share for the 2005 periodcompared with $0.24 in the prior year. 

·       Discontinuedoperations incurred pre-tax losses of $11.6 million in 2005, whichincludes losses primarily from call center operations of $5.9 million andan estimated loss on sale of $5.7 million during 2005 related primarily toindemnifications and other matters associated with the previously sold UnitedKingdom and Asia/Pacific staffing operations. Discontinued operations resultedin a loss of $0.12 per share compared with earnings of $0.33 per share in theprior year which included the recognition of a previously deferred tax benefitin the amount of $25.3 million. 

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·       DSO decreased to54 days at the end of 2005 compared with 60 days at the end of 2004. 

***Fiscal 2004 compared with 2003***

·       Revenuesin 2004 were $2,032.7 million, up 17.2% from 2003 due to increased demandincluding 1.5% of growth due to the additional week in 2004. The Bureau ofLabor Statistics reported an estimated increase of approximately 7.7% in thenumber of temporary employees in comparison with the prior year. 

·       Grossprofit increased to $425.6 million, up 9.7% from the prior year primarilydue to the increase in revenues. Our overall gross profit rate decreased to20.9% from 22.4% in the prior year due primarily to pricing pressure (125 basispoints) and increased state unemployment and federal employment taxes (75 basispoints), which has only been partially offset by lower employee benefit costs,including workers’ compensation costs (50 basis points).

·       Selling,general and administrative expenses were $401.5 million, an increase of4.3% over prior year. Selling, general and administrative expenses as apercentage of revenues decreased to 19.8% from 22.2% in the prior year. Wecontinued to reduce costs and incurred restructuring and other charges of$8.4 million in 2004 versus $4.2 million in 2003. 

·       Wecompleted the implementation of our enterprise-wide information system,spending $5.8 million in capital on this system in 2004. Our selling, generaland administrative expenses included $7.3 million of non-capitalizablecosts associated with this system, down $1.6 million from 2003. 

·       Interestexpense decreased marginally in 2004 compared with 2003, as the decrease ininterest expense relating to the retirement of our remaining 41¤2% convertible subordinated notes during2004 was largely offset by increased expense related to debt outstanding on ourU.S. and Canadian revolving lines of credit.

·       Oureffective tax rate (benefit) from continuing operations for 2004 was (18.0%)versus (9.5%) for 2003. The rate for 2004 is lower than the federal statutoryrate due to the impact of work opportunity and other employment tax credits anddue to state tax benefits. The rate for 2003 was lower than the federalstatutory rate of 35.0% as a result of the state tax expense impact thatreduced the overall tax benefit on operating losses. 

·       Discontinuedoperations incurred pre-tax losses of $14.0 million in 2004, whichincludes losses primarily from the United Kingdom and Asia Pacific staffingoperations and the call centers of $9.6 million and an estimated loss onsale of $4.4 million during 2004. 

·       DSO increased to60 days at the end of 2004 compared with 55 days at the end of 2003. 

***Discontinued Operations***

During 2004, we assessed the profitability of ouroperations and made decisions to exit five business units. We sold our courtreporting business and our staffing operations in the United Kingdom, theAsia/Pacific region and The Netherlands during 2004. The remaining businessunit, the call center outsourcing business, was comprised of four call centers,of which three were sold in 2005 and the fourth one is undergoing due diligencewith a potential purchaser. If that sale cannot be completed we will reportthis unit in continuing operations. These business units’ operating results areincluded in discontinued operations in the accompanying consolidated statementsof operations through the dates of their disposition.

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For the fiscal years ended January 1, 2006, December 31,2004 and December 26, 2003, discontinued operations through the dates oftheir disposition, as applicable, had revenues of $20.4 million, $226.7 millionand $340.7 million, respectively, and had pre-tax operating losses of $5.9million, $9.6 million and $14.9 million, respectively.

During 2005, we recorded, a charge of $5.7 million forthe estimated settlement of certain warranty indemnification and other mattersassociated with our former operations in Australia and the United Kingdom. 

See Note 2,Discontinued Operations, in the accompanying consolidated financial statementsfor further discussion.

***Restructuring and Other Charges***

Thefollowing is a summary of current and prior period restructuring activities. Thisshould be read in conjunction with Note 13, Restructuring and OtherCharges, in the accompanying consolidated financial statements. A summary ofthe charges is as follows (in thousands):

| ** **                              | ** ** | **Fiscal Years** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Restructuring                           |       | $                     | 2,230      |   | $ | 3,431 |   | $ | 4,811 |   |
| Restructuring  reversal of over accrual |       | (175                  | )          | (672 | ) | (606 | ) |
| Other charges                           |       | (292                  | )          | 5,636 |   | — |   |
|                                    |       | $                     | 1,763      |   | $ | 8,395 |   | $ | 4,205 |   |

 

***RestructuringCharges***

Restructuring charges for the year ended January 1,2006 totaled $2.2 million for severance related costs for the elimination of112 positions. The restructuring charges were primarily as a result of anannounced termination of a customer contract and other changes within themanaged services portion of the Staffing Services operating segment. 

During the second half of 2003, we identified certaincost reduction opportunities primarily related to the realignment of ouroperating segments and the implementation of our enterprise-wide informationsystem and adopted a restructuring plan (the “2003 Plan”) to eliminate redundancies,reduce excess capacity and centralize business support functions. Restructuring charges relating to this plantotaled $3.4 million and $4.8 million for the years ended December 31,2004 and December 26, 2003, respectively. 

The charges above were partiallyoffset by the reversal of $0.2 million, $0.7 million and $0.6 million for 2005,2004 and 2003, respectively, due to the favorable resolution of prior yearrestructuring items.

***OtherCharges***

During the second quarterof 2005, we identified $0.3 million of other charges recorded in the prior yearfor facility closures that were unnecessary and reversed these charges toincome. During 2004, we incurred other charges of $5.6 million to terminate theemployment contract of our former chief executive officer. 

***Operating Segments***

We evaluate the performance of our operating segmentsand allocate resources based on revenues, gross profit and segment operatingprofit. Segment operating profit from continuing operations is defined asincome before unallocated corporate costs, amortization expense, interestexpense, interest income, income taxes and special items (restructuring andother charges and gain (loss) on retirement of debt). All 

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material intercompanyrevenues and expenses have been eliminated. Additionally, amounts related todiscontinued operations have been excluded from the segment information belowand are presented as discontinued operations in the consolidated statements ofoperations.

Informationon operating segments and a reconciliation to earnings (loss) from continuingoperations before income taxes, discontinued operations and cumulative effectof changes in accounting principle for the periods indicated are as follows (inthousands):

| ** **                                                                                  | ** ** | **Fiscal Years** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                  | ** ** | ** **            | ** ** | **% of  Total** | ** ** | ** ** | ** ** | **% of  Total** | ** ** | ** ** | ** ** | **% of  Total** | ** ** |
| **Revenues:**                                                                               |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Staffing Services                                                                           |       | $                     | 1,521,486  |   | 77.2 | % | $ | 1,623,133 |   | 79.9 | % | $ | 1,382,964 |   | 79.8 | % |
| Professional Services                                                                       |       | 450,179               |       | 22.8 | % | 409,582 |   | 20.1 | % | 350,797 |   | 20.2 | % |
| **Total**                                                                                   |       | $                     | 1,971,665  |   | 100.0 | % | $ | 2,032,715 |   | 100.0 | % | $ | 1,733,761 |   | 100.0 | % |
| ** **                                                                                  | ** ** | ** **            | ** ** | **% of  Revenues** | ** ** | ** ** | ** ** | **% of  Revenues** | ** ** | ** ** | ** ** | **% of  Revenues** | ** ** |
| **Gross  Profit:**                                                                          |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Staffing Services                                                                           |       | $                     | 291,147    |   | 19.1 | % | $ | 297,147 |   | 18.3 | % | $ | 275,243 |   | 19.9 | % |
| Professional Services                                                                       |       | 143,143               |       | 31.8 | % | 128,464 |   | 31.4 | % | 112,885 |   | 32.2 | % |
| **Total**                                                                                   |       | $                     | 434,290    |   | 22.0 | % | $ | 425,611 |   | 20.9 | % | $ | 388,128 |   | 22.4 | % |
| **Segment Operating Profit:**                                                               |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Staffing Services                                                                           |       | $                     | 24,917     |   | 1.6 | % | $ | 25,475 |   | 1.6 | % | $ | 29,746 |   | 2.2 | % |
| Professional Services                                                                       |       | 19,236                |       | 4.3 | % | 19,769 |   | 4.8 | % | 4,717 |   | 1.3 | % |
| **Total**                                                                                   |       | 44,153                |       | 2.2 | % | 45,244 |   | 2.2 | % | 34,463 |   | 2.0 | % |
| Unallocated corporate  costs                                                                |       | (13,832               | )          |   |   | (20,637 | ) |   |   | (30,801 | ) |   |   |
| Amortization expense                                                                        |       | (416                  | )          |   |   | (543 | ) |   |   | (448 | ) |   |   |
| Interest expense                                                                            |       | (3,205                | )          |   |   | (5,766 | ) |   |   | (6,178 | ) |   |   |
| Interest income                                                                             |       | 4,072                 |       |   |   | 3,815 |   |   |   | 5,105 |   |   |   |
| Restructuring and other charges                                                             |       | (1,763                | )          |   |   | (8,395 | ) |   |   | (4,205 | ) |   |   |
| Gain (loss) on retirement of debt                                                      |       | —                |       |   |   | (841 | ) |   |   | 313 |   |   |   |
| Earnings (loss)  from continuing operations before income taxes and discontinued operations |       | $                     | 29,009     |   |   |   | $ | 12,877 |   |   |   | $ | (1,751 | ) |   |   |

 

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***Segment Operating Results***

***Staffing Services***

Informationon the Staffing Services operating segment’s skill sets and service lines forthe periods indicated are as follows (in thousands):

| ** **                           | ** ** | **Fiscal Years** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Revenue by Skill*:**               |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Clerical                             |       | $                     | 935,523    |   |   | 61.5 | % |   | $ | 1,022,651 |   |   | 63.0 | % |   | $ | 925,121 |   |   | 66.9 | % |   |
| Light Industrial                     |       | 585,963               |       |   | 38.5 | % |   | 600,482 |   |   | 37.0 | % |   | 457,843 |   |   | 33.1 | % |   |
| Segment Revenue                      |       | $                     | 1,521,486  |   |   | 100.0 | % |   | $ | 1,623,133 |   |   | 100.0 | % |   | $ | 1,382,964 |   |   | 100.0 | % |   |
| **Revenue  by Service:**             |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary Staffing                   |       | $                     | 1,312,515  |   |   | 86.2 | % |   | $ | 1,310,755 |   |   | 80.8 | % |   | $ | 1,054,516 |   |   | 76.2 | % |   |
| Managed Services*                    |       | 191,232               |       |   | 12.6 | % |   | 297,627 |   |   | 18.3 | % |   | 316,355 |   |   | 22.9 | % |   |
| Permanent Placement                  |       | 17,739                |       |   | 1.2 | % |   | 14,751 |   |   | 0.9 | % |   | 12,093 |   |   | 0.9 | % |   |
| Segment Revenue                      |       | $                     | 1,521,486  |   |   | 100.0 | % |   | $ | 1,623,133 |   |   | 100.0 | % |   | $ | 1,382,964 |   |   | 100.0 | % |   |
| **Gross  Profit Margin by Service:** |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (As % of Applicable  Revenue)        |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary Staffing                   |       | 16.8                  | %          |   |   |   |   | 15.7 | % |   |   |   |   | 17.0 | % |   |   |   |   |
| Managed Services                     |       | 27.8                  | %          |   |   |   |   | 25.7 | % |   |   |   |   | 26.5 | % |   |   |   |   |
| Permanent Placement                  |       | 100.0                 | %          |   |   |   |   | 100.0 | % |   |   |   |   | 100.0 | % |   |   |   |   |
| Total Staffing  Services             |       | 19.1                  | %          |   |   |   |   | 18.3 | % |   |   |   |   | 19.9 | % |   |   |   |   |

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*******                   **Managed services revenueand revenue by skill for 2004 and 2003 have not been adjusted for the movementof certain managed services contracts within Staffing Services during thesecond quarter of 2005 to temporary staffing within Professional Services. Theamount moved for the fiscal year ended January 1, 2006 was $14.1 million.Management responsibility for these contracts moved to Professional Services.

***Fiscal 2005 Compared with 2004***

*Revenues—**Staffing*Servicesrevenue decreased 6.3% to $1,521.5 million in 2005 from $1,623.1 million in the prior year, or 5.1%after considering the impact of the 53rd week in 2004. Revenue decreases are primarilydue to a decrease in managed services of $106.4 million, which includes theloss of one large managed service customer and several smaller contracts primarilyas the result of the intentional exit of certain staffing clients who did notmeet minimum thresholds, lower outplacement revenues due to a slowdown incorporate downsizing trends, the movement of $14.1 million in revenue for locally based technology servicescontracts from this segment to our Professional Services segment. The U.S.economy has continued to produce solid job growth, however, the GDP increasehas slowed down to 3.5% from 4.4% in the prior year. In this segment, revenuesfrom our largest 250 customers decreased while revenues from our smallercustomers increased due to our focus in targeted growth with small andmid-sized customers. Customers in the telecommunications, informationtechnology (IT), manufacturing, media and pharmaceutical industries representedour largest revenue decrease. This decrease was partially offset by highergrowth in the transportation, service, retail and food services industries.

·       Byskill—Clerical revenue decreased 8.5% and light industrial revenue decreased 2.4%from prior year levels, or 7.4% and 1.2% after considering the impact of the 53rd week in 2004. The decrease in clericalrevenues was primarily due to decreases in managed services as discussed below.

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·       Byservice—Managed services revenue decreased 35.7% from prior year levels due tothe loss of one large managed service customer and several smaller contracts,lower outplacement revenues due to a slowdown in corporate downsizing trendsand, the movement of $14.1 million inrevenue for locally based technology services contracts from this segment toour Professional Services segment. During 2005, managed services revenuesstabilized and showed sequential growth of 3.4% in the fourth quarter of 2005compared with the prior quarter as a result of an increase in recruitmentoutsourcing activity. Permanent placement revenues increased 20.3% overthe prior year due to the addition of recruiters. Temporary staffing revenueimproved slightly over the prior year despite the impact of the extra week in 2004. During 2005 we focused on pricing discipline and our growth mayhave been somewhat limited from potential and some existing customers that didnot meet minimum pricing thresholds.

*Gross Profit—**Gross* profitdecreased 2.0% to $291.1 million from $297.1 million in the prior year. Theoverall gross profit margin was 19.1% in 2005 compared with 18.3% in the prioryear, or an increase of 80 basis points. The increase in the gross profitmargin was primarily due to (i) pricing increases which resulted inimproved pay/bill spreads and higher profit recruitment processing outsourcing(75 basis points) and (ii) a decrease in insurance costs (60 basispoints), particularly for workers’ compensation due to improvements in prioryear loss estimates, improved safety programs, and favorable law changes. Theseincreases were partially offset by a shift in service mix away from the managedservices (40 basis points) and higher state unemployment taxes (15 basispoints).

*Segment Operating Profit—**Staffing*Servicessegment operating profit was $24.9 million compared with $25.5 million in theprior year. The decrease from prior year was due to lower gross profits of $6.0million partially offset by lower operating expenses of $5.4 million. Operatingexpenses decreased 2.0% compared with 2004, a slower decline than the revenuedecrease of 6.3%. Decreases in operating expenses were primarily associatedwith cost reductions made due to the managed services customer loss and loweroutplacement activity. Operating expenses as a percentage of revenue increasedto 17.5% compared with 16.7% inthe prior year primarily due to revenue volume decreases at a higher rate thancost reductions.

*Outlook—**The* market remainshighly competitive and is characterized by intense pricing pressures andcompetitive bidding. We plan to monitor pricing practices so that we can growat market rates while maintaining pricing discipline. If the US economycontinues to produce solid job growth, we would expect to see continuedincreases in permanent placement and temporary staffing. The outlook formanaged services in 2006 appears to be stabilizing, and we expect to seeincreased recruitment outsourcing opportunities. We plan to continue focusingour resources by continuing to target small and mid-sized customers where pricingpressures tend to be less severe. We will also try to increase accountpenetration by building on relationships with existing clients to whom we arecurrently providing services. Despite these efforts and economic growth, thereis no assurance that revenues will grow in 2006.

***Fiscal 2004 Compared with 2003***

*Revenues—**Staffing*Servicesrevenues increased 17.4% to $1,623.1 million in 2004 from$1,383.0 million in the prior year, including acquisition growth of 1.5%from our Canadian operations and an increase of approximately 1.4% due to anadditional week in 2004. This year over year growth was due to economic growth(GDP increased 4.4% during 2004) and the success of our marketing effortswithin the United States. A number of new marketing initiatives were undertakenand our Staffing Services operating segment grew at a faster rate than ourlargest competitors. Our largest 250 customers grew at a slower rate than thesmaller customers in this operating segment. Customers in thetelecommunications, manufacturing, retail, consulting and informationtechnology (IT) industries represented our largest revenue growth.

·       Byskill—Clerical revenues increased 10.5% and light industrial revenues increased31.2% from the prior year due to the reasons mentioned above. 

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·       Byservice—Temporary staffing increased 24.3%, compared with the prior year, dueto the reasons mentioned above. Managed services decreased 5.9% from the prioryear as customer losses and decreases in revenues from existing customersparticularly for IT managed services such as help desk and data centers morethan offset increases in outsourced recruitment and administrative services. Permanentplacement revenues increased 22.0% over the prior year due to the addition ofrecruitment resources and increased market demand.

*GrossProfit—**Gross* profits increased 8.0% to$297.1 million from $275.2 million in the prior year. Of thisincrease, $3.9 million or 1.4% was acquisition growth from our Canadianoperations, and $18.0 million, or 6.6% organic growth. The overall grossprofit percentage was 18.3% in 2004 compared to 19.9% in the prior year, or adecrease of about 160 basis points. The decrease in the gross profit margin isdue primarily to pricing pressure that we began to experience in 2003 (75 basispoints), a shift in the mix of business to lower margin temporary staffingservices (40 basis points), and an increase in state unemployment and federalemployment taxes (90 basis points), partially offset by a decrease in employeebenefit costs (45 basis points).

*Segment Operating Profit—**Staffing* Servicessegment operating profit was $25.5 million compared to $29.7 millionin the prior year. The decrease from the prior year was due to higher operatingexpenses of $26.1 million which was partially offset by the increase ingross profits of $21.9 million described above. The increased operatingexpenses were primarily associated with a higher revenues base, and includedhigher bonus, bad debt expenses, temporary help, salaries and licenseecommissions, which was only partially offset by lower travel and meetingexpenses. Operating expenses as a percentage of revenues decreased to 16.7%compared with 17.8% in the prior year due to greater leveraging of expenses. 

***Professional Services***

Informationon the Professional Services operating segment’s skill sets and service linesfor the periods indicated are as follows (in thousands):

| ** **                           | ** ** | **Fiscal Years** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | ** **            | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Revenue by Skill*:**               |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Information Technology               |       | $                     | 288,309    |   |   | 64.1 | % |   | $ | 267,108 |   |   | 65.2 | % |   | $ | 229,186 |   |   | 65.3 | % |   |
| Finance & Accounting        |       | 105,001               |       |   | 23.3 | % |   | 94,190 |   |   | 23.0 | % |   | 83,393 |   |   | 23.8 | % |   |
| Other                                |       | 56,869                |       |   | 12.6 | % |   | 48,284 |   |   | 11.8 | % |   | 38,218 |   |   | 10.9 | % |   |
| Segment Revenues                     |       | $                     | 450,179    |   |   | 100.0 | % |   | $ | 409,582 |   |   | 100.0 | % |   | $ | 350,797 |   |   | 100.0 | % |   |
| **Revenue  by Service:**             |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary Staffing*                  |       | $                     | 402,286    |   |   | 89.4 | % |   | $ | 368,788 |   |   | 90.0 | % |   | $ | 319,699 |   |   | 91.1 | % |   |
| Permanent Placement                  |       | 47,893                |       |   | 10.6 | % |   | 40,794 |   |   | 10.0 | % |   | 31,098 |   |   | 8.9 | % |   |
| Segment Revenues                     |       | $                     | 450,179    |   |   | 100.0 | % |   | $ | 409,582 |   |   | 100.0 | % |   | $ | 350,797 |   |   | 100.0 | % |   |
| **Gross  Profit Margin by Service:** |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (As % of Applicable  Revenue)        |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary Staffing                   |       | 23.7                  | %          |   |   |   |   | 23.8 | % |   |   |   |   | 25.6 | % |   |   |   |   |
| Permanent Placement                  |       | 100.0                 | %          |   |   |   |   | 100.0 | % |   |   |   |   | 100.0 | % |   |   |   |   |
| Total  Professional Services         |       | 31.8                  | %          |   |   |   |   | 31.4 | % |   |   |   |   | 32.2 | % |   |   |   |   |

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*                    Temporarystaffing revenue and revenue by skill for 2004 and 2003 have not been adjustedfor the movement of certain managed services contracts within Staffing Servicesduring the second quarter of 

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2005 toProfessional Services. The amount moved for the fiscal year ended January 1,2006 was $14.1 million. Management responsibility for these contracts moved toProfessional Services.

***Fiscal 2005 Compared with 2004***

*Revenues—**Professional* Servicesrevenue increased 9.9%, or $40.6 million, to $450.2 million in 2005 from $409.6million in the prior year, or 11.7% after considering the impact of the 53rd week in 2004. Customer demand continued to bestrong in 2005 and revenue also increased as a result of continued investmentsin hiring of additional sales and recruiting staff. Most of the increase, $33.5million, was in temporary staffing revenues and included $14.1 million due tothe movement in revenue for locally based technology service contracts from ourStaffing Services segment to this segment.

·       Byskill—Finance and accounting increased 11.5% largely due to continued strongdemand, which was primarily due to increased regulatory reporting requirementsfor US public companies. Information technology (“IT”) increased 2.7% from theprior year (excluding the movement in 2005 of approximately $14.1 million oflocally based technology services contracts from Staffing Services) due toincreased temporary staffing and permanent placement demand. Revenue from otherskills increased primarily due to increased demand for temporary staffing inthe legal, human resources, and sales and marketing sectors.

