**UNITED STATESSECURITIES 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 December 31,2006

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—$0.01 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 to this Form 10-K.x

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 |
|---------------------------|----------------------|-------------------------|

 

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

Theaggregate market value of the voting stock held by non-affiliates of theRegistrant, computed by reference to the closing price of the Registrant’sCommon Stock, par value $0.01 per share (“Common Stock”), as of June 30,2006 on the New York Stock Exchange, was $515,786,224.

Number of shares ofRegistrant’s Common Stock outstanding on January 26, 2007 was 56,581,466.

Documents Incorporated byReference:

Certainspecified portions of the registrant’s definitive proxy statement to be filedwithin 120 days after December 31, 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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**SPHERIONCORPORATION AND SUBSIDIARIES**

**TABLEOF CONTENTS**

|               | ** ** | ** **                                                                                                              | ** ** | **Page No.** |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I   |       |                                                                                                                    |       |              |
| ITEM 1        |       | Business                                                                                                                |       | 1                 |   |
| ITEM 1A       |       | Risk Factors                                                                                                            |       | 9                 |   |
| ITEM  1B      |       | Unresolved  Staff Comments                                                                                              |       | 13                |   |
| ITEM 2        |       | Properties                                                                                                              |       | 14                |   |
| ITEM 3        |       | Legal Proceedings                                                                                                       |       | 14                |   |
| ITEM  4       |       | Submission  of Matters to a Vote of Security Holders                                                                    |       | 14                |   |
| PART II  |       |                                                                                                                    |       |              |   |
| ITEM 5        |       | Market  for the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 15                |   |
| ITEM 6        |       | Selected  Financial Data                                                                                                |       | 17                |   |
| ITEM  7       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       | 18                |   |
| ITEM  7A      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                             |       | 35                |   |
| ITEM  8       |       | Financial  Statements and Supplementary Data                                                                            |       | 37                |   |
| ITEM  9       |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                   |       | 70                |   |
| ITEM  9A      |       | Controls  and Procedures                                                                                                |       | 70                |   |
| ITEM 9B       |       | Other  Information                                                                                                      |       | 70                |   |
| PART III |       |                                                                                                                    |       |              |   |
| ITEM 10       |       | Directors,  Executive Officers and Corporate Governance                                                                 |       | 72                |   |
| ITEM 11       |       | Executive  Compensation                                                                                                 |       | 72                |   |
| ITEM  12      |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |       | 72                |   |
| ITEM 13       |       | Certain  Relationships and Related Transactions, and Director Independence                                              |       | 72                |   |
| ITEM 14       |       | Principal  Accountant Fees and Services                                                                                 |       | 72                |   |
| PART IV  |       |                                                                                                                    |       |              |   |
| ITEM 15       |       | Exhibits  and Financial Statement Schedules                                                                             |       | 73                |   |
|          |       | Exhibit Index                                                                                                      |       | 73                |   |
| SIGNATURES    |       | 79                                                                                                                      |       |

 

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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 services, managed services and permanent placement services.We are headquartered in Fort Lauderdale, Florida, and operate a network of 660locations within North America. We are incorporated under the laws of the Stateof Delaware. As of December 31, 2006, we had 486 company-owned offices, 93licensed locations and 81 franchised locations.

We provide temporary staffing services, managedservices and permanent placement services under two basic operating segments—StaffingServices and Professional Services, within the United States of America andCanada. As of December 31, 2006, our Canadian operations representedapproximately 5.1% of the Company’s total revenue. Temporary staffing servicesinclude personnel in the following skill categories: clerical, lightindustrial, information technology, finance and accounting, legal, engineering,sales and marketing, human resources and administrative. Managed servicesinclude services where we manage certain aspects of a customer function suchas: recruiting, administrative services, data center or network operations. Permanentplacement is a service where our employees locate talent on behalf of ourcustomers, screen the candidates and assist in the recruitment efforts.

We provide services to a wide variety of customersacross most major industries in North America. Our customers range in size fromlarge Fortune 500 companies to small, locally run businesses.

During 2004 and 2005, wesold our operations in the United Kingdom, The Netherlands and in theAsia/Pacific region, as well as our court reporting operation and call centeroutsourcing business in the United States of America. The businesses were solddue to changes in client demand and was consistent with our strategy to focuson the North American recruiting and staffing markets. The internationaloperations, as well as the court reporting business, were all sold prior to December 31,2004. The remaining business unit, the call center outsourcing business, wascomprised of four call centers, of which three were sold in 2005 and weretained the remaining call center in the first quarter of 2006.