·       Byservice—Temporary staffing increased 9.1% primarily due to continued demand forfinance and accounting and IT personnel and the movement of $14.1 million oflocally based technology services contracts from Staffing Services. Permanentplacement revenue increased 17.4% primarily as a result of an increased focuson IT combined with the addition to the recruiter headcount.

*GrossProfit—**Professional* Services gross profitincreased 11.4% to $143.1 million from $128.5****million in the same prior year period. The overall gross profitmargin was 31.8% in 2005 compared with 31.4%****inthe prior year. This 40 basis point increase in gross profit margin isprimarily due to lower employee benefits and paid time off costs (90 basispoints), and a change in service mix as permanent placement has grown fasterthan temporary staffing (50 basis points). These increases were partiallyoffset by (i) the impact that a change in customer mix had on overallpay/bill spreads; in 2005, we focused on expanding our penetration withinexisting accounts which have lower pricing (80 basis points) and (ii) higherstate unemployment taxes (20 basis points).

*SegmentOperating Profit—**Professional* Services segmentoperating profit was $19.2 million compared with $19.8 million in the prioryear. The decrease in operating profit from the prior year was the result ofthe increase in gross profits of $14.6 million, described above, being morethan offset by an increase in operating expenses of $15.2 million. Operatingexpenses as a percentage of revenues increased to 27.5% compared with 26.5% inthe prior year. The increase in operating expenses is primarily due to (i) increasedincentive compensation as a result of higher volume, (ii) higher employeecosts as a result of growth in personnel due to increased sales and recruiterheadcounts, and the initial investment in staff as they increase theirproductivity levels, and (iii) increased candidate advertising expense.

*Outlook—**In* 2005, ProfessionalServices benefited from the continuation of the 2004 trends of job growth andclient investment. The technology skill set experienced continued growththroughout 2005. Growth in IT in 2006 is expected to continue, however, it willlargely depend on our ability to further penetrate existing clientrelationships upon customer project related work. We expect to continuecapitalizing on these growth opportunities as a result of the investments wemade in 2005 in additional sales and recruiting personnel. Within the financeand accounting skill sets, we expect growth to continue but possibly at a lowerrate as projects which resulted from the increased regulatory environment,transition from implementation to maintenance. As a result, there is noassurance that revenues for the finance and accounting skill sets will continueto grow at the same pace in 2006.

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***Fiscal 2004 Compared with 2003***

*Revenues—**Professional* Servicesrevenues increased 16.8% to $409.6 million in 2004 from$350.8 million in the prior year, including an increase of approximately1.9% due to an additional week in 2004. Market conditions substantially improvedover the prior year and economic recovery (4.4% GDP growth) along withincreased governmental regulation contributed to overall growth. Additionalrecruitment resources are being added to accelerate growth.

·       Byskill—Information technology increased 16.5% from prior year due to increasedmarket demand for IT consultants. Finance and accounting increased 12.9% ascompanies continued to actively address increased regulatory reportingrequirements in the United States, which more than offset decreases in themortgage banking industry. Increased revenues in other skill-sets wereprimarily driven by increased demand for temporary staffing in the legal andhuman resources sectors.

·       Byservice—Temporary staffing increased to meet demand for technology skills andto a lesser extent for finance and accounting personnel in response toincreased regulatory and reporting requirements. Permanent placement servicesincreased 31.2% due to improving market conditions and a higher demand foremployees in finance and accounting and an increased emphasis on IT.

*GrossProfit—**Professional* Services gross profitsincreased 13.8% to $128.5 million in 2004 from $112.9 million in theprior year. The overall gross profit margin was 31.4% in 2004 compared with32.2% in the prior year or an 80 basis point decrease. This decrease in grossprofit margin is due to lower pay/bill spreads experienced in the second halfof 2004 (200 basis points), increased state unemployment and federal employmenttaxes (30 basis points). These factors have been partially offset by a shift inbusiness mix towards permanent placement business (80 basis points), and loweremployee benefit costs (70 basis points).

*Segment Operating Profit—**Professional* Servicessegment operating profit was $19.8 million compared to $4.7 millionin the prior year. The increased profit from prior year was due to the increasein gross profit of $15.6 million as described above. Operating expensesincreased $0.5 million and as a percentage of revenues were 26.5% comparedto 30.8% in the prior year. Operating expenses did not increase significantlyas synergies obtained from combining the former technology and professionalrecruiting business units largely offset higher bonus and commission paymentsdue to higher profits.

***Unallocated corporate costs***

*2005compared with 2004—**Unallocated* corporate costsdecreased $6.8 million to $13.8 million in 2005 compared with $20.6million in 2004. The decrease is primarily due to lower costs as a result ofthe impact of our enterprise-wide information system which was completed during2004. As a percentage of consolidated revenue, these costs were 0.7% during2005 compared with 1.0%****in 2004.

*2004 compared with 2003—**Unallocated* corporatecosts decreased 33.0% to $20.6 million in 2004 compared to $30.8 millionin 2003. Unallocated corporate costs decreased in 2004 primarily as a result ofthe following items: decreases in general corporate overhead($3.6 million); lower non-capitalizable costs related to theimplementation of our enterprise-wide information system ($1.6 million);the recovery of an amount owed under a purchase agreement that was written-offin 2002; and a favorable judgment in the Interim HealthCare lawsuit. During2004, we recovered $1.4 million owed under a purchase agreement that was written-offin 2002 associated with the sale of a business, unpaid rent costs and therelated legal fees. The favorable judgment in the Interim HealthCare lawsuitresulted in a total decrease of $3.6 million in unallocated corporatecosts from 2003. See Note 12, Commitments and Contingencies in theaccompanying consolidated financial statements for further discussion. As apercentage of consolidated revenues, unallocated corporate costs were 1.0%during 2004 compared to 1.8% in 2003.

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***Liquidity and Capital Resources***

Historically, we have financed our operations throughexisting cash balances, operating cash flows and revolving lines of credit. Ourprincipal uses of cash are capital expenditures, working capital needs andrepayment of debt. The nature of our business requires payment of wages to ourtemporary employees and consultants on a weekly basis, while payments fromcustomers are received afterwards. Our DSO at January 1, 2006 was 54 days.

*Cash Flows*

As ofJanuary 1, 2006, we had total cash resources available of$30.2 million (an increase of $25.0 million from December 31, 2004).In 2005 we continued paying-off our long term debt, and as of January 1, 2006,we have $6.9 million in short-term and long-term debt, a decrease of $42.4million compared with December 31, 2004. Cash flows from operating,investing and financing activities, as reflected in the accompanyingconsolidated statements of cash flows, are summarized as follows (inthousands):

| ** **                                            | ** ** | **Fiscal Years** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash Provided By (Used In):                           |       |                  |       |   |   |   |   |
| Operating Activities                                  |       | $                     | 72,285     |   | $ | 6,077 |   | $ | 50,040 |   |
| Investing Activities                                  |       | 18,740                |       | 33,997 |   | (82,241 | ) |
| Financing Activities                                  |       | (66,148               | )          | (56,322 | ) | (14,047 | ) |
| Effect of exchange rates on cash                      |       | 132                   |       | 154 |   | 2,040 |   |
| Net increase (decrease)  in cash and cash equivalents |       | $                     | 25,009     |   | $ | (16,094 | ) | $ | (44,208 | ) |

 

**Operating cash flows**

Operating cash flows for 2005 of $72.3 million areprimarily comprised of earnings of $12.0 million plus the accrual for loss ondisposal of discontinued operations of $5.7 million, plus non-cash depreciationand amortization of $21.9 million, a reduction in working capital of $21.4million and a non-cash deferred income tax expense of $6.3 million. Workingcapital was reduced primarily due to (i) lower accounts receivable as we loweredDSO from 60 days at the end of December 2004 to 54 days as ofJanuary 1, 2006 and as we collected accounts receivable from higherrevenues in the prior period, and (ii) the receipt of an income tax refundof $7.5 million. Reductions in accounts receivable and tax refunds receivedwere partially offset by increases in payouts for accounts payable and accruedliabilities. Each one day decrease in DSO approximates $5.5 million of workingcapital.

Operating cash flows for 2004 of $6.1 million areprimarily comprised of earnings, excluding the gain on disposal of discontinuedoperations, of $8.8 million plus non-cash expenses for depreciation andamortization of $28.8 million, offset by working capital usage of$34.0 million and a non-cash deferred income tax benefit of$8.9 million. Working capital was used primarily to fund accountsreceivable as DSO increased to 60 days from 55 days in the prioryear.

Operating cash flows for 2003 of $50.0 millionare primarily comprised of cash provided by reductions in working capital of$28.4 million plus non-cash expenses for depreciation and amortization of$29.3 million and deferred compensation of $7.4 million, partiallyoffset by the net loss, excluding the loss on disposal of discontinued operations,of $9.8 million and non-cash deferred tax benefit of $10.2 million.Working capital for 2003 was provided primarily through federal tax refunds of$80.9 million, partially offset by a use of cash of $38.7 million tofund accounts receivable as DSO increased to 55 days from 49 days inthe prior year.

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**Investing cash flows**

Cash provided by investing activities for 2005 of$18.7 million is primarily related to (i) net withdrawals of $19.1 millionfrom our insurance deposits for claim payments, (ii) proceeds from a notereceivable from the 2004 sale of our Australian subsidiary, (iii) proceedsfrom the dispositions of our call centers of $1.4 million, and (iv) collectionson franchise notes, partially offset by capital expenditures of $9.7 million. Capitalexpenditures were primarily for further enhancements to our enterprise-wideinformation system and for client and candidate facing software improvements.

Investing cash flows for 2004 of $34.0 millionare primarily related to proceeds from the sale of discontinued operations of$43.7 million, offset by capital expenditures of $12.1 million. Proceedsfrom the sale of discontinued operations (net of cash sold) included$2.0 million, $13.7 million, $25.4 million and $2.6 millionfrom the sale of our operations in The Netherlands, Asia/Pacific region, UnitedKingdom and the court reporting business, respectively. Capital expendituresincluded the investment in our enterprise-wide information system, whichamounted to $5.8 million.

Investing cash outflows for 2003 of $82.2 millionare primarily related to capital expenditures of $60.5 million. Thesecapital expenditures included the investment in our enterprise-wide informationsystem, which amounted to $38.6 million ($45.8 million includingnotes payable for capital purchases). We also paid $10.7 million (excludingthe assumption of debt) to acquire 85% of our Canadian franchise during thesecond quarter of 2003.

We expect our total 2006capital expenditures to be between $16.0 million and $18.0 millionand to be funded through operating cash flow or through borrowings under ourexisting revolving lines of credit.

**Financing cash flows**

Financing cash outflows for 2005 of $66.1 million areprimarily due to the repayments of borrowings from lines of credit and notespayable of $45.7 million and the repurchase of common stock of $24.0 million. OnMay 24, 2005, the Board of Directors authorized the repurchase of up tosix million shares or approximately 10% of the Company’s outstanding commonstock. Share repurchases continue to be made in open-market transactions or in privatelynegotiated transactions, and may continue up to the six million sharesauthorized. The repurchase program does not require Spherion to acquire anyspecific number of shares and may be terminated at any time.

Financing cash outflows for 2004 of $56.3 millionare primarily due to the retirement of the remaining 41¤2% convertible subordinatednotes in the amount of $89.7 million, partially offset by net borrowingsfrom lines of credit used to fund working capital.

Financing cash outflowsfor 2003 of $14.0 million are primarily for the retirement of a portion ofour 41¤2% convertible subordinatednotes, the repayment of a portion of the debt assumed in conjunction with theCanadian acquisition and repayment of a portion of the short-term notes payablefor software and related costs.

*Financing*

We believe that a combination of our existing cashbalances, other liquid assets, operating cash flows, and existing revolvinglines of credit, taken together, provide adequate resources to fund ongoingoperating requirements, however, our operating cash flow could be impacted byfactors outside of our control.

We have a U.S. dollar revolving line of credit in theamount of $250.0 million that is secured by substantially all of our domesticaccounts receivable. At our option, the amount available can be increased to$300.0 million. As of January 1, 2006, there were no amounts outstandingunder this facility and as of 

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December 31, 2004,there was $25.0 million outstanding. Total availability under this facility was$189.2 million as of January 1, 2006 and is calculated as eligiblereceivables of $221.0 million, less: amounts outstanding, letters ofcredit of $4.1 million and a one week payroll reserve of$27.7 million. Interest on this line of credit is based upon the durationof the loan, availability under the line and other conditions and would havebeen approximately 5.96% (LIBOR plus a spread) or approximately 7.00% (primeplus a spread) as of January 1, 2006. We pay an unused line fee in therange of 0.25% to 0.38% per annum that is determined by the unused portion ofthe revolving line of credit as well as a letter of credit fee of 0.25% perannum. This line of credit expires in 2010.

We also have a Canadiandollar revolving line of credit (secured by Canadian accounts receivable) thatmatures July 2007. This facility provides up to CAD$13.0 million ofon-balance sheet financing (approximately $11.2 million at currentexchange rates). As of January 1, 2006, there were no borrowingsoutstanding under this facility, and as of December 31, 2004, there was$7.1 million outstanding. As of January 1, 2006, the interest rate foramounts borrowed on this facility would have approximated 6.0% (Canadian primeplus a spread). We incurred interest charges under this facility at an averageinterest rate approximating 5.25% during 2005. A commitment fee of 0.5% perannum is payable based on the unused portion of the revolving line of credit. Weguarantee the Canadian dollar revolving line of credit.

Our revolving lines of credit provide for certainaffirmative and negative covenants which may limit the total availability underthese revolving lines of credit based upon our ability to meet these covenants.These covenants include, but are not limited to: a fixed charge coverage ratio;limitations on capital expenditures; additional debt incurred; mergers,consolidations or sales; and transactions with subsidiaries and related parties.Failure to meet compliance with one or more of these covenants in the futurecould affect the amount of availability we have to borrow against and as aresult, our liquidity and financial condition may be adversely affected. At January 1,2006, we were in compliance with the requirements of these covenants.

During 2004, we retired our remaining U.S. dollarconvertible subordinated notes (the “Notes”) and paid a premium of $0.6 millionto retire the Notes and wrote-off the remaining bond issuance costs of $0.2 million,both of which are included in “Other gain (loss)” in the accompanyingconsolidation statements of operations. During 2003, we retired an aggregateface value of $7.0 million of the Notes for a purchase price of $6.6 million. Werecorded a gain, net of bond issuance cost write-offs of $0.3 million for thefiscal year ending December 26, 2003, which is included in “Other gain(loss)” in the accompanying consolidated statements of operations.

In October 2000, we issued $8.0 million ofinterest-bearing convertible promissory notes due October 1, 2005 inconjunction with the purchase of 80% of the membership interests of JobOptions,LLC. These notes were paid off in full at the end of the third quarter in 2005.

We have a voluntarynon-qualified deferred compensation plan for highly compensated employees whoare not eligible to participate in Spherion’s 401(k) Benefit Plan. Theplan is not funded, however, we maintained investments of $12.9 million, at January 1,2006, which are included in “Intangibles and other assets” in the accompanyingconsolidated balance sheets. In January 2006, we surrendered the remainingcompany-owned life insurance policies of $12.9 million and invested these fundsand an additional $10.7 million in a portfolio of mutual funds to fully matchthe deferred compensation liability of this plan.

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***ContractualObligations and Commitments (in thousands)***

| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** |
| Long-term debt  obligations     |       | $                                         | 2,237      |   | $ | 1,638 |   | $ | 300 |   | $ | 299 |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Capital lease  obligation       |       | 5,056                                     |       | 1,589 |   | 1,189 |   | 636 |   | 636 |   | 635 |   |   | 371 |   |   |
| Operating lease  obligations(1) |       | 67,891                                    |       | 24,169 |   | 18,197 |   | 11,563 |   | 7,621 |   | 3,988 |   |   | 2,353 |   |   |
| Purchase  obligations(2)        |       | 94,765                                    |       | 22,799 |   | 19,187 |   | 15,404 |   | 14,760 |   | 14,774 |   |   | 7,841 |   |   |
| Total                           |       | $                                         | 169,949    |   | $ | 50,195 |   | $ | 38,873 |   | $ | 27,902 |   | $ | 23,017 |   | $ | 19,397 |   |   | $ | 10,565 |   |   |

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(1)          Operating leaseobligations for rent and equipment will be offset by future sublease income of$2.8 million in 2006, $2.8 million in 2007, $2.7 million in2008, $2.6 million in 2009, $0.8 million in 2010 and thereafter.

(2)          Purchase obligationsinclude normal and customary contracts and minimum spend contracts in theordinary course of business, primarily information technology, outsourcing andmaintenance contracts.

In connection with theacquisition of our Canadian franchise in 2003 we entered into a put/callagreement with the minority interest holder, whereby the minority interestholder can put the remaining 15% interest in the Canadian operations back to usany time after January 1, 2006, or, as amended, we can call the remaining15% interest any time after January 1, 2008. If the put or the call wereexercised, the purchase price would be primarily determined based upon the netassets and gross profits from this operation in future periods. Based uponthese factors, the estimated purchase price using 2005 operating results andnet assets as of the end of the year would approximate $3.0 million. Asthis amount is not determinable or certain to be paid at this point in time, itis not included in the table above.

***Off-Balance Sheet Arrangements***

We do not have anysignificant off-balance sheet arrangements.

***Critical Accounting Policies***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses and the disclosure ofcontingencies. Due to the inherent uncertainty involved in making estimates,actual results reported in future periods may be materially different fromthose estimates. The following policies are those that we consider to be themost critical. See Note 1, Summary of Significant Accounting Policies, forfurther description of these and all other accounting policies.

*Allowance for DoubtfulAccounts*—Management analyzesaged receivables and the related allowance for doubtful accounts on a quarterlybasis. We use historical experience in assessing the adequacy of the reserveand this includes reviewing: net write-offs in relation to revenues, theallowance in comparison to the gross accounts receivable balance andcomparative agings. Receivables deemed by management to be uncollectible basedon historical trends, are reserved for and/or consequently written-off. Historically,losses from uncollectible accounts have not exceeded our allowance. Due to thejudgment used in making these assumptions, the ultimate amount of accountsreceivable that become uncollectible could differ from our original estimatedue to a worsening financial position in the economy or with our customers andcould result in charges or credits to amounts recorded in selling, general andadministrative expenses.

*Intangible Assets*—As required by Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,”goodwill and other intangible assets with indefinite lives are not 

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*amortized,and are tested for impairment on an annual basis, or earlier if an event occursor circumstances changes that would more likely than not reduce the fair valueof a reporting unit below its carrying amount. Spherion performs its annualimpairment test of goodwill as of its November month-end. The 2005, 2004and 2003 tests did not indicate the existence of impairment. Even though theseannual impairment tests did not result in impairment, due to the judgmentinherent in estimating future cash flows, there could be further charges infuture years to operations for up to the full value of our goodwill balance,which is currently $48.9 million, if the markets in which we operatedecline or if the market values of competitors decrease.*

*Accrued Self-InsuranceLosses*—We retain a portion ofthe risk under our workers’ compensation, general liability/professionalliability, employment practices liability insurance programs and healthinsurance benefits programs. Estimated losses for workers’ compensation,general liability/professional liability and employment practices have beendiscounted at 4.4% and 4.2% at January 1, 2006 and December 31, 2004,respectively, and are based on actuarial estimates. Changes in legislation, thecost of health care services, claims processing costs, or increased litigationcould affect the adequacy of these estimated liabilities. Prolonged changes ininterest rates for risk-free U.S. government bonds could also affect thediscount rate used in estimating these liabilities. An increase or decrease of1% in the discount rate would result in a reduction or increase, respectively,to pre-tax expense of approximately $1.7 million. Management reviews theseassumptions and related reserves and changes in the estimates of these accrualsare charged or credited to operations in the period determined. Due to thejudgment used in recording these reserves, the ultimate amount of reserves thatare needed could differ significantly from our original estimate and couldresult in charges or credits to amounts recorded in cost of services and /orselling, general and administrative expenses.

*Stock-BasedCompensation*—We account forstock-based compensation to employees using the intrinsic value method asprescribed by Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations. Accordingly,compensation cost for stock options issued to employees is measured as theexcess, if any, of the quoted market price of our stock at the date of grantover the amount an employee must pay for the stock.

No stock-based employee compensation costrelating to stock options is reflected in net earnings (loss), as all optionsgranted under this plan had exercise prices equal to the market value of theunderlying common stock on the date of grant. If we had applied the fairvalue recognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation, our net earnings forthe year ended January 1, 2006 would have been $10.1 million or $0.16per diluted share. The fair value of options at grant date was estimated usingthe Black-Scholes multiple option model. Changes in any of theassumptions used in this model for 2005 (expected life of 3.3 years, a weighted-averagerisk free interest rate of 3.6%, volatility of 52% and no expected dividends),would change the weighted average per share fair value of $3.14. SFAS No. 123(R),“Share-Based Payment,” issued in December 2004, requires us toexpense stock options beginning in fiscal year 2006. At that time, changes oradditions to assumptions or a change in the option-pricing model used,will impact our financial operating results. If our stock continues toexperience a high degree of price volatility or if employees begin to holdoptions for a longer period of time, the fair value of our options and our costwould increase. The assumptions we used are based upon our historical experience,however future results could differ from these assumptions.

*Income Taxes*—At January 1,2006, we had a net deferred tax asset of $161.2 million. This deferred taxasset was evaluated under the guidelines of SFAS No. 109, “Accounting forIncome Taxes,” and a determination on the basis of objective factors was madethat the asset will be realized through future years taxable earnings. If wedetermine that future taxable earnings will be insufficient to recover thedeferred tax assets, we will be required to write-off all or a portion of thedeferred tax asset by a charge to earnings. These objective factors includehistorical taxable income, normalized for non-recurring income 

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*andexpense items. Using an average of this income projected to future years, ifthe asset can be recovered within the statutory carryforward periods there isno impairment. If our future earnings, after being adjusted for non-recurringitems, should decrease from present levels and remain low for a period of 1 to2 years, there could be impairment of the existing deferred tax asset.*

***New Accounting Pronouncements***

See Note 1, Summaryof Significant Accounting Policies in the accompanying consolidated financialstatements for discussion of New Accounting Pronouncements.

***Inflation***

The effects of inflationon our operations were not significant during the periods presented in theaccompanying consolidated financial statements.

***Seasonality And Cyclical Nature Of Business***

*Seasonality*—Our businesses are seasonal in nature with customerrelated demand generally at its highest point during the third and fourthquarters and lowest during the first quarter. The third and fourth quarters arenormally higher as our customers increase their temporary workforces for theholiday season. We typically experience a decrease of approximately 5 to 10% inour first quarter revenues in comparison with fourth quarter revenues. Thedecrease in first quarter revenues in comparison with the preceding fourthquarters for 2005, 2004 and 2003 was 12%, 0%, and 8%, respectively. Firstquarter revenues of 2005 compared with the preceding fourth quarter growthdecreased partially due to the fact that first quarter 2005 was comprised oftwelve weeks, whereas fourth quarter 2004 was comprised of thirteen. Firstquarter revenues of 2004 in comparison with the preceding fourth quarter growthremained stable due to a higher volume of contract-based work in managedservices and increased demand experienced from the economic recovery. Thefluctuation of first quarter revenues of 2003 was usual to the seasonality ofthe business.

*Cyclical Nature of the Business*—The staffing industry has historically beenconsidered to be cyclical, often acting as an indicator of both economicdownswings and upswings. Staffing customers tend to use temporary staffing tosupplement their existing workforces and generally hire permanent workers whenlong term demand is expected to increase. As a consequence of this, ourrevenues tend to increase quickly when the economy begins to grow. Conversely,our revenues also tend to decrease quickly when the economy begins to weaken asour customers reduce temporary workers before terminating their own employees. Whilewe have longer-term managed service contracts which are not as directlydependent upon the economic cycle, these revenues are not significant enough tooffset the impact of cyclical economic activity in our larger serviceofferings.

***Forward Looking Statements—Safe Harbor***

In evaluating ourbusiness, you should carefully consider the following factors in addition tothe information contained elsewhere in this Annual Report on Form 10-Kor incorporated by reference herein. This Annual Report on Form 10-Kincludes “forward-looking statements” within the meaning of Section 21Eof the Securities Act of 1934, as amended, including, in particular, statementsabout our plans, strategies and prospects. Although we believe that our plans,strategies and prospects reflected in or suggested by our forward-lookingstatements, and the assumptions on which they are based, are reasonable, wecannot assure you that our plans, strategies and prospects or our otherexpectations and intentions will be realized or achieved. Important factorsthat could cause our actual results to differ materially from our forward-lookingstatements include those set forth in Item 1A, Risk Factors. If any of thoserisks, or other risks not presently known to us or that we currently believe tonot be significant, do materialize or develop into actual events, then ourbusiness, financial condition, results of operations or 

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prospectscould be materially adversely affected. All forward-looking statementsattributable to us or any persons acting on our behalf are expressly qualifiedin their entirety by the risk factors discussed in Item 1A, Risk Factors.

**Item 7A.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of January 1, 2006, approximately$27.1 million of cash and cash equivalents were invested in investmentgrade money market mutual funds. These financial instruments are not consideredto be subject to interest rate risk due to their short duration.

Our exposure to interest rate risk related to debt hasbeen minimized since we currently have no outstanding variable debt as of January 1,2006. At December 31, 2004, our outstanding variable-rate debt was$40.1 million. Based on the outstanding balance as of December 31,2004, a change of 1.0% in the interest rate would have caused a change ininterest expense of approximately $0.4 million in 2004, on an annualbasis.

From time to time, we participate in foreign exchangehedging activities to mitigate the impact of changes in foreign currencyexchange rates. We attempt to hedge transaction exposures through naturaloffsets. To the extent this is not practicable, exposure areas which areconsidered for hedging are foreign currency denominated receivables andpayables, intercompany loans and firm committed transactions and dividendsrelated to foreign subsidiaries. We use financial instruments, principallyforward exchange contracts, in our management of foreign currency exposures. Wedo not enter into forward contracts for trading purposes. In estimating thefair value of derivative positions, we utilize quoted market prices, ifavailable, or quotes obtained from outside sources. As of January 1, 2006,we had two outstanding forward contracts to sell €0.2million in January 2006 and 2007, and one outstanding forward contract tosell CAD$5.4 million in March 2006. We also had one outstanding forwardcontract to sell 4.8 million Australian dollars which was settled in 2005.

When foreign currency financial instruments areoutstanding, exposure to market risk on these instruments results fromfluctuations in currency rates during the periods in which the contracts areoutstanding. The counterparties to our currency exchange contracts consist ofmajor financial institutions, each of which is rated investment grade. We areexposed to credit risk to the extent of potential nonperformance bycounterparties on financial instruments. Any potential credit exposure does notexceed the fair value. We believe the risk of incurring losses due to creditrisk is remote.

The carrying amount of cash and cash equivalents,trade receivables and other current assets approximates fair value due to theshort-term maturities of these instruments. Our insurance deposits earn a fixedinterest rate as determined at the time of funding and are carried at fairvalue or $78.0 million and $92.9 million as of January 1, 2006and December 31, 2004, respectively. Company-owned life insurancepolicies are carried at fair market value which approximated $12.9 millionand $16.7 million as of January 1, 2006 and December 31, 2004,respectively.

The fair values of all other financial instruments,including debt, approximate their book values as the instruments are short-termin nature or contain market rates of interest.

36

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**Item8.**                        FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA
|                                                                        | ** ** |    | **Page** | ** ** |
|------------------------------------------------------------------------|------------|----|----------|------------|
| Management’s Report on  Internal Control Over Financial Reporting |       | 38 |     |
| Reports of Independent  Registered Public Accounting Firm              |       | 39 |     |
| Consolidated Statements of  Operations                                 |       | 42 |     |
| Consolidated Balance Sheets                                            |       | 43 |     |
| Consolidated Statements of  Stockholders’ Equity                  |       | 44 |     |
| Consolidated Statements of  Cash Flows                                 |       | 45 |     |
| Notes  to Consolidated Financial Statements                            |       | 46 |     |
|                                                                        |            |    |          |            |  |

 

 

37

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**Management’sReport on Internal Control Over Financial Reporting**

Management is responsible for the fair presentation ofthe consolidated financial statements of Spherion Corporation. Management isalso responsible for establishing and maintaining a system of internal controlsover financial reporting as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934. These internal controls are designed toprovide reasonable assurance that the reported financial information ispresented fairly, that disclosures are adequate and that the judgments inherentin the preparation of financial statements are reasonable. There are inherentlimitations in the effectiveness of any system of internal control, includingthe possibility of human error and overriding of controls. Consequently, aneffective internal control system can only provide reasonable, not absoluteassurance, with respect to reporting financial information.

Managementconducted an evaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl-Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on our evaluationunder the framework in *Internal Control-IntegratedFramework,* management concluded that our internal control overfinancial reporting was effective as of January 1, 2006. Management’sassessment of the effectiveness of our internal control over financialreporting as of January 1, 2006 has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, as stated intheir attestation report which is included herein.
| /s/ ROY G. KRAUSE                                    |                                                              | /s/ MARK W.  SMITH |
|------------------------------------------------------|-------------------------------------------------------------------|--------------------|
| Roy G. Krause  President and Chief Executive Officer | Mark W. Smith  Senior Vice President and  Chief Financial Officer |

 

38

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board ofDirectors and Stockholdersof Spherion Corporation

Fort Lauderdale, Florida

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Spherion Corporation and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of January 1,2006, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission. The Company’s managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financial reportingto future periods are subject to the risk that the controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Companymaintained effective internal control over financial reporting as of January 1,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control-IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of January 1,2006, based on the criteria established in *InternalControl-Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission.

39

----

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule as of and for the year ended January 1, 2006 of the Company andour report dated February 24, 2006 expressed an unqualified opinion onthose financial statements and financial statement schedule.

DELOITTE & TOUCHELLPCertified Public Accountants

Fort Lauderdale, FloridaFebruary 24, 2006

40

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board ofDirectorsand Stockholders of Spherion Corporation

Fort Lauderdale, Florida

We have audited the accompanying consolidated balancesheets of Spherion Corporation and subsidiaries (“Spherion”) as of January 1,2006 and December 31, 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the three years inthe period ended January 1, 2006. Our audits also included the financialstatement schedule listed in the Index at Item 15. These financial statementsand financial statement schedule are the responsibility of Spherion’smanagement. Our responsibility is to express an opinion on the financialstatements and financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of SpherionCorporation and subsidiaries as of January 1, 2006 and December 31,2004, and the results of their operations and their cash flows for each of thethree years in the period ended January 1, 2006, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Spherion’s internal control overfinancial reporting as of January 1, 2006, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 24, 2006 expressed anunqualified opinion on management’s assessment of the effectiveness of Spherion’sinternal control over financial reporting and an unqualified opinion on theeffectiveness of Spherion’s internal control over financial reporting.

DELOITTE & TOUCHELLPCertified Public Accountants

Fort Lauderdale, FloridaFebruary 24, 2006

41

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**SPHERIONCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(amounts in thousands,except per share amounts)**

| ** **                                                                                  | ** ** | **Fiscal Years Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                  | ** ** | **January 1,**              | ** ** | **December 31,** | ** ** | **December 26,** | ** ** |
| ** **                                                                                  | ** ** | **2006**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                                                    |       | $                                | 1,971,665  |   |   | $ | 2,032,715 |   |   |   | $ | 1,733,761 |   |   |
| Cost of services                                                                            |       | 1,537,375                        |       |   | 1,607,104 |   |   |   | 1,345,633 |   |   |
| Gross profit                                                                                |       | 434,290                          |       |   | 425,611 |   |   |   | 388,128 |   |   |
| Selling, general  and administrative expenses                                               |       | 404,385                          |       |   | 401,547 |   |   |   | 384,914 |   |   |
| Interest expense                                                                            |       | 3,205                            |       |   | 5,766 |   |   |   | 6,178 |   |   |
| Interest income                                                                             |       | (4,072                           | )          |   | (3,815 | ) |   |   | (5,105 | ) |   |
| Restructuring and  other charges                                                            |       | 1,763                            |       |   | 8,395 |   |   |   | 4,205 |   |   |
| Other (gain) loss                                                                           |       | —                           |       |   | 841 |   |   |   | (313 | ) |   |
|                                                                                        |       | 405,281                          |       |   | 412,734 |   |   |   | 389,879 |   |   |
| Earnings (loss)  from continuing operations before income taxes and discontinued operations |       | 29,009                           |       |   | 12,877 |   |   |   | (1,751 | ) |   |
| Income tax  (expense) benefit                                                               |       | (9,663                           | )          |   | 2,319 |   |   |   | 166 |   |   |
| Earnings (loss) from continuing operations before  discontinued operations                  |       | 19,346                           |       |   | 15,196 |   |   |   | (1,585 | ) |   |
| Discontinued  operations:                                                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Loss from discontinued operations before income  taxes                                      |       | (11,629                          | )          |   | (13,970 | ) |   |   | (16,114 | ) |   |
| Income tax benefit                                                                          |       | 4,312                            |       |   | 34,603 |   |   |   | 3,786 |   |   |
| Earnings (loss) from discontinued operations                                                |       | (7,317                           | )          |   | 20,633 |   |   |   | (12,328 | ) |   |
| Net earnings (loss)                                                                         |       | $                                | 12,029     |   |   | $ | 35,829 |   |   |   | $ | (13,913 | ) |   |
| Earnings (loss)  per share—Basic:                                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations before  discontinued operations                  |       | $                                | 0.32       |   |   | $ | 0.25 |   |   |   | $ | (0.03 | ) |   |
| Earnings (loss) from discontinued operations                                                |       | (0.12                            | )          |   | 0.34 |   |   |   | (0.21 | ) |   |
|                                                                                        |       | $                                | 0.20       |   |   | $ | 0.59 |   |   |   | $ | (0.23 | ) |   |
| Earnings (loss)  per share—Diluted:                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations before  discontinued operations                  |       | $                                | 0.31       |   |   | $ | 0.24 |   |   |   | $ | (0.03 | ) |   |
| Earnings (loss) from discontinued operations                                                |       | (0.12                            | )          |   | 0.33 |   |   |   | (0.21 | ) |   |
|                                                                                        |       | $                                | 0.20       |   |   | $ | 0.58 |   |   |   | $ | (0.23 | ) |   |
| Weighted average  shares used in computation of earnings (loss) per share:                  |       |                             |       |   |   |   |   |   |   |   |   |
| Basic                                                                                       |       | 60,938                           |       |   | 61,036 |   |   |   | 59,951 |   |   |
| Diluted                                                                                     |       | 61,430                           |       |   | 62,313 |   |   |   | 59,951 |   |   |

 

See Notes to Consolidated Financial Statements.

42

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**SPHERIONCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(amountsin thousands, except share data)**

| ** **                                                                                            | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2006**            | ** ** | **2004**              | ** ** |
| **Assets**                                                                                            |       |                |       |                  |       |   |   |
| Current Assets:                                                                                       |       |                |       |                  |       |   |   |
| Cash and cash  equivalents                                                                            |       | $                   | 30,163     |                  |       | $ | 5,154 |   |   |
| Receivables, less  allowance for doubtful accounts of $4,708 and $7,077                               |       | 292,742             |       |                  | 352,606    |   |   |
| Deferred tax asset                                                                                    |       | 9,155               |       |                  | 19,263     |   |   |
| Income tax receivable                                                                                 |       | 4,231               |       |                  | 12,363     |   |   |
| Insurance deposit                                                                                     |       | 24,914              |       |                  | 26,436     |   |   |
| Other current assets                                                                                  |       | 14,618              |       |                  | 18,885     |   |   |
| Assets of discontinued  operations                                                                    |       | 1,661               |       |                  | 4,772      |   |   |
| Total current assets                                                                                  |       | 377,484             |       |                  | 439,479    |   |   |
| Goodwill                                                                                              |       | 48,861              |       |                  | 48,757     |   |   |
| Property and equipment,  net of accumulated depreciation of $114,038 and $104,111                     |       | 88,546              |       |                  | 97,683     |   |   |
| Deferred tax asset                                                                                    |       | 152,084             |       |                  | 149,436    |   |   |
| Insurance deposit                                                                                     |       | 53,115              |       |                  | 66,482     |   |   |
| Other assets                                                                                          |       | 22,554              |       |                  | 28,429     |   |   |
|                                                                                                  |       | $                   | 742,644    |                  |       | $ | 830,266 |   |   |
| **Liabilities and Stockholders’  Equity**                                                        |       |                |       |                  |       |   |   |
| Current Liabilities:                                                                                  |       |                |       |                  |       |   |   |
| Accounts payable and  other accrued expenses                                                          |       | $                   | 93,542     |                  |       | $ | 108,308 |   |   |
| Accrued salaries, wages  and payroll taxes                                                            |       | 62,605              |       |                  | 62,956     |   |   |
| Revolving lines of  credit                                                                            |       | —              |       |                  | 32,131     |   |   |
| Accrued insurance  reserves                                                                           |       | 27,503              |       |                  | 34,135     |   |   |
| Accrued income tax  payable                                                                           |       | 51,792              |       |                  | 57,765     |   |   |
| Current portion of  long-term debt and short-term borrowings                                          |       | 3,141               |       |                  | 12,398     |   |   |
| Accrued restructuring  and other current liabilities                                                  |       | 8,846               |       |                  | 10,470     |   |   |
| Liabilities of  discontinued operations                                                               |       | 146                 |       |                  | 1,488      |   |   |
| Total current  liabilities                                                                            |       | 247,575             |       |                  | 319,651    |   |   |
| Long-term debt, net of  current portion                                                               |       | 3,735               |       |                  | 4,766      |   |   |
| Accrued insurance  reserves                                                                           |       | 28,119              |       |                  | 28,879     |   |   |
| Deferred compensation  and other long-term liabilities                                                |       | 24,710              |       |                  | 32,678     |   |   |
| Total liabilities                                                                                     |       | 304,139             |       |                  | 385,974    |   |   |
| Commitments and contingencies (see Notes 2 and 12)                                                    |       |                |       |                  |       |   |   |
| Stockholders’ Equity:                                                                            |       |                |       |                  |       |   |   |
| Preferred stock, par  value $.01 per share; authorized, 2,500,000 shares; none issued or  outstanding |       | —              |       |                  | —     |   |   |
| Common stock, par value  $.01 per share; authorized, 200,000,000; issued 65,341,609 shares            |       | 653                 |       |                  | 653        |   |   |
| Treasury stock, at cost,  6,510,739 and 4,238,678 shares, respectively                                |       | (56,299             | )          |                  | (40,430    | ) |   |
| Additional paid-in  capital                                                                           |       | 845,056             |       |                  | 847,806    |   |   |
| Accumulated deficit                                                                                   |       | (354,742            | )          |                  | (366,771   | ) |   |
| Accumulated other  comprehensive income                                                               |       | 3,837               |       |                  | 3,034      |   |   |
| Total stockholders’  equity                                                                      |       | 438,505             |       |                  | 444,292    |   |   |
|                                                                                                  |       | $                   | 742,644    |                  |       | $ | 830,266 |   |   |

 

See Notes to Consolidated Financial Statements.

43

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**SPHERIONCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**ForFiscal Years Ended January 1, 2006, December 31, 2004 andDecember 26, 2003**

**(amounts inthousands)**

| ** **                                                                                                                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                           | ** ** | ** ** | ** ** | ** **   | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                                                           | ** ** | **Common** | ** ** | **Treasury** | ** ** | **Paid-In**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                                           | ** ** | **Stock**  | ** ** | **Stock**    | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income/(Loss)** | ** ** | **Total**  | ** ** |
| Balance as of  December 27, 2002                                                                                                |       |       | $          | 653          |       |           |       | $               | (66,860    | )                 |       |       | $          | 859,551 |   |   |   | $ | (388,687 | ) |   |   | $ | (644 | ) |   | $ | 404,013 |   |
| Comprehensive income:                                                                                                                |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                                             |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | (13,913 | ) |   |   | — |   |   | (13,913 | ) |
| Other comprehensive  income:                                                                                                         |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments arising during the period                                                                  |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | — |   |   |   | 10,508 |   |   | 10,508 |   |
| Foreign currency  translation adjustments related to the sale of The Netherlands technology  subsidiary                              |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | — |   |   |   | 5,904 |   |   | 5,904 |   |
| Comprehensive  income                                                                                                                |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   | 2,499 |   |
| Proceeds from  exercise of employee stock options, including tax benefit                                                        |       |       | —     |         |       |           | 4,670      |            |       |              | (2,463     | )          |       |   | — |   |   |   | — |   |   | 2,207 |   |
| Proceeds from  issuance of shares under Employee Stock Purchase Plan                                                            |       |       | —     |         |       |           | 3,092      |            |       |              | (2,042     | )          |       |   | — |   |   |   | — |   |   | 1,050 |   |
| Treasury stock  reissued and compensation earned in connection with deferred  compensation                                      |       |       | —     |         |       |           | 4,127      |            |       |              | (2,051     | )          |       |   | — |   |   |   | — |   |   | 2,076 |   |
| Balance as of  December 26, 2003                                                                                                |       |       | 653        |         |       |           | (54,971    | )               |       |              | 852,995    |       |       |   | (402,600 | ) |   |   | 15,768 |   |   | 411,845 |   |
| Comprehensive income:                                                                                                                |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                           |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | 35,829 |   |   |   | — |   |   | 35,829 |   |
| Other comprehensive  income:                                                                                                         |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments arising during the period                                                                  |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | — |   |   |   | 1,028 |   |   | 1,028 |   |
| Foreign currency  translation adjustments related to the sale of The Netherlands, Asia/ Pacific  and the United Kingdom subsidiaries |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | — |   |   |   | (13,762 | ) |   | (13,762 | ) |
| Comprehensive  income                                                                                                                |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   | 23,095 |   |
| Proceeds from  exercise of employee stock options, including tax benefit                                                        |       |       | —     |         |       |           | 10,020     |            |       |              | (3,241     | )          |       |   | — |   |   |   | — |   |   | 6,779 |   |
| Proceeds from  issuance of shares under Employee Stock Purchase Plan                                                            |       |       | —     |         |       |           | 1,552      |            |       |              | (604       | )          |       |   | — |   |   |   | — |   |   | 948 |   |
| Treasury stock  reissued and compensation earned in connection with deferred  compensation                                      |       |       | —     |         |       |           | 2,969      |            |       |              | (1,344     | )          |       |   | — |   |   |   | — |   |   | 1,625 |   |
| Balance as of  December 31, 2004                                                                                                |       |       | 653        |         |       |           | (40,430    | )               |       |              | 847,806    |       |       |   | (366,771 | ) |   |   | 3,034 |   |   | 444,292 |   |
| Comprehensive income:                                                                                                                |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                           |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | 12,029 |   |   |   | — |   |   | 12,029 |   |
| Other comprehensive  income:                                                                                                         |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments arising during the period                                                                  |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | — |   |   |   | 803 |   |   | 803 |   |
| Comprehensive  income                                                                                                                |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   | 12,832 |   |
| Proceeds from  exercise of employee stock options, including tax benefit                                                        |       |       | —     |         |       |           | 5,531      |            |       |              | (1,717     | )          |       |   | — |   |   |   | — |   |   | 3,814 |   |
| Proceeds from  issuance of shares under Employee Stock Purchase Plan                                                            |       |       | —     |         |       |           | 1,193      |            |       |              | (511       | )          |       |   | — |   |   |   | — |   |   | 682 |   |
| Treasury stock  reissued and compensation earned in connection with deferred  compensation                                      |       |       | —     |         |       |           | 1,426      |            |       |              | (522       | )          |       |   | — |   |   |   | — |   |   | 904 |   |
| Treasury stock  purchases                                                                                                            |       |       | —     |         |       |           | (24,019    | )               |       |              | —     |       |       |   | — |   |   |   | — |   |   | (24,019 | ) |
| Balance as of January 1,  2006                                                                                                  |       |       | $          | 653          |       |           |       | $               | (56,299    | )                 |       |       | $          | 845,056 |   |   |   | $ | (354,742 | ) |   |   | $ | 3,837 |   |   | $ | 438,505 |   |

 

See Notes to Consolidated Financial Statements.