***Industry Overview***

Spherion Corporation is a diversified staffing companyoperating in North America. The North American staffing market was estimated tobe approximately $108.6 billion in 2006. This market includes temporarystaffing, permanent placement and other services similar to those provided bySpherion. The North American staffing market in 2006 is estimated to have grownby approximately 7% to 10% and at a faster rate for high demand skill sets suchas finance, accounting, legal, engineering, and information technologyspecialists.

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. Over the past three years,Spherion and many of its peers benefited from market expansion. Companies havecontinued to 

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experiencesuccess in the usage of temporary help, which has facilitated rapid workforceadjustments as economic conditions improve. This practice has increased thedemand for temporary help in North America, which as of December 2006 wasalmost 2.0% 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. If unemployment continues todecrease, we believe the shortage will increase the need for companies tocontinue to use the services of Spherion and other companies within thestaffing industry. The long-term growth rate for the North American staffingindustry is expected to be 5% to 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 and are estimated prior to the commencementof beginning the work. We typically retain the risk of loss if these estimatedmark-ups are not high enough to cover actual losses due to higher thananticipated unemployment, workers’ compensation or other losses.

·       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. A growing area of our managed services business is recruitmentoutsourcing and within this offering we take responsibility for most aspects ofa customer’s hiring or recruiting function. Fees are determined based on acombination of headcount, service level provided and/or fixed fee pertransaction/unit processed. We are responsible for all employment related taxesof our employees, workers’ compensation and federal and state unemployment. Aswith temporary staffing, we typically retain the risk of loss for unemployment,workers’ compensation or other losses if our rates are not high enough torecover these costs.

·       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 and we establish reserves for candidates placed withcustomers who do not stay through a guarantee period, typically three months.

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Thefollowing table represents the fiscal year 2006 revenues derived from each ofthese services within our operating segments (in thousands):

| ** **           | ** ** | **Staffing Services** | ** ** | **Professional Services** | ** ** |
|----------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **Amount**                 | ** ** | **% Total**               | ** ** | **Amount** | ** ** | **% Total** | ** ** |
| Temporary  staffing  |       | $                          | 1,231,301  |                           |       | 85.5 | % |   | $ | 440,170 |   |   | 89.3 | % |   |
| Managed services     |       | 187,268                    |       |                           | 13.0       | % |   | — |   |   | — |   |   |
| Permanent  placement |       | 21,817                     |       |                           | 1.5        | % |   | 52,503 |   |   | 10.7 | % |   |
| Total                |       | $                          | 1,440,386  |                           |       | 100.0 | % |   | $ | 492,673 |   |   | 100.0 | % |   |

 

Within the servicesdescribed above, the Staffing Services operating segment concentrates ontemporary staffing and placement 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 16, “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 2006, 2005 and 2004.

***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 2006, 87.3% ofrevenues were derived from company-owned locations, with the remainingderived from franchised and licensed locations.

Thefollowing table details the number of locations:

| ** **                | ** ** | **Fiscal Years** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Company-owned  locations  |       |                  | 486        |   |   |   | 478 |   |   |   | 532 |   |   |
| Licensed  locations       |       |                  | 93         |   |   |   | 94 |   |   |   | 95 |   |   |
| Franchised  locations     |       |                  | 81         |   |   |   | 87 |   |   |   | 86 |   |   |
| Discontinued  operations  |       |                  | —     |   |   |   | — |   |   |   | 3 |   |   |
| Total                     |       |                  | 660        |   |   |   | 659 |   |   |   | 716 |   |   |
| United States of  America |       |                  | 624        |   |   |   | 627 |   |   |   | 681 |   |   |
| Canada                    |       |                  | 36         |   |   |   | 32 |   |   |   | 32 |   |   |
| Discontinued  operations  |       |                  | —     |   |   |   | — |   |   |   | 3 |   |   |
| Total                     |       |                  | 660        |   |   |   | 659 |   |   |   | 716 |   |   |

 

*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.Future new or closed locations are driven by sales success creating the need fornew company-owned branches and customer on-premise locations. In 2006,the number of our locations remained flat with the prior year, after a decreasefrom 2004, primarily as a result of the loss of a large managed servicecontract.