44

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**SPHERIONCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(amounts inthousands)**

| ** **                                                                                  | ** ** | **Fiscal Years Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                  | ** ** | **January 1,**              | ** ** | **December 31,** | ** ** | **December 26,** | ** ** |
| ** **                                                                                  | ** ** | **2006**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash Flows from Operating  Activities:                                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                         |       |                             | $          | 12,029 |   |   |   | $ | 35,829 |   |   |   | $ | (13,913 | ) |   |
| Adjustments to reconcile  net earnings (loss) to net cash provided by operating activities: |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Discontinued operations (gain) loss on disposal, net  of income tax benefit                 |       |                             | 6,665      |   |   |   | (27,053 | ) |   |   | 4,101 |   |   |
| (Gain) loss on retirement of debt                                                           |       |                             | —     |   |   |   | 841 |   |   |   | (313 | ) |   |
| Depreciation and amortization                                                               |       |                             | 21,906     |   |   |   | 28,844 |   |   |   | 29,262 |   |   |
| Deferred income tax expense (benefit)                                                       |       |                             | 6,313      |   |   |   | (8,864 | ) |   |   | (10,154 | ) |   |
| Restructuring and other charges                                                             |       |                             | 1,763      |   |   |   | 10,508 |   |   |   | 5,213 |   |   |
| Other non-cash charges                                                                      |       |                             | 2,192      |   |   |   | 4 |   |   |   | 7,396 |   |   |
| Changes in assets  and liabilities, net of effects of acquisitions:                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Receivables                                                                                 |       |                             | 62,767     |   |   |   | (69,210 | ) |   |   | (38,687 | ) |   |
| Other assets                                                                                |       |                             | 2,551      |   |   |   | (2,158 | ) |   |   | 3,246 |   |   |
| Income tax receivable                                                                       |       |                             | 8,484      |   |   |   | 17,844 |   |   |   | 96,470 |   |   |
| Accounts payable, accrued liabilities and other  liabilities                                |       |                             | (49,016    | ) |   |   | 24,675 |   |   |   | (10,522 | ) |   |
| Accrued income taxes                                                                        |       |                             | —     |   |   |   | 2,078 |   |   |   | (16,253 | ) |   |
| Restructuring liabilities                                                                   |       |                             | (3,369     | ) |   |   | (7,261 | ) |   |   | (5,806 | ) |   |
| Net Cash Provided by Operating Activities                                                   |       |                             | 72,285     |   |   |   | 6,077 |   |   |   | 50,040 |   |   |
| Cash Flows from Investing  Activities:                                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from sale of discontinued operations                                               |       |                             | 1,376      |   |   |   | 43,745 |   |   |   | 1,000 |   |   |
| Acquisitions and earn-out payments, net of cash  acquired                                   |       |                             | (887       | ) |   |   | (312 | ) |   |   | (17,217 | ) |   |
| Capital expenditures                                                                        |       |                             | (9,651     | ) |   |   | (12,050 | ) |   |   | (60,453 | ) |   |
| Insurance (deposits) reimbursements                                                         |       |                             | 19,054     |   |   |   | 3,855 |   |   |   | (8,276 | ) |   |
| Surrender of company-owned life insurance policies,  net                                    |       |                             | 4,179      |   |   |   | — |   |   |   | — |   |   |
| Note receivable proceeds from sale of Australian  subsidiary                                |       |                             | 3,781      |   |   |   | — |   |   |   | — |   |   |
| Other                                                                                       |       |                             | 888        |   |   |   | (1,241 | ) |   |   | 2,705 |   |   |
| Net Cash Provided by (Used in) Investing Activities                                         |       |                             | 18,740     |   |   |   | 33,997 |   |   |   | (82,241 | ) |   |
| Cash Flows from Financing  Activities:                                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Debt repayments, net                                                                        |       |                             | (5,642     | ) |   |   | (798 | ) |   |   | (14,037 | ) |   |
| Retirement of convertible notes                                                             |       |                             | (8,000     | ) |   |   | (90,323 | ) |   |   | (6,602 | ) |   |
| Net borrowings from lines of credit                                                         |       |                             | (32,085    | ) |   |   | 29,407 |   |   |   | — |   |   |
| Purchase of treasury stock                                                                  |       |                             | (24,020    | ) |   |   | — |   |   |   | — |   |   |
| Proceeds from exercise of employee stock options                                            |       |                             | 3,605      |   |   |   | 5,654 |   |   |   | 2,420 |   |   |
| Other, net                                                                                  |       |                             | (6         | ) |   |   | (262 | ) |   |   | 4,172 |   |   |
| Net Cash Used in Financing Activities                                                       |       |                             | (66,148    | ) |   |   | (56,322 | ) |   |   | (14,047 | ) |   |
| Effect of exchange  rates on cash and cash equivalents                                      |       |                             | 132        |   |   |   | 154 |   |   |   | 2,040 |   |   |
| Increase  (decrease) in cash and cash equivalents                                           |       |                             | 25,009     |   |   |   | (16,094 | ) |   |   | (44,208 | ) |   |
| Cash and cash  equivalents, beginning of period                                             |       |                             | 5,154      |   |   |   | 21,248 |   |   |   | 65,456 |   |   |
| Cash and cash  equivalents, end of period                                                   |       |                             | $          | 30,163 |   |   |   | $ | 5,154 |   |   |   | $ | 21,248 |   |   |
| Supplemental Cash Flow  Information:                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| *Cash  (received) paid during the year for:*                                                | * *   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Income taxes                                                                                |       |                             | $          | (5,072 | ) |   |   | $ | (13,157 | ) |   |   | $ | (75,667 | ) |   |
| Interest                                                                                    |       |                             | $          | 1,935 |   |   |   | $ | 4,926 |   |   |   | $ | 6,174 |   |   |
| *Non-cash  activities:*                                                                     | * *   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Deferred purchase price from the sale of discontinued  operations                           |       |                             | $          | 120 |   |   |   | $ | 3,160 |   |   |   | $ | — |   |   |
| Short-term notes payable for purchase of software and  related costs                        |       |                             | $          | 714 |   |   |   | $ | 4,042 |   |   |   | $ | 9,060 |   |   |
| Debt assumed with  Canadian acquisition                                                     |       |                             | $          | — |   |   |   | $ | — |   |   |   | $ | 10,889 |   |   |

 

See Notes to Consolidated Financial Statements.

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**SPHERIONCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Business—******Spherion*** Corporationprovides temporary staffing services, managed services and permanent placementservices and currently operates in two countries: Canada and the United States.Temporary staffing is a service where Spherion’s employees work at customerlocations and under the supervision of customer personnel. Temporary staffingservices include personnel in the following skill categories: clerical, lightindustrial, information technology, finance and accounting, legal, engineering,sales and marketing, human resources, and administrative. Managed servicesincludes services where Spherion manages aspects of a customer function suchas: recruiting, administrative services, data center or network operations. Permanentplacement is a service where Spherion employees locate talent on behalf of itscustomers, screen the candidates and assist in the recruitment efforts. Spherionhas two operating segments, Staffing Services and Professional Services. Foundedin 1946, Spherion is headquartered in Fort Lauderdale, Florida, and operates anetwork of over 650 locations.

***Principles ofConsolidation—******The***accompanyingconsolidated financial statements include the accounts of Spherion Corporation,its wholly-owned subsidiaries and certain other entities it is requiredto consolidate (“Spherion”). All material intercompany transactions andbalances have been eliminated.

In accordance with Statement of Financial StandardsInterpretation No. 46 (“FIN 46R”), “Consolidation of Variable InterestEntities,” Spherion consolidates variable interest entities (VIE’s) for whichit is the primary beneficiary. VIE’s are generally entities that lack sufficientequity to operate without additional financial support from other parties orare entities whose equity holders do not have adequate decision makingauthority. The primary beneficiary of a VIE is the party that absorbs themajority of the entity’s expected losses or receives the majority of theresidual returns.

Spherion has evaluated the provisions of FIN 46R anddetermined that it applies to its two forms of franchise agreements forfranchisees and licensees. Spherion has determined that these agreements bythemselves do not create a VIE, but in some cases Spherion has providedfinancing under these agreements which does create a VIE. Spherion evaluatesall VIE’s to determine if it is the primary beneficiary and consolidates VIE’swhen it is the primary beneficiary.

***Use of Estimates—******The***preparationof financial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Due to the inherent uncertainty involved in makingestimates, actual results reported in future periods may be materiallydifferent from those estimates.

***Fiscal Year—******Effective***for2005, Spherion changed its fiscal year end by two days from 52 or 53 weeksending on the last Friday in December to 52 or 53 weeks ending on the lastSunday in December. This change conforms Spherion’s reporting periods to itsnormal weekly business cycle. This change did not have a material impact onSpherion’s quarterly or annual results of operations, cash flows or financialposition. The fiscal years ended in January 1, 2006 (“Fiscal year 2005” or“2005”), December 31, 2004, and December 26, 2003 had 52, 53 and 52weeks, respectively.

***Cash and CashEquivalents—******All***highlyliquid investments with original maturities of 90 days or less at the timeof purchase are classified as cash equivalents. Cash equivalents are carried atcost, which approximates fair value due to the short-term maturities of theseinstruments.

***Allowance forDoubtful Accounts—******Accounts***receivableare carried at the amount estimated to be collectible. Accordingly, allowancesare provided for accounts receivable estimated to be uncollectible 

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based on management’s bestestimates based on historical write-off levels. Recoveries are recognized inthe period they are received. The ultimate amount of accounts receivable thatbecome uncollectible could differ from those estimated.

***Investments—******Investments***incompany-owned life insurance policies are classified as tradingsecurities and are reported at fair value with gains and losses included inearnings during the period incurred. The specific identification method is usedto determine the cost of investments sold. Investments in company-ownedlife insurance policies are included in “Intangibles and other assets” in theaccompanying consolidated balance sheets. Spherion did not have any investmentsin available-for-sale securities as of January 1, 2006 or December 31,2004.

***Goodwill and OtherIntangible Assets—******Goodwill*********and other intangible assets are accounted for inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets.” This statement requires that goodwill and other intangible assets withindefinite lives should not be amortized, but should be tested for impairmenton an annual basis, or more often if an event occurs or circumstances changethat would more likely than not reduce the fair value of a reporting unit belowits carrying amount. Trade names and other intangible assets are amortized on astraight-line basis over a period of approximately 5 years. SeeNote 3, Goodwill and Other Intangible Assets, for further discussion.

***Property andEquipment—******Property***andequipment are stated at cost and depreciated using the straight-line methodover the estimated useful lives of the related assets. Leasehold improvementsare amortized over the shorter of their estimated useful life or the lease termusing the straight-line method. Maintenance and repairs, which do not improveor extend the life of an asset, are expensed as incurred.

***CapitalizedSoftware Costs—******Software***whichhas been developed for internal use is accounted for in accordance withStatement of Position (“SOP”) 98-1, “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use.” Only costs incurred duringthe application development stage, including design, coding, installation andtesting are capitalized. These capitalized costs include external consultingfees, software license fees and internal labor costs for employees directlyassociated with software development. Upgrades or modifications that result inadditional functionality are capitalized, while upgrades or modifications thatdo not result in additional functionality are expensed as incurred.

***Impairment ofLong-Lived Assets—******As***requiredby SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” long-lived assets should be tested for recoverability whenever eventsor circumstances indicate that their carrying amount may not be recoverable. Spherionevaluates the recoverability of long-lived assets at least annually todetermine whether an adjustment to carrying values or a revision to estimateduseful lives is appropriate if and/or when an event or circumstance arises thatwould require it to do so. If the estimated future cash flows are projected tobe less than the carrying value, an impairment write-down would be recorded,measured by the amount of the asset’s carrying value in excess of fair value. Theestimated future cash flows of an asset or asset group are calculated on anundiscounted basis.

***AccruedSelf-Insurance Losses—******Spherion***retainsa portion of the risk under its workers’ compensation, generalliability/professional liability, employment practices liability and healthinsurance benefits programs. Reserves have been recorded which reflect thediscounted estimated liabilities including claims incurred but not reported. Workers’compensation losses, general liability/professional liability and employmentpractices liability losses have been discounted at 4.4% and 4.2% at January 1,2006 and December 31, 2004, respectively, and are based on actuarialestimates. While management believes that the amount recorded for theliabilities is adequate, there can be no assurance that changes to management’sestimates may not occur due to limitations inherent in the estimation process. Changesin the estimates of these accruals are charged or credited to earnings in theperiod determined. Spherion funds its workers’ compensation liability with aninsurance deposit. This deposit was $78.0 million and 

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$92.9 million at January 1,2006 and December 31, 2004, respectively, and is included in “Insurancedeposit” in the accompanying consolidated balance sheets. The deposit will beused to fund claims and cannot be used for general corporate purposes.

***Foreign CurrencyTranslation—******Spherion’s***Canadianoperation uses the Canadian dollar as its functional currency. Assets andliabilities of this operation are translated at the exchange rates in effect onthe balance sheet date. Amounts included in Spherion’s Statements of Operationsare translated at the average exchange rates for the year. The impact ofcurrency fluctuation is included in stockholders’ equity as part of accumulatedother comprehensive income.

***Revenue Recognition—******Spherion***recordsrevenues from sales of services by its company-owned and licensedoperations and from royalties earned on sales of services by its franchisedoperations. Staffing and managed service revenues and the related labor costsand payroll are recorded in the period in which services are performed. Permanentplacement revenues are recognized upon candidate start date. Allowances areestablished to estimate losses due to placed candidates not remaining employedfor Spherion’s guarantee period. Spherion follows Emerging Issues Task Force (“EITF”)99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” inthe presentation of revenues and expenses. This guidance requires Spherion toassess whether it acts as a principal in the transaction or as an agent actingon behalf of others. In situations where Spherion is the principal in thetransaction and has the risks and rewards of ownership, the transactions arerecorded gross in the consolidated statements of operations.

Spherion utilizes two forms of franchising agreements.Under the first form, Spherion records franchise royalties in accordance withSFAS No. 45, “Accounting for Franchise Fee Revenue” based upon thecontractual percentage of franchise sales, in the period in which thefranchisee provides the service. Franchise royalties, which are included inrevenues, were $9.0 million, $8.4 million, and $7.3 million forthe 2005, 2004 and 2003 fiscal years, respectively. The second form offranchising agreement is a licensee agreement where Spherion acts as theprincipal in customer transactions through direct contractual relationshipswith the customers, owning related customer receivables and being the legalemployer of the temporary employee and the licensee acts as Spherion’s agentproviding certain sales and recruiting services. Accordingly, sales and costsof services generated by the licensed operation are recorded gross in Spherion’sconsolidated statements of operations. Spherion pays the licensee a commissionfor acting as Spherion’s agent and this commission is based on a percentage ofgross profit from the office managed by the licensee and averaged 70%, 68% and68% for the fiscal years ended 2005, 2004 and 2003, respectively, of thelicensed offices’ gross profit. The licensee is responsible for establishingtheir office location and paying related administrative and operating expenses,such as rent, utilities and salaries of the licensee’s full-time officeemployees.

Except in the circumstance where Spherion is requiredto consolidate certain licensees’ operations (see Note 14, VariableInterest Entities, for further discussion), Spherion’s consolidated statementsof operations reflect the licensee commission as an expense, but do not includethe rent, utilities and salaries of the full-time office employees since theseexpenses are the responsibility of the licensee. Spherion has credit risk forsales to its customers through licensee arrangements as Spherion pays alldirect costs associated with providing temporary services before relatedaccounts receivable are collected. Spherion has partially mitigated this riskby making the licensee responsible to reimburse Spherion up to 100% ofuncollected accounts receivable (bad debts are deducted from commissionpayments); however, Spherion bears the loss in cases where the licensee doesnot have sufficient financial wherewithal to reimburse uncollected amounts.

***Income Taxes—******Deferred***taxesarise from temporary differences between the tax basis of an asset or liabilityand its reported amount in the consolidated financial statements. Valuationallowances on deferred tax assets are recorded to the extent it is more likelythan not that a tax benefit will not be realized. See Note 6, IncomeTaxes, for further discussion.

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***Earnings Per Share—******Basic***earnings(loss) per share is computed by dividing Spherion’s earnings (loss) by theweighted average number of shares outstanding during the period. When theeffects of the common stock equivalents are not anti-dilutive, diluted earningsper share is computed by dividing Spherion’s net earnings plus after-taxinterest on the convertible notes, if applicable, by the weighted averagenumber of shares outstanding and the impact of all dilutive potential commonshares, primarily stock options, convertible notes, restricted stock anddeferred stock units. During 2004 and 2005, Spherion paid off its convertiblesubordinated notes and convertible promissory notes, respectively. The dilutiveimpact of stock options is determined by applying the “treasury stock” methodand the dilutive impact of the convertible notes is determined by applying the “ifconverted” method. See Note 16, Earnings (Loss) Per Share, for furtherdiscussion.

***DerivativeFinancial Instruments—******From***time totime, Spherion enters into foreign exchange forward contracts as part of themanagement of its foreign currency exchange rate exposures. These financialinstruments are not held for trading purposes and none of the instruments areleveraged. All financial instruments are put into place to hedge specificexposures. Gains and losses on foreign currency forward contracts offset gainsand losses resulting from the underlying transactions. Spherion accounts forits derivatives in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” as amended. Gains and losses oncontracts that hedge foreign currency commitments are recognized in earnings. Asof January 1, 2006, Spherion had two outstanding forward contracts to sell€0.2million in January 2006 and 2007, and one outstanding forward contract tosell CAD$5.4 million in March 2006. Spherion also had one outstandingforward contract to sell 4.8 million Australian dollars which was settled in2005. Each of these derivatives had a fair value or cost to unwind that is notmaterial to Spherion’s consolidated results of operations. Amounts receivableor payable under the agreements are included in “Other current assets” or “Othercurrent liabilities” in the accompanying consolidated balance sheets.

***Stock-BasedCompensation—******Spherion***accountsfor stock-based compensation to employees using the intrinsic valuemethod as prescribed by Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Accordingly,compensation cost for stock options issued to employees is measured as theexcess, if any, of the quoted market price of Spherion’s stock at the date ofgrant over the amount an employee must pay for the stock. Compensation costrelated to restricted stock or deferred stock units granted is recognized inthe period the compensation is earned and measured using the quoted marketprice on the effective grant date.

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Spherionhas one primary stock option plan, the 2000 Stock Incentive Plan, which isdescribed more fully in Note 8, Stock-Based Compensation Plans. Asall options granted under this plan had exercise prices equal to the marketvalue of the underlying common stock on the date of grant, Spherion has nothistorically or in the periods presented, recorded stock-basedcompensation cost in the determination of net earnings or loss. The followingtable illustrates the effect on net earnings (loss) and earnings (loss) pershare if Spherion had applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation,” to stock-based employeecompensation (in thousands, except per share data):

| ** **                                                                                                                                              | ** ** | **Fiscal Years** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings  (loss), as reported                                                                                                                       |       |                  | $          | 12,029 |   |   | $ | 35,829 |   | $ | (13,913 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       |                  | (1,917     | ) |   | (2,957 | ) | (3,063 | ) |
| Pro forma net  earnings (loss)                                                                                                                          |       |                  | $          | 10,112 |   |   | $ | 32,872 |   | $ | (16,976 | ) |
| Earnings (loss)  per share:                                                                                                                             |       |                  |       |   |   |   |   |   |   |
| Basic—as reported                                                                                                                                  |       |                  | $          | 0.20 |   |   | $ | 0.59 |   | $ | (0.23 | ) |
| Basic—pro forma                                                                                                                                    |       |                  | $          | 0.17 |   |   | $ | 0.54 |   | $ | (0.28 | ) |
| Diluted—as  reported                                                                                                                               |       |                  | $          | 0.20 |   |   | $ | 0.58 |   | $ | (0.23 | ) |
| Diluted—pro forma                                                                                                                                  |       |                  | $          | 0.16 |   |   | $ | 0.53 |   | $ | (0.28 | ) |

 

Thefair value of options at grant date was estimated using the Black-Scholesmultiple option model where each vesting increment is treated as a separateoption with its own expected life and own fair value. The following weightedaverage assumptions were used:

| ** **                             | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life (in  years)              |       | 3.3                   |       | 3.3 |   | 3.2 |   |
| Interest rate                          |       | 3.60                  | %          | 2.72 | % | 2.27 | % |
| Volatility                             |       | 52.00                 | %          | 55.00 | % | 59.00 | % |
| Expected  dividends                    |       | —                |       | — |   | — |   |
| Weighted average per  share fair value |       | $                     | 3.14       |   | $ | 3.55 |   | $ | 4.11 |   |
|                                        |            |                       |            |  |  |  |  |  |  |  |

 

***New Accounting Pronouncements and Interpretations—******In***December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised2004), “Share-Based Payment” (SFAS No. 123R). SFAS No. 123R requiresthat the cost resulting from all share-based payment transactions be recognizedin the financial statements. The standard also requires that entities apply afair-value-based measurement method to account for share-based paymenttransactions with employees (excluding equity instruments held by employeeshare ownership plans). SFAS No. 123R is effective for Spherion for fiscalyear 2006. Beginning with the first quarter of 2006, Spherion will recordcompensation expense related to outstanding employee stock options, inaccordance with SFAS No. 123R. Based on current information, Spherionanticipates the impact of this item is approximately ($0.06) per share for thefull year 2006.

**2.   DISCONTINUEDOPERATIONS**

During 2004, Spherionassessed the profitability of its operations and made decisions to exit five ofits business units. Spherion sold its court reporting business and its staffingoperations in the United Kingdom, the Asia/Pacific region and The Netherlandsduring 2004. The remaining business unit, the call 

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centeroutsourcing business, is comprised of four call centers, of which three weresold in 2005 and the fourth one is undergoing due diligence with a potentialpurchaser. If that sale cannot be completed we will report this unit incontinuing operations. The sale of these subsidiaries required Spherion toprovide customary representations and warranties to the purchasers and in somecases, required adjustments to the purchase price based upon working capitalaudits. These business units’ operating results are included in discontinuedoperations in the accompanying consolidated statements of operations throughthe dates of their disposition.

During the first quarterof 2004, Spherion sold its operations in The Netherlands for cash proceeds ofapproximately $2.0 million (net of cash sold of $0.5 million) resulting in apre-tax loss on the sale of $1.7 million. As part of the sale of Spherion’soperations in The Netherlands, Spherion indemnified the purchaser for anemployment related liability to The Netherlands’ government. In August 2005,Spherion settled and paid $0.6 million for the employment liability, and hasremaining reserves of $0.2 million as of January 1, 2006 for the paymentof related social security taxes for this matter.

Spherion sold itsoperations in the Asia/Pacific region in two separate transactions to two differentpurchasers. Total cash proceeds was from both sales aggregated $13.7 million(net of cash sold of $0.2 million) and a deferred purchase price of $3.8million due and paid to Spherion in 2005. Spherion incurred a total loss on thesale of these businesses of $3.4 million in 2004. The first transactioninvolved the sale of the information technology education business in theAsia/Pacific region and was completed in May 2004. The second transactioninvolved the remainder of Spherion’s staffing operations in the Asia/Pacificregion and was completed in June 2004. Both transactions required workingcapital audits which were settled in 2004 and 2005 for a total payment of $1.4million to the purchasers. Both purchasers have made claims under the warrantyprovisions of the respective sale agreements. One of these claims in the secondtransaction relates to research and development syndicates formed in Australiaduring the early 1990s and entered into by the business prior to its originalacquisition by Spherion. These syndicates were formed to create newtechnologies, typically software, and allowed the third party investment memberof the syndicates to obtain accelerated tax deductions and credits. Spherion’sformer Asia/Pacific business provided the investment member with certain taxindemnifications. In November 2004 and December 2004, Spherion wasnotified that the Australian Tax office was examining two of these syndicatesand seeking repayment of some or all of the tax benefits received by theinvestment members. Spherion has engaged counsel in Australia to review theissues raised by the Australian Tax office, and the discussions with theAustralian Tax office are ongoing. The total amount of the tax benefits takenby the investment members is approximately $9.2 million Australian dollars($6.7 million at current exchange rates). The total accrued liability at January 1,2006 related to all of the warranty matters for both transactions was $4.1million.

During the third quarterof 2004, Spherion completed the disposition of its staffing operation in theUnited Kingdom. The operations in the United Kingdom were sold for cashproceeds of $25.4 million (net of cash sold of $3.1 million), resulting in apre-tax gain on the sale of $9.5 million, (net of a $2.6 million reserve forestimated adjustments to the net proceeds). Spherion resolved the final workingcapital audit and paid approximately $1.1 million to the purchaser in January 2006.The purchaser has made claims under the warranty provisions of the agreementsand Spherion is attempting to resolve these claims. The total accrued liabilityat January 1, 2006 related to this transaction was $3.7 million, whichincluded amounts for the final working capital adjustment paid in January 2006as well as estimated liabilities for warranty matters. Spherion remainsobligated for a facility lease of one former operating location of one of thesubsidiaries of its staffing operation in the United Kingdom; a charge of $0.8million for the expected remaining liability under this lease (net of estimatedsublease income) was included in discontinued operations in 2004.

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During the fourth quarterof 2004, Spherion sold its court reporting business for cash proceeds of $2.6million, which resulted in a pre-tax gain on the sale of $1.2 million. In February 2006,Spherion received $1.0 million in final proceeds as the purchaser achievedrevenue growth targets.

In connection withSpherion’s decision to sell its call center outsourcing business, a $6.2million estimated loss on sale, net of tax, was recorded during the thirdquarter of 2004. As of January 1, 2006, Spherion recorded an additionalloss of approximately $0.5 million, net of tax, as the sales agreements for thethree call centers sold in 2005 were finalized. Gross cash proceeds, during thefiscal year ended January 1, 2006, from the sales of the three facilitieswere $1.9 million.

The major classes of assets and liabilitiesfor the one remaining call center outsourcing business as of January 1,2006 are as follows (in thousands):

| Receivables, net                                         |   | $  | 1,589  |   |
|----------------------------------------------------------|--------|----|--------|--------|
| Prepaid and other  assets                                |   | 72 |   |
| Total assets of discontinued operations                  |   | $  | 1,661  |   |
| Account payable,  other accrued expenses and liabilities |   | $  | 146    |   |

 

Revenuesand pre-tax earnings (loss) of these subsidiaries included within earnings(loss) from discontinued operations in the accompanying consolidated statementsof operations are as follows (in thousands):

| ** **                                             | ** ** | **2005**         | ** ** | **2004**        | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|------------------|------------|-----------------|------------|------------|------------|
| ** **                                             | ** ** | **Professional** | ** ** | **Staffing**    | ** ** | ** ** | ** ** | **Professional** | ** ** | **Staffing** | ** ** | ** ** | ** ** | **Professional** | ** ** | **Staffing** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **Services(1)**  | ** ** | **Services(2)** | ** ** | **Total**  | ** ** | **Services(1)** | ** ** | **Services(2)** | ** ** | **Total** | ** ** | **Services(1)** | ** ** | **Services(2)** | ** ** | **Total** | ** ** |
| Revenues                                               |       |             | $          | —          |       |       |       | $ | 20,443 |   |   | $ | 20,443 |   |   | $ | 185,922 |   |   |   | $ | 40,792 |   |   | $ | 226,714 |   |   | $ | 306,903 |   |   |   | $ | 33,822 |   |   | $ | 340,725 |   |
| Pre-tax loss from  operations                          |       |             | $          | (1,008          | )          |       |       | $ | (4,942 | ) |   | $ | (5,950 | ) |   | $ | (5,172 | ) |   |   | $ | (4,446 | ) |   | $ | (9,618 | ) |   | $ | (7,343 | ) |   |   | $ | (7,543 | ) |   | $ | (14,886 | ) |
| Pre-tax gain  (loss) on disposal                       |       |             | (6,178     | )               |       |       | 499        |   |   | (5,679 | ) |   | 5,656 |   |   |   | (10,008 | ) |   | (4,352 | ) |   | (1,651 | ) |   |   | 423 |   |   | (1,228 | ) |
| Income tax benefit                                |       |             | 3,824      |            |       |       | 488        |   |   | 4,312 |   |   | 28,875 |   |   |   | 5,728 |   |   | 34,603 |   |   | 1,132 |   |   |   | 2,654 |   |   | 3,786 |   |
| Net earnings  (loss) from discontinued operations |       |             | $          | (3,362          | )          |       |       | $ | (3,955 | ) |   | $ | (7,317 | ) |   | $ | 29,359 |   |   |   | $ | (8,726 | ) |   | $ | 20,633 |   |   | $ | (7,862 | ) |   |   | $ | (4,466 | ) |   | $ | (12,328 | ) |

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(1)             Results from discontinued operationspreviously reported within the Professional Services operating segment includethe court reporting business, the staffing operations in the United Kingdom,the Asia/Pacific region and The Netherlands, and the technology consultingsubsidiaries in the United Kingdom and The Netherlands through the period ofeach respective business’s disposition.

(2)             Results from discontinued operationspreviously reported within the Staffing Services operating segment include thecall center outsourcing business and Saratoga, a human capital measurementbusiness, through the date of its disposition.

Net loss for the fiscal year ended January 1,2006 included (i) after-tax restructuring and other charges of $(1.1)million, or $(0.02) per basic and diluted share, (ii) estimated charges of$5.7 million, or $(0.09) per basic and diluted share, to increase or set-upreserves for working capital settlement and indemnification or other mattersrelated to the 2004 disposal of Spherion’s operations in the Asia/Pacificregion and the United Kingdom, and (iii) a tax benefit from operatingactivities of $3.8 million, or $0.06 per basic and diluted share.

Net earnings for the fiscal year ended December 31,2004 included the recognition of a previously deferred tax benefit of $25.3million that resulted from a higher tax basis than book basis on the sale ofthe international operations. Net earnings for the fiscal year ended December 31,2004 also included a tax benefit of $3.9 million for the estimated loss on saleof the call centers. As a result of the finalization of the sale of the threecall centers, the tax benefit was adjusted by $0.8 million during the fiscalyear ended January 1, 2006.

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**3.   GOODWILLAND OTHER INTANGIBLE ASSETS**

SFAS No. 142 provides that goodwill and otherintangible assets with indefinite lives should not be amortized, but rathertested for impairment on an annual basis, or more often if an event occurs orcircumstances change that would more likely than not reduce the fair value of areporting unit below its carrying amount. Spherion has six reporting units withgoodwill and performs its annual impairment test of goodwill as of its November month-end.The test for potential impairment is at the reporting unit level which is onelevel below an operating segment. Reporting units are aggregated for purposesof the impairment test only when the aggregation rules under SFAS No. 142,paragraph 30 are met. These rules permit reporting units with similareconomic characteristics to be combined for purposes of measuring impairment. The2005, 2004 and 2003 test results indicated no impairment.

Thechanges in the carrying amount of goodwill by segment are as follows (inthousands):

| ** **                                                                              | ** ** | **Staffing  Services** | ** ** | **Professional  Services** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|-----------|------------|
| **Balance  at December 26, 2003**                                                  |       | $                      | 38,436     |                       |       | $         | 11,541     |   |   | $ | 49,977 |   |
| Foreign currency  changes                                                               |       | 1,508                  |       |                       | —     |      |       | 1,508 |   |
| Goodwill written  off in conjunction with the sale of the court reporting business |       | —                 |       |                       | (403       | )         |       | (403 | ) |
| Goodwill written  off in conjunction with the sale of the Asia/Pacific operations  |       | —                 |       |                       | (2,325     | )         |       | (2,325 | ) |
| **Balance  at December 31, 2004**                                                  | ** ** | 39,944                 |       |                       | 8,813      |      |       | 48,757 |   |
| Foreign currency  changes and other                                                     |       | 645                    |       |                       | (96        | )         |       | 549 |   |
| Goodwill  additions during the period                                                   |       | 960                    |       |                       | —     |      |       | 960 |   |
| Net operating  loss tax benefit realization                                             |       | (1,405                 | )          |                       | —     |      |       | (1,405 | ) |
| **Balance at January 1, 2006**                                                     |       | $                      | 40,144     |                       |       | $         | 8,717      |   |   | $ | 48,861 |   |

 

Goodwill additions, during the fiscal year ended January 1,2006 relate primarily to the repurchase of Spherion licensed operations duringthe first and second quarters of 2005. The net operating loss tax benefitrealization related to the utilization of net operating losses carry-forwardsof Spherion’s Canadian franchise operation prior to the franchise’sacquisition.

Other intangible assets,which are amortized and are included in other long-term assets, are primarilycomprised of trade names, trademarks, non-compete and employment agreements andamounted to $1.2 million and $2.0 million, less accumulated amortization of$1.0 million and $1.4 million as of January 1, 2006 and December 31,2004, respectively. Amortization of trade names and other intangible assets forthe fiscal years 2005, 2004 and 2003 amounted to $0.4 million, $0.5 million and$0.4 million, respectively. Annual amortization expense of other intangibleassets is expected to be less than $0.2 million for fiscal year 2006 andimmaterial amounts in the years thereafter. The remaining weighted average lifeof other intangible assets is approximately two years.

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**4.**   PROPERTY ANDEQUIPMENT

Asummary of property and equipment follows (dollar amounts in thousands):

| ** **                                          | ** ** | **Life  (in years)** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|----------|------------|----------|------------|
| Land                                                |       |                      | —     |     |       | $        | 4,167      |   | $ | 4,167 |   |
| Buildings                                           |       |                      | 10-40      |     |       | 21,478   |       | 21,187 |   |
| Equipment                                           |       |                      | 3-8        |     |       | 78,911   |       | 84,792 |   |
| Enterprise-wide  information system                 |       |                      | 7          |     |       | 58,912   |       | 57,069 |   |
| Software,  primarily third party purchased software |       |                      | 5          |     |       | 28,613   |       | 25,324 |   |
| Leasehold  improvements and other                   |       |                      | 3-7        |     |       | 10,503   |       | 9,255 |   |
|                                                |       |                      |       |     |       | 202,584  |       | 201,794 |   |
| Less: Accumulated  depreciation and amortization    |       |                      |       |     |       | (114,038 | )          | (104,111 | ) |
|                                                |       |                      |       |     |       | $        | 88,546     |   | $ | 97,683 |   |

 

The enterprise-wide information system consists ofcapitalized consulting fees, labor and license costs.

Equipment includes capital lease assets of $4.6million and $6.4 million as of January 1, 2006 and December 31,2004, respectively.

Depreciation andamortization expense of property and equipment including leased assets for thefiscal years 2005, 2004 and 2003 amounted to $21.4 million,$23.3 million and $19.6 million, respectively.

**5.**   SHORT-TERMAND LONG-TERM DEBT OBLIGATIONS

A summary of short-termand long-term debt obligations is as follows (in thousands):

| ** **                                                                           | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Short-term  debt obligations:**                                                    | ** ** | ** ** |       |     |       |
| Other debt, due  2006 and 2005, respectively                                         |       | $          | 1,338      |     | $          | 1,460 |   |
| U.S. dollar revolving  line of credit, secured by accounts receivables, due 2010     |       | —     |       | 25,000   |       |
| Canadian dollar  revolving line of credit, secured by accounts receivables, due 2007 |       | —     |       | 7,131    |       |
| U.S. dollar  convertible promissory notes, due 2005                                  |       | —     |       | 8,000    |       |
| Software license  note payable, due 2005                                             |       | —     |       | 1,526    |       |
| Current portion  of long-term debt                                                   |       | 1,803      |       | 1,412    |       |
| Total short-term debt obligations                                                    |       | $          | 3,141      |     | $          | 44,529 |   |
| **Long-term  debt obligations:**                                                     | ** ** | ** ** |       |     |       |
| Capital lease,  due through 2011                                                     |       | $          | 4,639      |     | $          | 5,858 |   |
| Other debt, due  2006 through 2008 and 2005 through 2008, respectively               |       | 899        |       | 320      |       |
| Total long-term debt obligations                                                     |       | 5,538      |       | 6,178    |       |
| Less current  portion of long-term debt                                              |       | (1,803     | )          | (1,412   | )          |
| Long-term debt,  net of current portion                                              |       | $          | 3,735      |     | $          | 4,766 |   |

 

Spherion has a U.S. dollar revolving line of credit inthe amount of $250.0 million that is secured by substantially all of itsdomestic accounts receivable. At Spherion’s option, the amount available can beincreased to $300.0 million. As of January 1, 2006, there were no amountsoutstanding under this facility, and as of December 31, 2004, there was$25.0 million outstanding. Total availability under this facility was$189.2 million for the year ending January 1, 2006 and is calculatedas eligible receivables of $221.0 million, 

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less: amounts outstanding,letters of credit of $4.1 million and a one week payroll reserve of$27.7 million. Interest on this line of credit is based upon the durationof the loan, availability under the line and other conditions and would havebeen approximately 5.96% (LIBOR plus a spread) or approximately 7.00% (primeplus a spread) as of January 1, 2006. Spherion pays an unused line fee inthe range of 0.25% to 0.38% per annum that is determined by the unused portionof the revolving line of credit as well as a letter of credit fee of 0.25% perannum. This line of credit expires in 2010.

Spherion also has a Canadian dollar revolving line ofcredit (secured by Canadian accounts receivable) that matures July 2007. Thisfacility provides up to CAD$13.0 million of on-balance sheet financing(approximately $11.2 million at current exchange rates). As of January 1,2006, there were no borrowings outstanding under this facility, and as of December31, 2004, there was $7.1 million outstanding. As of January 1, 2006, theinterest rate for amounts borrowed on this facility would have approximated6.0% (Canadian prime plus a spread). A commitment fee of 0.5% per annum ispayable based on the unused portion of the revolving line of credit. Spherionguarantees the Canadian dollar revolving line of credit.

Spherion’s lines of credit provide for certainaffirmative and negative covenants which may limit the total availability underthese facilities based upon Spherion’s ability to meet these covenants. Thesecovenants include, but are not limited to: a fixed charge coverage ratio;limitations on capital expenditures; additional debt incurred; mergers,consolidations or sales; and transactions with subsidiaries and related parties.At January 1, 2006, Spherion was in compliance with the requirements ofthese covenants.

During 2004, Spherion retired its remaining U.S.dollar convertible subordinated notes (the “Notes”) and paid a premium of$0.6 million to retire the Notes and wrote-off the remaining bond issuancecosts of $0.2 million, both of which are included in “Other gain (loss)”in the accompanying consolidated statements of operations. During 2003,Spherion had retired an aggregate face value of $7.0 million of the Notesfor a purchase price of $6.6 million. Spherion recorded a gain, net ofbond issuance cost write-offs of $0.3 million for the fiscal year ending December 26,2003, which is included in “Other gain (loss)” in the accompanying consolidatedstatements of operations.

Spherion entered into a seven-year contract with athird party information technology company to outsource its technologyinfrastructure operations effective as of July 26, 2004. The contractincludes the sale at book value (which approximates fair market value) ofcertain computer hardware to be operated by the outsource provider. Spherionaccounted for this portion of the outsourced transaction as a sale-leasebackpursuant to SFAS No. 13, “Accounting for Leases.” Spherion recorded anasset and a capital lease obligation of $6.4 million at the start of thecontract. The capital lease obligation remaining at January 1, 2006 was$4.6 million.

In October 2000, Spherion issued $8.0 million ofinterest-bearing convertible promissory notes due October 1, 2005 inconjunction with the purchase of 80% of the membership interests of JobOptions,LLC. These notes were paid off in full at the end of the third quarter in 2005.

Aggregate future maturities of long-term debt as of January 1,2006 are $1.8 million in 2006, $1.4 million in 2007,$0.8 million in 2008, $0.6 million in 2009, $0.6 million in 2010and $0.4 million due thereafter.

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**6.   INCOME TAXES**

Earnings(loss) from continuing operations before income taxes and the components of theincome tax expense (benefit) are as follows (in thousands):

| ** **                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Earnings (loss)  from continuing operations before income taxes: |       |     |       |     |       |     |       |
| United States                                                    |       | $        | 27,455     |     | $          | 12,643   |       | $ | (1,782 | ) |
| Foreign                                                          |       | 1,554    |       | 234      |       | 31       |       |
|                                                             |       | $        | 29,009     |     | $          | 12,877   |       | $ | (1,751 | ) |
| Current tax  expense:                                            |       |     |       |     |       |     |       |
| Federal                                                          |       | $        | 426        |     | $          | 1,724    |       | $ | 5,580 |   |
| State and local                                                  |       | 1,386    |       | 968      |       | 806      |       |
| Foreign                                                          |       | 47       |       | 44       |       | 1        |       |
|                                                             |       | 1,859    |       | 2,736    |       | 6,387    |       |
| Deferred tax  expense (benefit):                                 |       |     |       |     |       |     |       |
| Federal                                                          |       | 7,218    |       | 579      |       | (7,149   | )          |
| State and local                                                  |       | 3        |       | (5,634   | )          | 596      |       |
| Foreign                                                          |       | 583      |       | —   |       | —   |       |
|                                                             |       | 7,804    |       | (5,055   | )          | (6,553   | )          |
| Total expense (benefit)  for income taxes                        |       | $        | 9,663      |     | $          | (2,319   | )          | $ | (166 | ) |

 

Thefollowing table reconciles the United States Federal income tax rate toSpherion’s effective tax rate (benefit):

| ** **                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory rate                                           |       | 35.0     | %          | 35.0     | %          | (35.0    | )%         |
| Increase  (decrease) in rate resulting from:             |       |     |       |     |       |     |       |
| State and local income taxes, net of Federal tax benefit |       | 1.7      |       | (40.7    | )          | 62.1     |       |
| Wages to work credits                                    |       | (6.0     | )          | (17.2    | )          | (118.8   | )          |
| Foreign income and withholding taxes                     |       | 0.9      |       | 1.3      |       | 71.2     |       |
| Nondeductible meals and entertainment                    |       | 1.5      |       | 4.2      |       | 35.2     |       |
| Company-owned life insurance                             |       | (0.4     | )          | (3.2     | )          | (22.6    | )          |
| Other, net                                               |       | 0.6      |       | 2.6      |       | (1.6     | )          |
| Effective tax rate  (benefit)                            |       | 33.3     | %          | (18.0    | )%         | (9.5     | )%         |

 

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Significantcomponents of Spherion’s deferred tax assets and liabilities are as follows (inthousands):

| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Current deferred  tax asset (liabilities):         |       |     |       |     |       |
| Employee benefits, primarily deferred compensation |       | $        | 2,912      |     | $          | 2,424 |   |
| Self-insurance and accrued compensation            |       | 3,288    |       | 3,098    |       |
| Sale of Interim Health Care business               |       | —   |       | 938      |       |
| Accrued expenses, including restructuring          |       | 2,846    |       | 10,062   |       |
| Receivables allowances                             |       | 1,824    |       | 2,741    |       |
|                                               |       | 10,870   |       | 19,263   |       |
| Valuation allowance                                |       | (1,715   | )          | —   |       |
|                                               |       | 9,155    |       | 19,263   |       |
| Non-current deferred tax asset (liabilities):      |       |     |       |     |       |
| Employee benefits, primarily deferred compensation |       | 9,925    |       | 12,944   |       |
| Self-insurance                                     |       | 18,335   |       | 20,956   |       |
| Fixed assets                                       |       | (11,260  | )          | (6,992   | )          |
| Intangible assets                                  |       | 69,120   |       | 81,707   |       |
| Accrued expenses                                   |       | 3,957    |       | —   |       |
| General business credit carryforward               |       | 12,960   |       | 6,428    |       |
| Foreign tax credit carryforward                    |       | 19,625   |       | 207      |       |
| Capital loss carryforward                          |       | 7,199    |       | —   |       |
| Federal net operating losses                       |       | 41,455   |       | 29,957   |       |
| State net operating loss                           |       | 10,410   |       | 8,229    |       |
| Canada net operating loss                          |       | 1,303    |       | 2,128    |       |
|                                               |       | 183,029  |       | 155,564  |       |
| Valuation allowance                                |       | (30,945  | )          | (6,128   | )          |
|                                               |       | 152,084  |       | 149,436  |       |
| Net deferred tax  asset                            |       | 161,239  |       | 168,699  |       |
| Less current  deferred tax asset                   |       | 9,155    |       | 19,263   |       |
| Long-term  deferred tax asset                      |       | $        | 152,084    |     | $          | 149,436 |   |

 

At January 1, 2006, Spherion had a net deferredtax asset of $161.2 million. This deferred tax asset was evaluated underthe guidelines of SFAS No. 109 “Accounting for Income Taxes,” and adetermination on the basis of objective factors was made that the asset will berealized through future years’ taxable earnings. These objective factorsinclude historical taxable income, normalized for non-recurring income andexpense items. Using an average of this income projected to future years, ifthe asset can be recovered within the statutory carryforward periods, there isno impairment.

Spherion has a U.S. federal net operating losscarryforward in the amount of $118.4 million expiring in 2023 andthereafter. Spherion has $253.9 million of state net operating losscarryforwards which expire over the next one to twenty years. Canada netoperating loss carryforwards are available in the amount of $3.7 million,and expire between 2007 and 2012.