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*Licensed Locations*

| ** **                                   | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Licensee revenues  (in thousands)            |       | $                     | 236,195    |   | $ | 256,411 |   | $ | 238,140 |   |
| Licensee  commissions as a % of gross profit |       | 72                    | %          | 70 | % | 68 | % |
| Number of  licensees                         |       | 51                    |       | 52 |   | 50 |   |
| Number of licensee  locations                |       | 93                    |       | 94 |   | 95 |   |
|                                              |            |                       |            |  |  |  |  |  |  |  |

 

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 provide licenseeswith our national, regional and cooperative local advertising. We also assist ourlicensees in obtaining business from our national accounts. 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 forall temporary employees, including those placed from a licensed location. Webill all customers serviced by licensees in our name and collect theremittances as Spherion owns the client contract. Licensees use our computersystems.

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. Weshare responsibilities in collecting accounts receivable. The licensee isresponsible to reimburse us up to 100% of uncollected accounts receivable, butwe bear the loss in cases where the licensee does not have sufficient financialwherewithal to reimburse uncollectible accounts.

The licensee is responsible for establishing itslocation and paying its related administrative and operating expenses, such asthe rent, utilities and salaries of their sales and service staff. The licenseereceives a commission from us, which averaged 72% of the licensed offices’gross profit for the fiscal year ended December 31, 2006. Our ConsolidatedStatements of Earnings reflect the licensee commission as an operating expense,but do not include the rent, utilities and salaries of the licensee’s full-timeoffice employees as these expenses are the responsibility of the licensee. OurConsolidated Balance Sheets include the accounts receivable, payrollliabilities for temporary employees and related employee benefit liabilitiesand the licensee commission payable. The only exception to this financialstatement presentation is the circumstance when we are required to consolidatecertain licensees. See Note 13, “Variable Interest Entities,” in theaccompanying Consolidated Financial Statements for further discussion of theselicensees.

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 outstandingprincipal balance of such notes receivable was $0.8 million as of December 31,2006.

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*Franchised Locations*

| ** **                                   | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Franchisee  royalty revenues (in thousands)  |       | $                     | 8,554      |   | $ | 8,976 |   | $ | 8,370 |   |
| Royalty revenues  as a % of franchisee sales |       | 4                     | %          | 4 | % | 4 | % |
| Number of  franchisees                       |       | 17                    |       | 23 |   | 22 |   |
| Number of franchisee  locations              |       | 81                    |       | 87 |   | 86 |   |
|                                              |            |                       |            |  |  |  |  |  |  |  |

 

We grant franchises, which give the franchisee theright to establish a recruitment business utilizing our trade names, servicemarks, advertising materials, sales programs, operating procedures, manuals andforms within a designated territory. We typically grant franchisees theexclusive right to establish an office to market and provide light industrialand clerical temporary personnel within a designated geographic area. Weprovide franchisees with our national, regional and local advertising. We alsoassist our licensees in obtaining business from our national accounts. Mostfranchise agreements are 10 years in length and renewable every 5 yearsthereafter. A number of franchisees are second-generation owners and mostoperate in more than one franchise territory.

Franchisees operate their businesses autonomouslywithin the framework of our policies and standards and recruit, employ and paytheir own full-time and temporary employees. Franchisees are responsible forall employment related taxes and workers’ compensation costs of their employees.Franchisees do not use our computer systems except to bill activity relating tonational accounts. We receive royalty fees from each franchise based upon thefranchisee’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 $0.8 million as of December 31,2006.

***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.

We own 85% of our Canadian operation and have aput/call agreement with the minority interest shareholder, whereby the minorityinterest shareholder can put the remaining 15% interest in the business to usany time or 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 (whoultimately must be approved by us, even if we waive our right of firstrefusal), and we have a standard end of term purchase option on our licensesand our more recently granted franchises, however we are not obligated in ourstandard agreements 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 having 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 

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competitors may also bemore flexible in offering alternatives to their customers in either attractingcandidates or in servicing the customer, but generally cannot service nationalcustomers due to a lack of systems or geographic coverage. We compete withlocal competitors in all of our jurisdictions generally when the customer is alocal or retail customer, and we expect 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 where the customer requires broadgeographic coverage, competitive national pricing and typically consolidatedreporting to assist it in better controlling costs. Since most national customersuse a central procurement department, the industry has moved towardsconsolidated competitive bidding with pricing as one of the key selectioncriteria. This has led to intense price competition within the staffing andrecruitment industry, particularly within the large account customer segment.