Spherion’s valuationallowance increased by $26.5 million during 2005. The valuation allowancereduces our deferred tax asset to an amount that is more likely than not to berealized, and is based on the uncertainty of the realization of two principalitems. As a result of federal tax return filings in 2005, foreign tax creditsand capital losses were released for carry forward from the 2001 tax year. Theexit from most of our foreign operations makes it unlikely that we will utilizethese foreign tax credits in the future. A valuation allowance has beenrecorded against the full amount of foreign tax credit carryforward of $19.6million. In addition, we have recorded a valuation allowance against the fullamount of the $7.2 million 

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benefiton capital loss carry forward of $20.6 million. The benefits on foreign taxcredits and capital loss carryforwards expire between 2006 and 2009, andgeneral business credits carried forward will expire between 2021 and 2025. Valuationallowances for state net operating loss carryforwards and other items accountfor remainder of the total $32.7 million. At January 1, 2006 and December 31,2004, there were no unremitted earnings from our foreign subsidiaries.

**7.   EMPLOYEESAVINGS AND INVESTMENT PLANS**

Spherion has a voluntary employee savings plan (the401(k) Benefit Plan) covering substantially all eligible United Statesemployees. This plan has a basic match for those employees eligible to receivethe match, which is based on employee contributions. Employer contributions bySpherion under the plan amounted to $0.7 million, $0.6 million and$0.5 million for fiscal years 2005, 2004 and 2003, respectively. Therewere approximately 1,500 participating employees in this plan as of January 1,2006.

Spherion also has a voluntary non-qualified deferredcompensation plan for highly compensated employees who are not eligible toparticipate in Spherion’s 401(k) Benefit Plan. The plan allows eligibleemployees to defer receipt of a portion of their compensation. Employeedeferrals earn a return based on each employee’s elected hypothetical planinvestments including amounts represented by deferred stock units of Spherion’scommon stock. The plan is not funded, however Spherion maintained investmentswhich are included in “Intangibles and other assets” in the accompanyingconsolidated balance sheets. These assets had values of $12.9 million and$16.7 million as of January 1, 2006 and December 31, 2004,respectively. The earnings from these investments partially offset Spherion’scost of providing the benefit. In May 2005, we surrendered some of thecompany-owned life insurance policies for a total of $4.2 million, net of a$1.6 million policy loan, and transferred the funds to a money market account. InJanuary 2006, we surrendered the remaining company-owned life insurancepolicies of $12.9 million and invested these funds and an additional $10.7million in a portfolio of mutual funds to fully match the deferred compensationliability of this plan. The deferred compensation and accumulated investmentearnings or losses, are accrued. Such accrual amounted to $24.3 millionand $27.4 million at January 1, 2006 and December 31, 2004,respectively, the long-term portion of which was included in “Deferredcompensation and other long-term liabilities” and the short-term portion in “Accruedrestructuring and other current liabilities” in the accompanying consolidatedbalance sheets. Employee deferrals within this plan represented as deferredstock units of Spherion are included in additional paid-in capital within thestockholders’ equity section of the accompanying consolidated balance sheets(rather than in “Deferred compensation and other long-term liabilities”) asemployees may only be paid out in shares of Spherion stock. There were approximately140 employees participating in this plan as of January 1, 2006.

Spherion has an Employee Stock Purchase Plan thatprovides substantially all employees who have been employed for at least sixmonths an opportunity to purchase shares of its common stock at a discount of15%. The aggregate amount an employee may purchase each calendar year islimited to a maximum of 15% of an employee’s compensation or $25,000 in thevalue of the stock. There were approximately 107,000 and 113,000 shares issuedin 2005 and 2004, respectively, under this plan. A total of approximately942,000 shares are available as of January 1, 2006 for purchase under theplan, which expires on July 1, 2015.

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**8.**                 STOCK-BASEDCOMPENSATION PLANS

Spherion has one primary stock option plan, the 2000Stock Incentive Plan. Under the plan, options to purchase Spherion’s commonstock may be granted to employees and outside directors of Spherion and itssubsidiaries for periods not to exceed ten years at a price that is not lessthan 100% of fair market value on the date of grant. At January 1, 2006and December 31, 2004, Spherion had 3,168,277 and 3,418,626 shares,respectively, reserved for future grants under the plan.

Changesunder these stock option plans for 2005, 2004 and 2003 were as follows:

| ** **                                 | ** ** | **2005**   | ** ** | **2004**                               | ** ** | **2003**   | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of fiscal year   |       | 4,582,969  |       |                                   | $          | 10.16      |       |   | 6,538,323 |   |   | $ | 10.02 |   |   | 7,545,644 |   |   | $ | 10.20 |   |   |
| Granted                                    |       | 1,240,060  |       |                                   | 7.92       |       |       | 82,353 |   |   | 8.72 |   |   | 1,511,780 |   |   | 9.72 |   |   |
| Exercised                                  |       | (516,758   | )          |                                   | 6.88       |       |       | (804,492 | ) |   | 6.86 |   |   | (396,990 | ) |   | 6.59 |   |   |
| Forfeited                                  |       | (1,035,597 | )          |                                   | 9.97       |       |       | (1,233,215 | ) |   | 11.47 |   |   | (2,122,111 | ) |   | 11.08 |   |   |
| Outstanding at  end of fiscal year         |       | 4,270,674  |       |                                   | $          | 9.98       |       |   | 4,582,969 |   |   | $ | 10.16 |   |   | 6,538,323 |   |   | $ | 10.02 |   |   |
| Options exercisable at  end of fiscal year |       | 2,840,369  |       |                                   | $          | 10.78      |       |   | 3,422,654 |   |   | $ | 10.57 |   |   | 3,472,343 |   |   | $ | 11.57 |   |   |

 

The followingtable summarizes information about fixed stock options outstanding at January 1,2006:

| ** **                                  | ** ** | **Options Outstanding**                               | ** ** | **Options Exercisable**                        | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  Outstanding at  January 1, 2006** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable at  January 1, 2006** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $  0.00-$  7.49         |       |                                                       | 1,052,417  |                                                |       |   | 6.35 |   |   |   | $ | 6.58 |   |   |   | 1,003,446 |   |   |   | $ | 6.56 |   |   |
| $  7.50-$  9.99         |       |                                                       | 2,304,563  |                                                |       |   | 8.32 |   |   |   | 8.77 |   |   |   | 940,163 |   |   |   | 9.32 |   |   |
| $10.00-$19.99                               |       |                                                       | 659,617    |                                                |       |   | 4.00 |   |   |   | 13.90 |   |   |   | 645,383 |   |   |   | 13.98 |   |   |
| $20.00-$31.00                               |       |                                                       | 254,077    |                                                |       |   | 2.17 |   |   |   | 24.84 |   |   |   | 251,377 |   |   |   | 24.87 |   |   |
|                                        |       |                                                       | 4,270,674  |                                                |       |   | 6.80 |   |   |   | $ | 9.98 |   |   |   | 2,840,369 |   |   |   | $ | 10.78 |   |   |

 

As discussed in Note 1, Summary of SignificantAccounting Policies, Spherion accounts for stock-based compensation usingthe intrinsic value method of accounting as prescribed by APB Opinion No. 25.The table in Note 1 summarizes the impact had Spherion adopted the fairvalue based method prescribed by SFAS No. 123, “Accounting for Stock-BasedCompensation” for the fiscal years 2005, 2004 and 2003.

Spherion employees andoutside directors are also eligible to receive grants of deferred stock units. Deferredstock units entitle the individual to receive shares of Spherion common stockat a future date after meeting service requirements or Spherion has metfinancial targets. Approximately 417,204 and 52,500 deferred stock units weregranted during 2005 and 2004, respectively. These deferred stock units weregranted to key management employees and outside directors and ranged in marketvalues from $6.60 to $10.00. Deferred stock units vest based on either employeeservice with the Company over a period of one to seven years or solely based onthe Company’s attainment of financial performance criteria over a three-yearperiod. The value of these deferred stock units is amortized to compensationexpense ratably over the vesting period and totaled $0.9 million,$1.0 million and $2.5 million, for the years ended 2005, 

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2004 and2003, respectively. The provisions of SFAS No. 123R do not change theaccounting for deferred stock units.

**9.**                 STOCKHOLDERRIGHTS PLAN

On February 17, 1994, Spherion’s Board ofDirectors adopted a rights plan to protect stockholders in the event of anunsolicited attempt to acquire Spherion which is not believed by the Board ofDirectors to be in the best interest of stockholders. Under the plan, adividend of one right (a “Right”) per share was declared and paid on each shareof Spherion’s common stock outstanding on April 1, 1994. As to sharesissued after such date, Rights will automatically attach to them after theirissuance.

The Rights become exercisable when a person or groupof persons acquires 15% or more of the outstanding shares of Spherion’s commonstock without the prior written approval of Spherion’s Board of Directors (an “UnapprovedStock Acquisition”), and after ten business days following the publicannouncement of the intent to commence a tender offer that would result in anUnapproved Stock Acquisition.

If a person or group of persons makes an UnapprovedStock Acquisition, the registered holder of each Right has the right topurchase, for the exercise price of the Right (currently set at $55), eitherone-hundredth of a share of a new class of Spherion’s preferred stock or shareof Spherion’s common stock having a market value equal to two times theexercise price of the Right. Following an Unapproved Stock Acquisition, ifSpherion is involved in a merger, or 50% or more of Spherion’s assets orearning power are sold, the registered holder of each Right has the right topurchase, for the exercise price of the Right, a number of shares of the commonstock of the acquiring company having a market value equal to two times theexercise price of the Right.

After an Unapproved Stock Acquisition, but before anyperson or group of persons acquires 50% or more of the outstanding shares ofSpherion’s common stock, the Board of Directors may exchange all or part of thethen outstanding and exercisable Rights for Spherion common stock at anexchange ratio of one share of common stock per Right. Upon any such exchange,the right of any holder to exercise a Right terminates.

Spherion may redeem theRights at a price of $0.01 per Right at any time prior to an Unapproved StockAcquisition. The Rights expire on April 1, 2014, unless extended by theBoard of Directors. Until a Right is exercised, the holder thereof, as such,has no rights as a stockholder of Spherion, including the right to vote or toreceive dividends. The issuance of the Rights alone has no dilutive effect anddoes not affect reported earnings per share. A committee comprised of Spherion’sindependent board members shall review the Rights plan at least once in everythree-year period to determine whether the maintenance of the plan continues tobe in the best interest of Spherion and its stockholders. The committee willreview the plan in 2006.

**10.**          STOCKHOLDERS’EQUITY

On May 24, 2005, the Board of Directorsauthorized the repurchase of up to six million shares or approximately 10% ofthe Company’s outstanding common stock. Share repurchases are being made fromtime to time in open-market transactions or in privately negotiatedtransactions. The repurchase program does not require Spherion to acquire anyspecific number of shares and may be terminated at any time.

During the fiscal yearended January 1, 2006, Spherion purchased 3.0 million shares forapproximately $24.0 million at an average price per share of $7.87.

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**11.**          FINANCIALINSTRUMENTS AND FAIR VALUES

The fair value of a financial instrument representsthe amount at which the instrument could be exchanged in a current transactionbetween willing parties, other than in a forced or liquidation sale. Fair valueestimates are made at a specific point in time, based upon relevant marketinformation about the financial instrument.

The carrying amount of cash and cash equivalents,trade receivables and other current assets approximates fair value due to theshort-term maturities of these instruments. Spherion’s insurance deposits earna fixed interest rate as determined at the time of funding and are carried atfair value or $78.0 million and $92.9 million as of January 1, 2006 and December31, 2004, respectively. Company-owned life insurance policies are carriedat fair market value, which approximated $12.9 million and $16.7 million as of January1, 2006 and December 31, 2004, respectively.

In estimating the fair value of derivative positions,Spherion utilizes quoted market prices, if available, or quotes obtained fromoutside sources. As of January 1, 2006, Spherion had two outstanding forwardcontracts to sell €0.2 million in January 2006and 2007, and one outstanding forward contract to sell CAD$5.4 million in March2006. Each of these derivatives had a fair value or cost to unwind that is notmaterial to Spherion’s consolidated results of operations.

The fair values of allother financial instruments, including debt, approximate their book values asthe instruments are short-term in nature or contain market rates of interest.

**12.**          COMMITMENTSAND CONTINGENCIES

Substantially all of Spherion’s operations are conductedin leased premises. Spherion also leases computers and other equipment. Total leaseexpense for the fiscal years ended 2005, 2004 and 2003 was $22.1 million, $22.1million and $23.2 million, respectively. Future minimum lease payments under non-cancelableleases as of January 1, 2006 are $24.2 million, $18.2 million, $11.6 million, $7.6million and $4.0 million in the years 2006 through 2010 and $2.3 million thereafterwhich are partially offset by $11.8 million under future non-cancelable subleases.Of these future minimum lease payments, $8.0 million has been accrued as of January1, 2006, related to facility closures, in amounts of $1.0 million, $1.6 millionand $5.4 million which are included as part of “Accrued restructuring,” “Accountspayable and other accrued expenses” and “Deferred compensation and other long-termliabilities” in the accompanying consolidated balance sheets, respectively.

In connection with the disposition of certainsubsidiaries, Spherion, from time to time provides routine indemnificationswith respect to equipment and real estate leases and in certain cases theperformance of services. The disposition of these businesses also usuallyrequires that we indemnify the purchaser for liabilities that arose prior tothe disposition date. These liabilities are typically related to audits of taxliabilities by local authorities and other pre-existing liabilities. Additionally,in the contracts we make a number of representations and warranties and fromtime to time claims are made against us related to these items. The fair valueof these indemnifications are recorded at the time of the sale. Subsequently ifany liabilities become known and are both probable and reasonably estimable,they are recorded as an expense. For some of the dispositions, we have or mayhave future claims which are not yet probable and reasonably estimable and havenot been recorded as an expense. See Note 2, Discontinued Operations, forfurther discussion.

On April 4, 2003, in connection with Spherion’sacquisition of 85% of its Canadian franchise operation, Spherion also enteredinto a put/call agreement with the minority interest holder, whereby theminority interest holder can put the remaining 15% interest in the Canadianoperations back to Spherion any time after December 31, 2005, or, asamended, Spherion can call the remaining 15% interest any time after January 1,2008. If the put or the call were exercised,the purchase price would be primarily determined 

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basedupon the net assets and gross profits from this operation. Based upon thesefactors, the estimated purchase price using 2005 operating results and netassets as of the end of the year would approximate $3.0 million, however,this amount is not determinable or certain to be paid at this point in time.

Spherion had outstanding irrevocable letters of creditof approximately $0.7 million and surety bonds outstanding ofapproximately $0.4 million as of January 1, 2006. These instrumentsprimarily collateralize Spherion’s recorded obligations under workers’ compensationinsurance programs. The level of collateral required is determined by theinsurance carrier based on claims experience of the programs and may vary fromyear to year. Additionally, Spherion has a bank guarantee of €3.4million ($4.0 million at current exchange rates) relating to an indemnificationon the sale of its Netherlands operations.

Spherion, in the ordinary course of its business, isor may be threatened with or named as a defendant in various lawsuits. Spherionmaintains insurance in such amounts and with such coverages and deductibles asmanagement believes are reasonable and prudent. The principal risks thatSpherion insures against are workers’ compensation, personal injury, bodilyinjury, property damage, professional malpractice, errors and omissions,employment practices and fidelity losses. Spherion’s management does not expectthat the outcome of any pending lawsuits relating to such matters, individuallyor collectively, will have a material adverse effect on Spherion’s financialcondition, results of operations or cash flows.

Interim HealthCare Inc., Catamaran Acquisition Corp. andCornerstone Equity Investors IV, L.P. filed an action against Spherion in the DelawareCourt of Chancery in 2001 related to the divestiture of Interim HealthCare (the“Healthcare Divestiture”). They sought damages of approximately $10.0 million forbreach of contract, reformation of the purchase agreement to reduce the purchaseprice by approximately $24.0 million, or rescission of the contract. The same partiesalso sought damages against Spherion in an action in Delaware Superior Court allegingmultiple breach of contract claims arising out of the Healthcare Divestiture. Spherion’smotion for summary judgment was granted for the reformation claim. The cases wentto trial in December 2003 and the court issued its opinion in February 2005. Theopinion provided that Spherion did not have to pay damages on any of the claims,except for one breach of contract claim for which the damages awarded to the plaintiffstotal approximately $1.1 million plus pre- and post-judgment interest and attorneys’fees. After the parties stipulated to the amount of pre-judgment interest and attorneys’fees, the judge entered an order of judgment in June 2005 directing Spherion topay a total of approximately $1.7 million, and in August 2005 this amount was paidby Spherion to the plaintiffs. In June 2005, the plaintiffs filed a notice of appealand oral argument was heard in the Delaware Supreme Court in October 2005. On October31, 2005, the Delaware Supreme Court issued its opinion affirming the trial court’sruling in all respects.

On December 13, 2004, and as amended on January 13, 2005and October 31, 2005, Glidepath Holding B.V. and Jeimon Holdings N.V. filed an actionagainst Spherion Corporation in the U.S. District Court of the Southern Districtof New York. Glidepath and Jeimon Holdings, investors in the entity that acquiredthe Cyber Center business of Spherion Technology (UK) Limited, a subsidiary of SpherionCorporation, in 2002, sued Spherion for fraud, negligent misrepresentation, aidingand abetting breach of fiduciary duty and unjust enrichment and seek $32.0 millionin damages, and treble for punitive damages, plus attorneys’ fees, expert fees andcosts. Glidepath and Jeimon Holdings allege that an individual who was an officerof Spherion Technology (UK) fraudulently induced them to invest in a corporationformed to purchase the Cyber Center business, while he remained in the employ ofSpherion Technology (UK) and was to be paid an incentive bonus for the sale by Spherion.They allege that he misled them as to his employment status at the time, as to theprospects for the Cyber Center, and as to whether the newly formed corporation wasassuming the indebtedness of Spherion Technology (UK) associated with the CyberCenter business. They allege that in doing so, he was acting as an agent of Spherion.Spherion intends to vigorously defend this matter. Although this claim is in thepreliminary stages, Spherion has a reserve of $0.1 million related to this matter.Spherion does not have insurance coverage for this claim.

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In 2002, Spherion engaged in transactions thatgenerally had the effect of accelerating certain future projected tax deductionsand losses, resulting in an increase in the amount of net operating losses andcapital losses available for carry back into prior tax years. As a result ofthese transactions, Spherion’s tax refund for its 2002 filing year wasincreased by approximately $60.0 million. Spherion believes that it hasappropriately reported these transactions in its tax returns, and that it hasestablished adequate reserves as of January 1, 2006 in the amount of $51.8million, with respect to any tax liabilities that may arise in relation tothese transactions or any other potential tax liabilities should its positionbe successfully challenged by tax authorities. An unfavorable settlement oradverse resolution could result in the repayment of a portion of the refundreceived plus interest.

Several states areexamining Spherion’s prior year unemployment tax rates. Revisions of theserates by any state would result in additional payments related to the prioryear’s unemployment taxes in that state. In the states where the rate iscurrently being examined and challenged, the claims raised by the statesapproximate $3.6 million plus potential interest and penalties. As of January 1,2006, Spherion had $2.1 million accrued as its best estimate of losses itexpects to incur as a result of these challenges. It is possible that Spherioncould face additional challenges in these or other states to its rates in prioryears, but Spherion will vigorously defend against these challenges.

**13.**          RESTRUCTURINGAND OTHER CHARGES

Asummary of the charges is as follows (in thousands):

| ** **                              | ** ** | **Fiscal Years** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Staffing Services                       |       | $                     | 1,840      | ** ** | $ | 543 |   | $ | 2,826 |   |
| Professional  Services                  | ** ** | 49                    |       | 1,537 | ** ** | 1,261 |   |
| Corporate                               |       | 341                   | ** ** | 1,351 |   | 724 |   |
| Restructuring                           |       | 2,230                 |       | 3,431 |   | 4,811 |   |
| Restructuring  reversal of over accrual |       | (175                  | )          | (672 | ) | (606 | ) |
| Other charges                           |       | (292                  | )          | 5,636 |   | — |   |
|                                    |       | $                     | 1,763      |   | $ | 8,395 |   | $ | 4,205 |   |

 

***Restructuring Charges***

Restructuring charges for the year ended January 1,2006 totaled $2.2 million for severance related costs for the elimination of112 positions. The restructuring charges were primarily the result of anannounced termination of a customer contract and other changes within themanaged services portion of the Staffing Services operating segment.

During the second half of 2003, Spherion identifiedcertain cost reduction opportunities primarily related to the realignment ofits operating segments and the implementation of its enterprise-wideinformation system and adopted a restructuring plan (the “2003 Plan”) toeliminate redundancies, reduce excess capacity and centralize business supportfunctions. Restructuring charges relating tothis plan totaled $3.4 million and $4.8 million for the years ended December 31,2004 and December 26, 2003, respectively. For the fiscal years 2004 and 2003,the charges consisted of severance charges of $2.1 million and $3.9million and facility closure expenses and charges for asset write-offs forproperty previously vacated of $1.3 million and $0.9 million,respectively.

These charges were offset by reversals of accruals of$0.2 million, $0.7 million and $0.6 million for the years ended January 1,2006, December 31, 2004 and December 26, 2003, respectively, that wereunnecessary primarily as the result of the resolution of uncertainties relatedto facility closures, sublease income exposure, lower broker fees, lower fixedasset write-offs and lower severance costs than initially anticipated, in whichthese amounts were reversed to income in the period they were identified.

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As discussed inNote 2, Discontinued Operations, Spherion remains obligated for a facilitylease of one former operating location for its operations in the United Kingdomdisposition. This lease obligation of $0.8 million was recorded as arestructuring charge within discontinued operations during the second quarterof 2004 and is included in the table below as a facility closure liability.

***Other Charges***

During the second quarter of 2005, Spherion identified$0.3 million of other charges recorded in the prior year for facility closuresthat were unnecessary and reversed these charges to income.

During 2004, Spherion incurred other charges of$5.6 million to terminate the employment contract of its former chiefexecutive officer.