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 660 locations in NorthAmerica throughout the United States of America and Canada, and believe thatour coverage is adequate in the markets we serve. However, our lack ofinternational coverage could put us at a disadvantage compared to our largercompetitors in obtaining new business from multinational customers. However, wedo not believe our North American focus to be a significant disadvantage incompeting for business in our targeted small and mid-sized customer segments. Servicedelivery is understanding the customers’ specific job requirements throughconsultative assessments, the ability to provide the right candidate for theright job and the ability to measure the quality of job performance. Factors inobtaining qualified candidates for employment assignments with customersinclude the quality of available opportunities, wages, responsiveness to workschedules and the number of available work hours. No single customer accountedfor 10 percent or more of our consolidated revenues in 2006.

Within the StaffingServices operating segment, some of our largest competitors are Adecco S.A., Manpower Inc.and Kelly Services, Inc. Within the Professional Services operatingsegment, we compete with Robert Half International Inc., MPS Group, Inc.and Kforce Inc., among others.

***Trademarks***

Through our subsidiaries,we maintain a number of trademarks, trade names and service marks in the UnitedStates of America and certain other countries. We believe that many of thesemarks and trade names, including SPHERION®, NORRELL®, ON-PREMISE® andTHE MERGIS GROUPSM  are important to our business. In addition, wemaintain other intangible property rights including registered trademarks onthe following: EMERGING WORKFORCE® and SALESFIT®. Our trademark registrations in theUnited States of America for SPHERION®,NORRELL® and INTERIM® expire October 9, 2011, March 8,2013 and April 6, 2013, but are renewable for ten-year successive terms.

***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 wage and hour regulations, taxwithholding and reporting, social security or retirement, anti-discriminationand workers’ compensation.

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We also have operations in Canada. In this country,there are 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 uniform franchiseoffering circular or disclosure document (similar to a prospectus) toprospective franchisees and licensees. These and other state laws may alsoapply substantive standards that govern the relationship between franchisorsand franchisees. 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 273,000 people in 2006. On average, approximately 51,000billable 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 decreasein our first quarter revenues compared with fourth quarter revenues. The decreasein first quarter revenues compared with the preceding fourth quarters for 2006,2005 and 2004 was 7%, 12%, and 0%, respectively. First quarter revenues in 2005compared with the preceding fourth quarter decreased partially due to firstquarter 2005 including thirteen weeks, whereas fourth quarter 2004 includedfourteen weeks. First quarter revenues in 2004 compared with the precedingfourth quarter remained stable due to a higher volume of contract-basedwork in managed services and increased demand experienced from the economicrecovery.

*CyclicalNature of the Business—**The***staffing industry has historically been considered to becyclical, often acting as an indicator of both economic downswings and upswings.Staffing customers tend to use temporary staffing to supplement their existingworkforces and generally hire permanent workers when long term demand isexpected to increase. As a consequence of this, our revenues tend to increasequickly when the economy begins to grow. Conversely, our revenues also tend todecrease quickly when the economy begins to weaken as our customers reducetemporary workers before terminating their own employees. While we havelonger-term managed service contracts which are not as directly dependent uponthe economic cycle, these revenues are not significant enough to offset theimpact of cyclical economic activity in our larger service offerings.

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***Executive Officers of the Registrant***

Ourexecutive officers are:

| **Name and Age**      | ** ** | **Position**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Roy G. Krause, 60.    |       | 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 |       | Executive Vice President  since February 2007. Senior Vice President and Chief Marketing and Corporate  Development Officer from November 2005 to February 2007. From  March 2002 to September 2005, Chief Operating Officer, Spring Group  plc, a publicly held information technology and professional staffing and  recruiting company based in the United Kingdom. From April 2001 to  February 2002, CEO Spring Technology Staffing Services, a division of  Spring Group plc. From October 2000 to March 2001, CEO Spring ASP,  a division of Spring Group plc. |
| John D. Heins, 47     |       | Senior Vice President  and Chief Human Resources Officer since October 2006. From 1995 to 2006,  Vice President—Human Resources and Administrative Services for JM Family  Enterprises, a privately held $9 billion diversified automotive company.                                                                                                                                                                                                                                                                                                                                       |
| Lisa G. Iglesias, 41  |       | Senior Vice President,  General Counsel and Secretary since August 2003; General Counsel, Vice  President and Secretary from July 1999 to August 2003, Associate  Counsel from August 1998 to July 1999.                                                                                                                                                                                                                                                                                                                                                                        |
| Mark W. Smith, 44     |       | 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 of Reports and Other Information***