Ananalysis of the restructuring plans, along with amounts remaining to bedistributed under prior years’ restructuring plans, are as follows (inthousands):

| ** **                                     | ** ** | **Facility  Closures  and Asset  Write-offs** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|---------------|------------|-----------|------------|
| **Balance  at December 27, 2002**         |       |                                               | $          | 5,722         |       |      |       | $ | 216 |   |   | $ | 5,938 |   |
| 2003 Plan Charges                              |       |                                               | 949        |          |       |      | 3,862      |   |   | 4,811 |   |
| 2003 Plan  Charges, discontinued operations(1) |       |                                               | 224        |          |       |      | 785        |   |   | 1,009 |   |
| Utilized during  fiscal 2003                   |       |                                               | (2,900     | )             |       |      | (2,721     | ) |   | (5,621 | ) |
| Reversal of over  accrual                      |       |                                               | (606       | )             |       |      | —     |   |   | (606 | ) |
| **Balance  at December 26, 2003**         | ** ** |                                               | 3,389      |          |       |      | 2,142      |   |   | 5,531 |   |
| 2003 Plan Charges                              |       |                                               | 1,285      |          |       |      | 2,146      |   |   | 3,431 |   |
| 2003 Plan  Charges, discontinued operations(1) |       |                                               | 791        |          |       |      | —     |   |   | 791 |   |
| Utilized during  fiscal 2004                   |       |                                               | (2,669     | )             |       |      | (4,104     | ) |   | (6,773 | ) |
| Foreign currency  changes and other            |       |                                               | 123        |          |       |      | (11        | ) |   | 112 |   |
| Reversal of over  accrual                      |       |                                               | (590       | )             |       |      | (82        | ) |   | (672 | ) |
| **Balance  at December 31, 2004**         | ** ** |                                               | 2,329      |          |       |      | 91         |   |   | 2,420 |   |
| Other Plan  Charges                            |       |                                               | 8          |          |       |      | 2,222      |   |   | 2,230 |   |
| Utilized during  fiscal 2005                   |       |                                               | (1,173     | )             |       |      | (2,193     | ) |   | (3,366 | ) |
| Foreign currency  changes and other            |       |                                               | (99        | )             |       |      | —     |   |   | (99 | ) |
| Reversal of over  accrual                      |       |                                               | (81        | )             |       |      | (94        | ) |   | (175 | ) |
| **Balance at January 1, 2006**            |       |                                               | $          | 984           |       |      |       | $ | 26 |   |   | $ | 1,010 |   |

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(1)   Chargesincurred in current and prior year to discontinued operations.

As of January 1,2006, the remaining accruals for facility closures of $1.0 million relate to leasepayments on five closed locations that will be paid out through 2013 (net ofapplicable sublease income). Severance for employees with retention periodsthat extend past 60 days are accrued ratably over the retention period.

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**14.**   VARIABLE INTERESTENTITIES

Asummary of Spherion’s variable interest entities (VIE’s) follows:

| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Number of VIE’s:    |       |     |       |     |       |
| Consolidated             |       | 7        |       | 6        |       |
| Not consolidated         |       | 2        |       | 2        |       |
| Total VIE’s         |       | 9        |       | 8        |       |
| Revenues (in thousands): |       |     |       |     |       |
| Consolidated             |       | $        | 57,343     |     | $          | 39,594 |   |
| Not consolidated         |       | $        | 7,177      |     | $          | 7,776 |   |

 

Spherion’s consolidated VIE’s (all of which arelicensees) provide light industrial and clerical staffing. Spherion’sconsolidated net assets were $0.7 million and $0.8 million at January 1,2006 and December 31, 2004. Each licensee’s loan is collateralized bytheir respective business and in the event of default on the loan, Spherionretains the right to take over their operations. General creditors of Spherion’slicensees do not have any recourse against Spherion.

Spherion’s VIE’s that arenot consolidated are franchisees and provide light industrial and clericalstaffing. Spherion’s maximum exposure to loss from these VIE’s is limited toits loan and royalty receivable balances of $0.5 million as of January 1,2006 and December 31, 2004. All loan and royalty receivables are includedin “Other current assets” and “Other assets” in the accompanying consolidatedbalance sheets.

**15.   SEGMENT INFORMATION**

Spherion is organized and managed around two operatingsegments—Staffing Services and Professional Services. Each segment has separateand distinct leadership teams, each with a business unit president that reportsdirectly to Spherion’s Chief Executive Officer. Each segment provides servicesto customers in different types of skill-sets. The Staffing Servicesoperating segment is concentrated around clerical and light industrialstaffing, while the Professional Services operating segment is concentratedaround higher level skill-sets, such as information technology, financeand accounting, engineering and administrative. Spherion evaluates theperformance of its operating segments and allocates resources based onrevenues, gross profit and segment operating profit. Segment operating profitis defined as earnings (loss) from continuing operations before unallocatedcorporate costs, amortization expense, interest expense, interest income,income taxes and special items (restructuring, other charges and gain (loss) onretirement of debt). All material intercompany revenues and expenses have beeneliminated. Operating results related to discontinued operations have beeneliminated from the segment information below.

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Informationon operating segments and a reconciliation to earnings (loss) from continuingoperations before income taxes and discontinued operations for the periodsindicated are as follows (in thousands):

| ** **                                                                                  | ** ** | **Fiscal Years** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues:***                                                                              | ** ** | ** **            |       |   |   |   |   |
| Staffing Services                                                                           |       | $                     | 1,521,486  |   | $ | 1,623,133 |   | $ | 1,382,964 |   |
| Professional Services                                                                       |       | 450,179               |       | 409,582 |   | 350,797 |   |
| **Total**                                                                                   |       | $                     | 1,971,665  |   | $ | 2,032,715 |   | $ | 1,733,761 |   |
| **Gross Profit:**                                                                           |       |                  |       |   |   |   |   |
| Staffing Services                                                                           |       | $                     | 291,147    |   | $ | 297,147 |   | $ | 275,243 |   |
| Professional Services                                                                       |       | 143,143               |       | 128,464 |   | 112,885 |   |
| **Total**                                                                                   |       | $                     | 434,290    |   | $ | 425,611 |   | $ | 388,128 |   |
| **Segment Operating Profit (Loss):**                                                        |       |                  |       |   |   |   |   |
| Staffing Services                                                                           |       | $                     | 24,917     |   | $ | 25,475 |   | $ | 29,746 |   |
| Professional Services                                                                       |       | 19,236                |       | 19,769 |   | 4,717 |   |
| **Total**                                                                                   |       | 44,153                |       | 45,244 |   | 34,463 |   |
| Unallocated  corporate costs                                                                |       | (13,832               | )          | (20,637 | ) | (30,801 | ) |
| Amortization  expense                                                                       |       | (416                  | )          | (543 | ) | (448 | ) |
| Interest expense                                                                            |       | (3,205                | )          | (5,766 | ) | (6,178 | ) |
| Interest income                                                                             |       | 4,072                 |       | 3,815 |   | 5,105 |   |
| Restructuring and  other charges                                                            |       | (1,763                | )          | (8,395 | ) | (4,205 | ) |
| Gain (loss) on  retirement of debt                                                          |       | —                |       | (841 | ) | 313 |   |
| Earnings (loss) from  continuing operations before income taxes and discontinued operations |       | $                     | 29,009     |   | $ | 12,877 |   | $ | (1,751 | ) |

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*                    Revenue for2004 and 2003 have not been adjusted for the movement of certain managedservices contracts within Staffing Services during the second quarter of 2005to Professional Services. The amount moved for the fiscal year ended January 1,2006 was $14.1 million.

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Geographic,services, depreciation expense, and assets’ information on operating segmentsfor the periods indicated are as follows (in thousands):

| ** **                       | ** ** | **Fiscal Years** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Services  Information:**       |       |                  |       |   |   |   |   |
| **Revenues:**                    |       |                  |       |   |   |   |   |
| Temporary Staffing               |       | $                     | 1,714,801  |   | $ | 1,679,543 |   | $ | 1,374,215 |   |
| Managed Services                 |       | 191,232               |       | 297,627 |   | 316,355 |   |
| Permanent Placement              |       | 65,632                |       | 55,545 |   | 43,191 |   |
| **Total**                        |       | $                     | 1,971,665  |   | $ | 2,032,715 |   | $ | 1,733,761 |   |
| **Depreciation Expense:**        |       |                  |       |   |   |   |   |
| Staffing Services                |       | $                     | 15,295     |   | $ | 17,312 |   | $ | 13,685 |   |
| Professional Services            |       | 6,057                 |       | 5,959 |   | 5,937 |   |
| **Total**                        |       | $                     | 21,352     |   | $ | 23,271 |   | $ | 19,622 |   |
| **Total Assets:**                |       |                  |       |   |   |   |   |
| Staffing Services                |       | $                     | 253,266    |   | $ | 323,911 |   | $ | 286,298 |   |
| Professional Services            |       | 97,863                |       | 102,104 |   | 162,704 |   |
| Corporate                        |       | 391,515               |       | 404,251 |   | 415,832 |   |
| **Total**                        |       | $                     | 742,644    |   | $ | 830,266 |   | $ | 864,834 |   |
| **Property and Equipment, Net:** |       |                  |       |   |   |   |   |
| North America                    |       | $                     | 88,546     |   | $ | 97,683 |   | $ | 123,965 |   |
| Europe                           |       | —                |       | — |   | 7,113 |   |
| Asia/Pacific                     |       | —                |       | — |   | 2,370 |   |
| **Total**                        |       | $                     | 88,546     |   | $ | 97,683 |   | $ | 133,448 |   |

 

Spherion has no singlecustomer representing greater than 10% of revenues. All revenues are earned inNorth America.

**16.   EARNINGS (LOSS) PER SHARE**

Basic earnings (loss) per share are computed bydividing Spherion’s earnings (loss) from continuing operations beforediscontinued operations by the weighted average number of shares outstandingduring the period.

When inclusion of common stock equivalents are notanti-dilutive, diluted earnings per share are computed by dividing Spherion’searnings from continuing operations plus after-tax interest on the convertiblenotes, by the weighted average number of shares outstanding and the impact ofall dilutive potential common shares, primarily stock options, convertiblenotes, restricted stock and deferred stock units. The dilutive impact of stockoptions is determined by applying the “treasury stock” method and the dilutiveimpact of the convertible notes is determined by applying the “if converted”method. The convertible promissory notes and convertible subordinated noteswere paid-off in 2005 and 2004, respectively.

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Thefollowing table reconciles the numerator (earnings (loss) from continuingoperations) and denominator (shares) of the basic and diluted earnings (loss)per share computations (amounts in thousands, except per share amounts):

| ** **                                       | ** ** | **Fiscal Years**                      | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **Earnings  From  Continuing  Operations** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Earnings  From  Continuing  Operations** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Loss  From  Continuing  Operations** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** |
| Basic EPS                                        |       |                                       | $          | 19,346 |   |   | 60,938 |   |   | $ | 0.32 |   |   |   | $ | 15,196 |   |   | 61,036 |   |   | $ | 0.25 |   |   |   | $ | (1,585 | ) |   | 59,951 |   |   | $ | (0.03 | ) |   |
| Effect of Dilutive  Securities:                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options and other dilutive securities |       |                                       | —     |   |   | 492 |   |   |   |   |   |   | — |   |   | 877 |   |   |   |   |   |   | — |   |   | — |   |   |   |   |   |
| Convertible notes                                |       |                                       | —     |   |   | — |   |   |   |   |   |   | 67 |   |   | 400 |   |   |   |   |   |   | — |   |   | — |   |   |   |   |   |
| Diluted EPS                                      |       |                                       | $          | 19,346 |   |   | 61,430 |   |   | $ | 0.31 |   |   |   | $ | 15,263 |   |   | 62,313 |   |   | $ | 0.24 |   |   |   | $ | (1,585 | ) |   | 59,951 |   |   | $ | (0.03 | ) |   |

 

For the fiscal years 2005, 2004 and 2003, outstandingemployee stock options of 3.4 million, 3.0 million and7.0 million, respectively, have been excluded from the computation ofdiluted earnings (loss) per share since they are anti-dilutive. Additionally,0.3 million, 2.4 million and 3.9 million of convertiblesecurities are excluded as they would also be anti-dilutive for the fiscalyears 2005, 2004 and 2003, respectively.

**17.   QUARTERLYFINANCIAL DATA**(unaudited—amountsin thousands, except per share data and share price)

Thefollowing is an analysis of certain quarterly results of operations and otherdata for the 2005 and 2004 fiscal years:

| ** **                         | ** ** | **2005**           | ** ** |
|------------------------------------|------------|--------------------|------------|
| ** **                         | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth **

**Quarter(1)** | ** ** |
| Revenues                           |       | $                  | 505,541    |   | $ | 476,818 |   | $ | 492,405 |   |   | $ | 496,901 |   |   |
| Gross profit                       |       | 105,125            |       | 104,839 |   | 110,257 |   |   | 114,069 |   |   |
| Net earnings  (loss)               |       | (1,228             | )          | 1,755 |   | 5,160 |   |   | 6,342 |   |   |
| Basic earnings  (loss) per share   |       | (0.02              | )          | 0.03 |   | 0.08 |   |   | 0.11 |   |   |
| Diluted earnings (loss)  per share |       | (0.02              | )          | 0.03 |   | 0.08 |   |   | 0.10 |   |   |
|                                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                         | ** ** | **2004**           | ** ** |
|------------------------------------|------------|--------------------|------------|
| ** **                         | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter(1)** | ** ** |
| Revenues                           |       | $                  | 467,212    |   | $ | 485,937 |   | $ | 507,728 |   |   | $ | 571,838 | ** ** |   |
| Gross profit                       |       | 98,887             |       | 104,960 |   | 105,851 |   |   | 115,913 | ** ** |   |
| Net earnings  (loss)               |       | (8,132             | )          | 2,804 |   | 29,743 |   |   | 11,414 | ** ** |   |
| Basic earnings  (loss) per share   |       | (0.13              | )          | 0.05 |   | 0.49 |   |   | 0.19 | ** ** |   |
| Diluted earnings (loss)  per share |       | (0.13              | )          | 0.05 |   | 0.48 |   |   | 0.18 | ** ** |   |
|                                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          The fourth quarter of2005 contains 13 weeks and the fourth quarter of 2004 contains 14 weeks.

In the first quarter of 2005 after-tax restructuringand other charges of $(1.1) million were incurred, or $(0.02) per basicand diluted share. In the fourth quarter of 2005, the net loss fromdiscontinued operations includes estimated charges of $5.7 million, or $(0.09)per basic and diluted share, for working capital and warranty matters relatedto the 2004 disposal of Spherion’s operations in the United Kingdom andAsia/Pacific region. The net loss from discontinued operations also includes atax benefit from operating activities of $3.8 million, or $0.07 per basic anddiluted share.

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In the first quarter of2004 after-tax restructuring and other charges of $(5.4) million wereincurred, or $(0.09) per basic and diluted share. The third quarter of 2004includes an after-tax loss on the retirement of the remaining convertiblesubordinated notes of $(0.5) million or $(0.01) per basic and dilutedshare. Net earnings from discontinued operations for the third quarter of 2004includes a $30.4 million tax benefit, or $0.50 per basic share and $0.49per diluted share as a result of the recognition of a previously deferred taxbenefit of $26.0 million that resulted from the sale of the internationaloperations, a tax benefit of $3.8 million for the estimated loss on saleof the call centers and a tax benefit from operations of $0.5 million. Fourthquarter 2004 continuing operations includes a $6.3 million tax benefit forincreased state deferred income tax assets resulting from an increase in theactual state income tax rate, or $0.10 per basic and diluted share.

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** **

**Item 9.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There has been no changein our principal accountants during the two most recent fiscal years or anysubsequent interim period.

**Item 9A.**                CONTROLSAND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

We carried out an evaluation, under the supervisionand with the participation of our management, including our principal executiveofficer and principal financial officer, of the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this AnnualReport. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this Annual Report in alertingthem in a timely manner as to material information relating to our Company(including our consolidated subsidiaries) required to be included in thisAnnual Report.

There has been no changein our internal control over financial reporting during the quarter endedJanuary 1, 2006, identified in connection with the evaluation referred toabove, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**Management’s Reporton Internal Control Over Financial Reporting**

Management’s Report onInternal Control Over Financial Reporting and the corresponding Report ofIndependent Registered Public Accounting Firm are included in Item 8.,Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

**Item 9B.**               OTHERITEMS

On February 21, 2006, we entered into an EmploymentAgreement with each of William J. Grubbs and William G. Halnon.  In addition, on the same date, we enteredinto a Change in Control Agreement with William J. Grubbs. The forms ofEmployment Agreement and Change in Control Agreement have been previously filedas Exhibits 10.62 and 10.58 to our Form 10-K for the year ended December 31,2004.  We have amended the form ofEmployment Agreement solely to include Messrs. Grubbs and Halnon as employeesthat are subject to the Employment Agreement. We have amended the form ofChange in Control Agreement solely to include Mr. Grubbs as a person subject tothe Change in Control Agreement.  Copiesof the revised forms of Employment Agreement and Change in Control Agreementare attached as Exhibits 10.62 and 10.58, both of which are incorporated hereinby reference.

On February 21, 2006, the Compensation Committeeof the Board of Directors approved amendments to the performance targetscontained in the 2005 incentive award plans for executive officers, copies ofwhich were filed as exhibits 10.72 and 10.73 to Spherion’s Form 10-K for fiscalyear 2004, to make those targets consistent with the performance targetsestablished for the rest of Spherion’s bonus-eligible personnel. At the sametime, the following cash incentive payments were approved in accordance withthe amended plan terms, augmented in some cases at the discretion of theCompensation Committee, for the following executive officers: $300,000 to RoyG. Krause, $135,137 to Eric Archer, $96,000 to William G. Halnon, $90,000 toLisa G. Iglesias, $100,000 to Richard A. Lamond, $170,000 to Byrne K.Mulrooney, and $125,000 to Mark W. Smith. In addition, on the same date theCompensation Committee approved a one-time cash payment of $50,000 to WilliamJ. Grubbs, in accordance with the terms of his original offer of employment.

On February 21, 2006, the Compensation Committee ofthe Board of Directors approved the 2006 incentive award plans for executiveofficers, copies of which are attached as Exhibits 10.3 and 10.4 and are 

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incorporated herein byreference. Under these plans, the annual incentive awards for all executiveofficers, with the exception of Byrne K. Mulrooney, are based 100% on EPStargets. Byrne K. Mulrooney’s annual incentive award is based 75% on EPStargets and 25% on a performance measure related to gross profit growth andexpense control.  

The 2006 annual incentive award targets for each executiveofficer is as follows: 100% for Roy G. Krause, 75% of base salary for Byrne K.Mulrooney, 60% of base salary for William J. Grubbs, William G. Halnon, Lisa G.Iglesias, Richard A. Lamond and Mark W. Smith.

On February 9, 2006, Spherion announced the departureof Eric Archer, president of the Company’s Professional Services division. Theterms of his separation have been finalized and a copy of his SeparationAgreement, which became effective February 24, 2006, is attached hereto asExhibit 10.5. The terms of the Separation Agreement are consistent with Mr.Archer’s employment agreement, which was filed as Exhibit 10.57 to the Form10-K for the fiscal year ended January 1, 2006, except that Mr. Archer isreceiving $138,961 additional severance and has agreed to an extended no-hireprovision for certain of our employees. Mr. Archer will receive a lump sumtotal payment of $531,393 (which includes the additional amount describedabove) in consideration for his agreement to abide by certain non-compete,non-disparagement and confidentiality provisions in his Separation Agreement.

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**PART III**

**Items 10, 11, 12, 13 and 14.**

Certain informationregarding our executive officers is contained in Part I and certaininformation regarding our stock plans is contained in Part III, Item 12below. The remaining information required by Items 10 and 12 and theinformation required by Items 11, 13 and 14 of this Part III isomitted because, no later than 120 days from January 1, 2006, we willfile and distribute our definitive proxy statement for our 2006 annual meetingof stockholders containing the information required by such Items. Such omittedinformation is incorporated herein by this reference.

**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The following tablesummarizes our stock options and deferred stock units to be issued uponexercise and the number of securities available for future issuances as of January 1,2006:

**EquityCompensation Plan Information**

| ** **                                                   | ** ** | **(a)**                                    | ** ** | **(b)**                                     | ** ** | **(c)**                                         | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                 | ** ** | ** **                                  | ** ** | **Number of securities**              | ** ** |
| ** **                                                   | ** ** | ** **                                 | ** ** | **Weighted-average**                        | ** ** | **remaining available for**           | ** ** |
| ** **                                                   | ** ** | **Number of securities to** | ** ** | **exercise price of**             | ** ** | **future issuance under equity** | ** ** |
| ** **                                                   | ** ** | **be issued upon exercise** | ** ** | **outstanding**                             | ** ** | **compensation plans**                     | ** ** |
| ** **                                                   | ** ** | **of outstanding options**       | ** ** | **options and deferred**          | ** ** | **(excluding securities**                  | ** ** |
| **Plan Category**                                       | ** ** | ** **                                 | ** ** | **and deferred stock units** | ** ** | **stock units**                            | ** ** | **reflected in column (a))** | ** ** |
| Equity  compensation plans approved by security holders |       |                                       | 4,270,674  |                                        |       |                                            | $          | 9.98 |   |   |   | 3,168,277 |   |   |
| Equity  compensation plans not approved by security holders  |       |                                       | 885,529    |                                        |       |                                            | —     |   |   |   | 209,164 |   |   |
| Total                                                        |       |                                       | 5,156,203  |                                        |       |                                            | $          | 8.27 |   |   |   | 3,377,441 |   |   |
|                                                              |            |                                            |            |                                             |            |                                                 |            |  |  |  |  |  |  |  |  |  |

 

The equity compensation plan not approved by securityholders is a deferred stock plan which allows grants of deferred stock units toemployees and outside directors. Deferred stock units entitle the individual toreceive shares of our common stock at a future date after meeting servicerequirements or financial targets. The deferred stock units vest between oneand seven years or a shorter period based upon certain performance criteria.

The information required by Item 403 of Regulation S-Kis omitted because, no later than 120 days from January 1, 2006, wewill file and distribute our definitive proxy statement for our 2006 annualmeeting of stockholders containing the information required by such Item.

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**PART IV**

**Item 15.**                 EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)                    FINANCIALSTATEMENTS

Thefollowing consolidated financial statements of Spherion Corporation andsubsidiaries are filed under Item 8 of Part II of this Report:

|                                                                        | ** ** | **Page** |
|------------------------------------------------------------------------|------------|----------|
| Management’s Report on  Internal Control Over Financial Reporting |       | 38       |
| Reports of Independent  Registered Public Accounting Firm              |       | 39       |
| Consolidated Statements of  Operations                                 |       | 42       |
| Consolidated Balance Sheets                                            |       | 43       |
| Consolidated Statements of  Stockholders’ Equity                  |       | 44       |
| Consolidated Statements of  Cash Flows                                 |       | 45       |
| Notes  to Consolidated Financial Statements                            |       | 46       |

 

(2)          FINANCIAL STATEMENTSCHEDULES

The following financial statement schedule is filed aspart of this Report:

Schedule II—Valuationand Qualifying Accounts

Schedules not filed herewith are either not applicable,the information is not material or the information is set forth in theconsolidated financial statements or notes thereto.

(3)          EXHIBITSREQUIRED BY ITEM 601 OF REGULATION S-K
| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Exhibit Name** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|
| 3.1              |       | Restated Certificate of Incorporation of Spherion,  as last amended on May 19, 2004, filed as Exhibit 3.1 to Spherion’s  Form 10-Q for the quarter ended June 25, 2004, is  incorporated herein by reference.                                                                                                                        |
| 3.2              |       | Restated By-Laws  of Spherion, as amended through November 11, 2003, filed as  Exhibit 3.2 to Spherion’s Form 10-K for the fiscal year ended  December 26, 2003, is incorporated herein by reference.                                                                                                                                |
| 4.1              |       | Form of Stock  Certificate, filed as Exhibit 4.1 to Spherion’s Form 10-K for  the fiscal year ended December 29, 2000, is incorporated herein by  reference.                                                                                                                                                                         |
| 4.2              |       | Rights Agreement dated  as of March 17, 1994 between Spherion and Boatmen’s Trust Company, filed  as Exhibit 1.1 to Spherion’s Form 8-A filed April 11,  1994, is incorporated herein by reference.                                                                                                                             |
| 4.3              |       | Restated Certificate of  Designation, Preferences and Rights of Participating Preferred Stock of  Spherion as filed with the Secretary of State of the State of Delaware, filed  as Exhibit 4.3 to Spherion’s Report on Form 8-K filed  July 7, 2000, is incorporated herein by reference.                                                |
| 4.4              |       | Amendment  No. 1, dated as of June 26, 1996, to Rights Agreement dated  March 17, 1994, between Spherion, Boatmen’s Trust Company and  ChaseMellon Shareholder Services L.L.C., filed as Exhibit 4.1(A) to  Spherion’s Form 10-Q for the quarter ended September 27,  1996, is incorporated herein by reference. |

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| 4.5         |   | Amendment No. 2, dated as of February 25,  1997, to Rights Agreement dated March 17, 1994, between Spherion and  ChaseMellon Shareholder Services L.L.C., filed as Exhibit 4.1(B) to  Spherion’s Form 10-Q for the quarter ended March 28, 1997, is  incorporated herein by reference.                                                                                                                                                                                                                         |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6         |   | Articles Fourth, Fifth,  Seventh, Eighth and Tenth of the Restated Certificate of Incorporation of  Spherion, as last amended May 19, 2004, filed as Exhibit 4.6 to  Spherion’s Form 10-Q for the quarter ended June 25, 2004, are  incorporated herein by reference.                                                                                                                                                                                                                                                         |
| 4.7         |   | Article I and  Article V of the Restated By-Laws of Spherion, as amended through  November 11, 2003, filed as Exhibit 4.7 to Spherion’s Form 10-Q  for the quarter ended June 28, 2002, are incorporated herein by  reference.                                                                                                                                                                                                                                                                                      |
| 4.8         |   | Certificate of Increase  of Shares Designated as Participating Preferred Stock, filed as  Exhibit 2.2 to Spherion’s Form 8-A/A2, dated November 3,  1997, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                     |
| 4.10        |   | Amendment No. 3,  dated as of January 20, 1998, to Rights Agreement dated as of  March 17, 1994, between Spherion and ChaseMellon Shareholder Services  L.L.C., filed as Exhibit 4.10 to Spherion’s Form 10-K for the  fiscal year ended December 25, 1998, is incorporated herein by  reference.                                                                                                                                                                                                                   |
| 4.11        |   | Amendment No. 4,  dated as of November 21, 2000, to Rights Agreement dated March 17,  1994, between Spherion, ChaseMellon Shareholder Services L.L.C. and the Bank  of New York, filed as Exhibit 4.11 to Spherion’s Form 10-K  for the fiscal year ended December 29, 2000, is incorporated herein by  reference.                                                                                                                                                                                                  |
| 4.12        |   | Amendment No. 5,  dated as of March 23, 2001, to Rights Agreement dated March 17,  1994, by and between Spherion and the Bank of New York, filed as  Exhibit 4.12 to Spherion’s Form 10-Q for the quarter ended  March 30, 2001, is incorporated herein by reference.                                                                                                                                                                                                                                               |
| 4.13        |   | Spherion is a party to  other agreements for unregistered long-term debt securities, which do  not exceed 10% of Spherion’s total assets. Spherion agrees to furnish a copy  of such agreements to the Commission upon request.                                                                                                                                                                                                                                                                                                                   |
| 4.14        |   | Amendment No. 6,  dated as of December 1, 2003, to Rights Agreement dated March 17,  1994, by and between Spherion and the Bank of New York, filed as Exhibit 4.14  to Spherion’s Form 10-K for the fiscal year ended  December 26, 2003, is incorporated herein by reference.                                                                                                                                                                                                                                      |
| 10.1*       |   | Spherion’s 1994 Stock  Option Plan for Franchisees, Licensees and Agents, as amended through and  restated as of August 10, 1999, filed as Exhibit 10.1 to Spherion’s  Form 10-Q for the quarter ended September 24, 1999, is  incorporated herein by reference.                                                                                                                                                                                                                                                         |
| 10.2        |   | Form of  Indemnification Agreement between Spherion and each director of Spherion,  dated August 10, 1999 for all directors except James J. Forese,  David R. Parker and Anne Szostak, filed as Exhibit 10.2 to  Spherion’s Form 10-Q for the quarter ended September 24,  1999, is incorporated herein by reference. The Indemnification Agreements for  Messrs. Forese and Parker are dated February 25, 2003 and  Ms. Szostak’s Indemnification Agreement is dated March 21, 2005. |
| 10.3*† |   | Spherion Corporation  Corporate Executives Management 2006 Variable Pay Plan for the individuals  listed on Schedule A attached thereto, filed as Exhibit 10.3 attached  hereto.                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4*† |   | Spherion Corporation  Line of Business Executive Management 2006 Variable Pay Plan for the  individuals listed on Schedule A attached thereto, filed as Exhibit 10.4  attached hereto.                                                                                                                                                                                                                                                                                                                                                            |
| 10.5*† |   | Separation Agreement  dated February 9, 2006, by and between Spherion and Eric Archer, filed  as Exhibit 10.5 attached hereto.                                                                                                                                                                                                                                                                                                                                                                                                               |

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| 10.11* |   | Norrell Corporation 1994  Stock Incentive Plan, filed as Exhibit 10.27 to Norrell Corporation’s  Registration Statement on Form S-1, as filed with the Securities  and Exchange Commission on June 10, 1994, is incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17  |   | Restated Stock Purchase  Agreement, dated September 26, 1997 among Interim Services Inc.,  Catamaran Acquisition Corp. and Cornerstone Equity Investors IV, L.P., filed  as Exhibit 2.1 to Spherion’s Form 8-K dated  September 26, 1997 and filed October 13, 1997, is incorporated  herein by reference.                                                                                                                                                                                                                                                               |
| 10.18* |   | Spherion Corporation  Deferred Compensation Plan amended and restated as of January 1, 2005,  filed as Exhibit 99.1 to Spherion’s Form 8-K filed  January 5, 2006, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19* |   | Spherion Corporation  Outside Directors’ Compensation Plan, effective July 1, 2005, filed as  Exhibit 10.19 to Spherion’s Form 10-Q for the quarter ended  July 3, 2005, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                            |
| 10.22* |   | Spherion Corporation  2000 Stock Incentive Plan, filed as Exhibit 10.22 to Spherion’s  Form 10-K for the fiscal year ended December 29, 2000, is  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.39* |   | Spherion Corporation  Amended and Restated 2000 Employee Stock Purchase Plan, as last amended  May 19, 2004, filed as Exhibit 10.39 to Spherion’s Form 10-Q  for the quarter ended June 25, 2004, is incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                       |
| 10.51* |   | Separation Agreement  dated March 9, 2004, by and between Spherion and Cinda A. Hallman, filed  as Exhibit 10.51 to Spherion’s Form 10-Q for the quarter  ended March 26, 2004, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                          |
| 10.55* |   | Restated Employment  Agreement by and between Spherion and Roy G. Krause, amended through  March 9, 2005, filed as Exhibit 10.55 to Spherion’s Form 10-K  for the fiscal year ended December 31, 2004, is incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                  |
| 10.56* |   | Restated Change in  Control Agreement by and between Spherion and Roy G. Krause, amended through  March 9, 2005, filed as Exhibit 10.56 to Spherion’s Form 10-K  for the fiscal year ended December 31, 2004, is incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                           |
| 10.57* |   | Form of Restated  Employment Agreement by and between Spherion and the individuals listed on  Schedule A attached thereto, filed as Exhibit 10.57 attached hereto.                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.58* |   | Form of Restated  Change in Control Agreement by and between Spherion and the individuals  listed on Schedule A attached thereto, filed as Exhibit 10.58 attached  hereto.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.59* |   | Spherion Corporation  Deferred Stock Plan (as amended and restated December 20, 2002) filed as  Exhibit 10.59 to Spherion’s Form 10-K for the year ended  December 27, 2002, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                             |
| 10.60  |   | Credit Agreement, dated  as of July 24, 2003, made by and among the financial institutions from  time to time parties thereto (such financial institutions, together with  their respective successors and assigns, are referred to thereinafter each  individually as a “Lender” and collectively as the “Lenders”), Bank of  America, N.A., as Administrative Agent and Collateral Agent for the Lenders  and Spherion, filed as Exhibit 10.60 to Spherion’s Form 10-Q  for the quarter ended September 26, 2003, is incorporated herein by  reference. |

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| 10.61        |   | First Amendment to  Credit Agreement, Security Agreement, Pledge Agreement and Guaranty Agreement  dated August 25, 2003 by and among Spherion, as borrower, each  subsidiary of Borrower party to the Security Agreement, the Pledge Agreement  and the Guaranty Agreement, each of the Lenders signatory hereto and Bank of  America, N.A., as agent to the Lenders, filed as Exhibit 10.61 to  Spherion’s Form 10-Q for the quarter ended September 26,  2003, is incorporated herein by reference. |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.62*       |   | Form of Restated  Employment Agreement by and between Spherion and the individuals listed on  Schedule A attached thereto, filed as Exhibit 10.62 attached hereto.                                                                                                                                                                                                                                                                                                                                                    |
| 10.63        |   | Second Amendment to  Credit Agreement dated as of March 30, 2004, made by and among Spherion,  as borrower, each subsidiary of Borrower party to the Guaranty Agreement,  each of the Lenders signatory hereto and Bank of America, N.A., as agent for  the Lenders, filed as Exhibit 10.63 to Spherion’s Form 10-Q  for the quarter ended September 24, 2004, is incorporated herein by  reference.                                                                                                   |
| 10.64        |   | Third Amendment to  Credit Agreement dated as of July 12, 2004, made by and among Spherion,  as borrower, each subsidiary of Borrower party to the Guaranty Agreement,  each of the Lenders signatory hereto and Bank of America, N.A., as agent for  the Lenders, filed as Exhibit 10.64 to Spherion’s Form 10-Q  for the quarter ended September 24, 2004, is incorporated herein by  reference.                                                                                                     |
| 10.65*       |   | Spherion Corporation  form of 2000 Stock Incentive Plan Stock Option Agreement, filed as  Exhibit 10.65 to Spherion’s Form 10-K for the fiscal year  ended December 31, 2004, is incorporated herein by reference.                                                                                                                                                                                                                                                                                          |
| 10.66*       |   | Spherion Corporation  form of standard Deferred Stock Agreement, filed as Exhibit 10.66 to  Spherion’s Form 10-K for the fiscal year ended December 31,  2004, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                         |
| 10.67*† |   | Spherion Corporation  form of Deferred Stock Agreement with vesting criteria related to  implementation of enterprise resource planning system, filed as  Exhibit 10.67 to Spherion’s Form 10-K for the fiscal year  ended December 31, 2004, is incorporated herein by reference.                                                                                                                                                                                                                          |
| 10.68*† |   | Spherion Corporation  form of Deferred Stock Agreement with performance based vesting criteria,  filed as Exhibit 10.68 attached hereto.                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.69        |   | Fourth Amendment to  Credit Agreement dated as of July 29, 2005, made by and among Spherion,  as borrower, each subsidiary of Borrower party to the Guaranty Agreement,  each of the Lenders signatory hereto and Bank of America, N.A., as agent for  the Lenders, filed as Exhibit 99.1 to Spherion’s Form 8-K  filed August 3, 2005, is incorporated herein by reference.                                                                                                                           |
| 10.70*† |   | Spherion Corporation  Corporate Executives Management 2004 Variable Pay Plan for the individuals  listed on Schedule A attached thereto, filed as Exhibit 10.70 to  Spherion’s Form 10-K for the fiscal year ended December 31,  2004, is incorporated herein by reference.                                                                                                                                                                                                                                 |
| 10.71*† |   | Spherion Corporation  Line of Business Executive Management 2004 Variable Pay Plan for the  individuals listed on Schedule A attached thereto, filed as  Exhibit 10.71 to Spherion’s Form 10-K for the fiscal year  ended December 31, 2004, is incorporated herein by reference.                                                                                                                                                                                                                           |
| 10.72*† |   | Spherion Corporation  Corporate Executives Management 2005 Variable Pay Plan for the individuals  listed on Schedule A attached thereto, filed as Exhibit 10.72 to  Spherion’s Form 10-K for the fiscal year ended December 31,  2004, is incorporated herein by reference.                                                                                                                                                                                                                                 |

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| 10.73*† |   | Spherion Corporation  Line of Business Executive Management 2005 Variable Pay Plan for the  individuals listed on Schedule A attached thereto, filed as  Exhibit 10.73 to Spherion’s Form 10-K for the fiscal year  ended December 31, 2004, is incorporated herein by reference. |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.74*† |   | Spherion Corporation  form of Deferred Stock Agreement with vesting criteria related to EPS targets  filed as Exhibit 10.74 to Spherion’s Form 10-K for the fiscal  year ended December 31, 2004, is incorporated herein by reference.                                            |
| 11           |   | See “Earnings (Loss) Per  Share” in Note 16 of the Notes to Consolidated Financial Statements included  at page 67 herein.                                                                                                                                                             |
| 21           |   | Subsidiaries of  Spherion, filed as Exhibit 21 attached hereto.                                                                                                                                                                                                                                  |
| 23.1         |   | Consent of  Deloitte & Touche LLP, filed as Exhibit 23.1 attached hereto.                                                                                                                                                                                                               |
| 31.1         |   | Rule 13a-14(a) Certification  in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002,  filed as Exhibit 31.1 attached hereto.                                                                                                                                           |
| 31.2         |   | Rule 13a-14(a) Certification  in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002,  filed as Exhibit 31.2 attached hereto.                                                                                                                                           |
| 32.1         |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002, furnished as Exhibit 32.1 attached  hereto.                                                                                                                  |
| 32.2         |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002, furnished as Exhibit 32.2 attached  hereto.                                                                                                                  |

----

*                    This Exhibit isa management contract or compensatory plan or arrangement.

†                    Portions ofthis Exhibit have been omitted and filed separately with the Commission pursuantto a request for confidential treatment.

(b)          EXHIBITS FILED WITH THISFORM

| Exhibit   Number | ** ** | ** **                                                                                                                                     | ** ** | **Exhibit Name** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 10.3*†      |       | Spherion Corporation  Corporate Executives Management 2006 Variable Pay Plan for the individuals  listed on Schedule A attached thereto.       |
| 10.4*†      |       | Spherion Corporation  Line of Business Executive Management 2006 Variable Pay Plan for the  individuals listed on Schedule A attached thereto. |
| 10.5*†      |       | Separation Agreement  dated February 9, 2006, by and between Spherion and Eric Archer.                                                    |
| 10.57*           |       | Form of Restated  Employment Agreement by and between Spherion and the individuals listed on  Schedule A attached thereto.                |
| 10.58*           |       | Form of Restated  Change in Control Agreement by and between Spherion and the individuals  listed on Schedule A attached thereto.         |
| 10.62*           |       | Form of Restated  Employment Agreement by and between Spherion and the individuals listed on  Schedule A attached thereto.                |
| 10.68*†     |       | Spherion Corporation  form of Deferred Stock Agreement with performance based vesting criteria.                                                |
| 21               |       | Subsidiaries of  Spherion.                                                                                                                     |
| 23.1             |       | Consent of  Deloitte & Touche LLP.                                                                                                    |
| 31.1             |       | Rule 13a-14(a) Certification  in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002.                                 |

77

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| 31.2 |   | Rule 13a-14(a) Certification  in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002.                      |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |
| 32.2 |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

----

*                    This Exhibit isa management contract or compensatory plan or arrangement.

†                    Portions ofthis Exhibit have been omitted and filed separately with the Commissionpursuant to a request for confidential treatment.

(c)           OTHER FINANCIALSTATEMENTS

There were no other financial statements of the typedescribed in subparagraph (d) of Item 15 of Part IV required to be filedherein.

78

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, Spherion has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

|                        | SPHERION CORPORATION |
|------------------------|----------------------|
| February 27, 2006 | By                   | /s/  ROY G. KRAUSE |
|                   | * *             | Roy G. Krause*President and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of Spherion and in thecapacities and on the date indicated.
|                         | **Signature** | ** **             |  |  | Title | ** ** |
|-------------------------|---------------|------------------------|--|--|-------|------------|
| /s/  STEVEN S. ELBAUM   |          | Chairman  and Director |
| Steven S. Elbaum        |          |
| /s/  WILLIAM F. EVANS   |          | Director               |
| William F. Evans        |          |
| /s/  JAMES J. FORESE    |          | Director               |
| James J. Forese         |          |
| /s/  ROY G. KRAUSE      |          | Director               |
| Roy G. Krause           |          |
| /s/  J. IAN MORRISON    |          | Director               |
| J. Ian Morrison         |          |
| /s/  DAVID R. PARKER    |          | Director               |
| David R. Parker         |          |
| /s/  M. ANNE SZOSTAK    |          | Director               |
| M. Anne Szostak         |          |
| /s/  A. MICHAEL VICTORY |          | Director               |
| A. Michael  Victory     |          |

(Signed as to each on February 27, 2006)

----

 
|                    | **Signature** | ** **                                         | ** ** | ** ** | **Title** | ** ** |
|--------------------|---------------|----------------------------------------------------|------------|------------|-----------|------------|
| /s/ ROY G.  KRAUSE |          | President and  Chief Executive Officer             |
| Roy G. Krause      |          |
| /s/ MARK  W. SMITH |          | Senior Vice President and  Chief Financial Officer |
| Mark W. Smith      |          |
|               |          | (principal financial and accounting officer)       |

(Signedas to each on February 27, 2006)

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**SPHERIONCORPORATION AND SUBSIDIARIESSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**(amountsin thousands)

| ** **                                    | **Column A** | ** **            | ** ** | **Column B**   | ** ** | **Column C Additions** | ** ** | **Column D** | ** ** | **Column E**   | ** ** |
|-----------------------------------------------|-------------------|-----------------------|------------|---------------------|------------|----------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                    | ** **        | **Balance at**   | ** ** | **Charged to** | ** ** | **Charged to**              | ** ** | ** **        | ** ** | **Balance at** | ** ** |
| ** **                                    | ** **        | **Beginning of** | ** ** | **Costs and**  | ** ** | **Other**                        | ** ** | ** **        | ** ** | **End of**     | ** ** |
| ** **                                    | **Description**   | ** **            | ** ** | **Period**          | ** ** | **Expenses**                     | ** ** | **Accounts**      | ** ** | **Deductions**      | ** ** | **Period** | ** ** |
| **Fiscal Year Ended  December 26, 2003** | ** **        |                  | ** ** |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  Doubtful Accounts              |              |                  | $          | (6,760              | )          |                             |       | $                 | (3,298     | )                   |       |   | $ | — |   |   |   | $ | 3,387 |   |   |   | $ | (6,671 | ) |   |
| Accumulated  Amortization:                    |              |                  |       |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Trade names                                   |              |                  | $          | (364                | )          |                             |       | $                 | (203       | )                   |       |   | $ | — |   |   |   | $ | 18 |   |   |   | $ | (549 | ) |   |
| Other                                         |              |                  | (84        | )                   |       |                             | (245       | )                 |       |                | (4         | ) |   |   | — |   |   |   | (333 | ) |   |
|                                          |              |                  | $          | (448                | )          |                             |       | $                 | (448       | )                   |       |   | $ | (4 | ) |   |   | $ | 18 |   |   |   | $ | (882 | ) |   |
| **Fiscal Year Ended  December 31, 2004** | ** **        |                  | ** ** |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for Doubtful  Accounts              |              |                  | $          | (6,671              | )          |                             |       | $                 | (7,238     | )                   |       |   | $ | — |   |   |   | $ | 6,832 |   |   |   | $ | (7,077 | ) |   |
| Accumulated  Amortization:                    |              |                  |       |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Trade names                                   |              |                  | $          | (549                | )          |                             |       | $                 | (208       | )                   |       |   | $ | — |   |   |   | $ | 77 |   |   |   | $ | (680 | ) |   |
| Other                                         |              |                  | (333       | )                   |       |                             | (335       | )                 |       |                | (23        | ) |   |   | — |   |   |   | (691 | ) |   |
|                                          |              |                  | $          | (882                | )          |                             |       | $                 | (543       | )                   |       |   | $ | (23 | ) |   |   | $ | 77 |   |   |   | $ | (1,371 | ) |   |
| **Fiscal Year Ended  January 1, 2006**   | ** **        |                  | ** ** |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Allowance for  Doubtful Accounts              |              |                  | $          | (7,077              | )          |                             |       | $                 | (4,902     | )                   |       |   | $ | — |   |   |   | $ | 7,271 |   |   |   | $ | (4,708 | ) |   |
| Accumulated  Amortization:                    |              |                  |       |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Trade names                                   |              |                  | $          | (680                | )          |                             |       | $                 | (193       | )                   |       |   | $ | — |   |   |   | $ | 317 |   |   |   | $ | (556 | ) |   |
| Other                                         |              |                  | (691       | )                   |       |                             | (222       | )                 |       |                | 46         |   |   |   | 437 |   |   |   | (430 | ) |   |
|                                          |              |                  | $          | (1,371              | )          |                             |       | $                 | (415       | )                   |       |   | $ | 46 |   |   |   | $ | 754 |   |   |   | $ | (986 | ) |   |
|                                               |                   |                       |            |                     |            |                                  |            |                   |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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