Our corporate website is *http://www.spherion.com.*We make availableon this website or in print, 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 pursuant to Section 13(a) or 15(d) of the Securitiesand Exchange Act of 1934 as soon as reasonably practicable after weelectronically submit such materials to the Securities and Exchange Commission.Also available on our website, or in print to any shareholder that requests it,are Spherion’s Corporate Governance Principles, Code of Business Conduct andEthics, as well as charters for the Audit Committee, Compensation Committee,Corporate Governance 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.

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**Item 1A.**                RISKFACTORS

We are affected by a wide range of factors which couldmaterially affect future developments and performance. In addition to thefactors affecting specific business operations identified in connection withthe description of these operations and the financial results of theseoperations elsewhere in this report, the following are some of the factors thatcould affect our operations:

*We operate inhighly competitive markets with low barriers to entry, and may be unable tocompete successfully against existing or new competitors.*

We operate in highly competitive and fragmentedmarkets in both of our operating segments. There are low barriers to entry bypotential competitors at the local level. We face significant competition inthe markets we serve and will continue to face significant competition in anygeographic markets or industry sectors that we may enter. The majority ofcompetitors are significantly smaller than we are. However, certain of ourcompetitors are larger, have greater marketing, technical and financialresources, and have stronger brand name recognition than we have. As a result,some of our competitors may be in a better position to capitalize on newtechnologies and changes in customer requirements, and to devote more resourcesthan we can to the development, promotion and sale of their service offerings. Insome cases, our large competitors have lower operating expenses and as aresult, we may face increased competitive pricing pressures and may not be ableto obtain or retain our new or existing customers. Some of our competitors canprovide broader geographic coverage than we can and this could limit ourability to service large customers who wish to consolidate services.

There has been a significant increase in the number ofcustomers consolidating their staffing services purchases with a single provideror with a small number of providers. The trend to consolidate purchases has insome cases made it more difficult for us to obtain or retain customers. We alsoface the risk that certain of our current and prospective customers may decideto provide similar services internally. Additionally, pricing pressures haveintensified as customers have continued to competitively bid new contracts. Thistrend is expected to continue for the foreseeable future. As a result, wecannot assure you that we will not encounter increased competition in thefuture.

*Any significanteconomic downturn could result in less demand from customers and lowerrevenues.*

Because demand for personnel services and recruitmentservices is sensitive to changes in the level of economic activity, ourbusiness may suffer during economic downturns. As economic activity slows down,companies tend to reduce their use of temporary employees and recruitmentservices before undertaking layoffs of their regular employees, resulting indecreased demand for our personnel. Additionally, an economic downturn couldresult in higher unemployment claims and costs in future periods. Also, asbusinesses reduce their hiring of permanent employees, revenues from ourrecruitment services is adversely affected. As a result, any significanteconomic downturn could have a material adverse effect on our business,financial condition or results of operations.

*A loss of customersmay result in a material impact on the results of our operations.*

We may experience a reduction in business from asignificant customer or a number of customers, or we may lose such customers. Wecannot guarantee that we will be able to retain long-term relationships orsecure renewals of short-term relationships with our more substantial customersin the future. Our customers may experience a deterioration in their currentfinancial condition or future prospects, or may experience a bankruptcy. We arealso at a risk of losses from uncollectible account receivables if ourcustomers’ financial positions deteriorate. A significant reduction in demandfrom our customers may result in an adverse impact on our business and resultsof operations in future periods.

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

Our business strategy is based on profitable growth inNorth America. We have implemented steps to continue increasing our growthrates by concentrating in local markets with small and mid-sized customersthrough relationship selling, focusing on key large accounts with profitablemargins, targeting new accounts by providing integrated services, andcontinuing to improve operating leverage by reducing corporate and fieldoverhead. We also plan to grow within our Professional Services segment byproviding more services to existing staffing group segment customers. If we arenot successful in achieving these objectives with our customers, our revenues,costs and overall profitability could be negatively affected. If we are unableto execute our business strategy effectively, our productivity and costcompetitiveness could be negatively affected.

*Our contractscontain termination provisions and pricing risks that could decrease ourrevenues, profitability and cash flow.*

Some of our customer contracts permit termination inthe event our performance is not consistent with service levels specified inthose contracts. Our customers’ ability to terminate contracts, as well ashaving many short-term contracts, creates uncertain revenue streams. Some ofour contracts contain pricing provisions that allow customers to pay a set feefor our services regardless of whether our costs to perform these servicesexceed the amount of the set fee. Some of our contracts provide for credits toour customers 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. Many of our contracts provide for a billingat a set mark-up above the temporary employees pay rate. In estimating thesemark-ups we use our best estimates of expected costs for unemployment, workers’compensation or other costs. If actual costs for these items exceed ourestimates, we typically cannot recover these retroactively from customers. Additionally,the actual development of workers’ compensation claims can take many yearsafter the accident or injury develops; such development, if adverse couldnegatively impact the Company.

*Our failure orinability to perform under customer contracts could result in damage to ourreputation and give rise to legal claims against us.*

If customers are not satisfied with our level ofperformance, our reputation in the industry may suffer, which could materiallyand adversely affect our business, financial condition, results of operations andcash flow. Certain areas of our business require us to assume a greater levelof responsibility for developing or maintaining processes on behalf of ourcustomers. Many of these processes are critical to the operation of ourcustomers’ businesses. Our failure or inability to complete these engagementssatisfactorily could have a material adverse effect on our customers’operations and consequently may give rise to claims against us for actual orconsequential damages or otherwise damage our reputation. Any of these claimscould have a material adverse effect on our business, financial condition orresults of operations.

*The disposition ofbusinesses previously sold may create contractual liabilities associated withindemnifications provided.*

We have disposed of several business units over thepast five years. The disposition of these businesses usually requires that weindemnify the purchaser for liabilities that arose prior to the dispositiondate. These liabilities are typically related to audits of tax liabilities bylocal authorities and other pre-existing liabilities such as lease obligations.Additionally, in the contracts we make a number of representations andwarranties and from time to time claims are made against us related to theseitems. During 2006, we recorded $3.3 million as part of discontinued operationsfor these matters. The fair value of these indemnifications are recorded at thetime of the sale. Subsequently if any liabilities become known and are bothprobable and reasonably estimable, they are recorded as an expense. For some ofthe dispositions, we have or may have future claims which are not yet probableand reasonably estimable and have not been recorded as an expense. Futureearnings from discontinued operations could be materially adversely 

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affected if we are notsuccessful in defending our positions with the purchasers of these discontinuedoperations. Additionally, if we are required to make cash payments for any ofthese liabilities, our financial condition could be materially adverselyaffected.

*We may experiencebusiness interruptions that could have an adverse affect on our operations.*

We could be negatively affected by natural disasters(many of our processing functions are located in a hurricane-prone area), fire,power loss, telecommunications failures, hardware or software malfunctions andbreak-downs, computer viruses or similar events. Although we have disasterrecovery plans in place, we may not be able to adequately execute these plansin a timely fashion. If our critical information systems fail or are otherwiseunavailable, this could temporarily impact our ability to pay employees, billcustomers, service customers, maintain billing and payroll records reliably andpay taxes, which could adversely affect our revenues, operating expenses, andfinancial condition. A prolonged outage could seriously impact our ability toservice customers or hire temporary workers and could seriously threaten theorganization.

*Regulatorychallenges to our tax filing positions could result in additional taxes.*

We file tax returns with various governmental entitieswithin the United States and Canada. The filings include returns with theFederal government, the states and numerous cities, counties andmunicipalities. Additionally, we have a limited number of filings with foreigngovernments related to the final wind down of our international operations. Whenwe prepare these tax filings, we are required to follow numerous and complexlegal and technical requirements where interpretation of rules andregulations is required. We believe that we have appropriately filed our taxreturns and properly reported taxable transactions, but the final tax amountsare subject to regulatory audit and interpretation. We believewe have established adequate reserves with respect to any tax liabilitiesthat may arise in relation to these transactions should our position besuccessfully challenged by tax authorities, however, an unfavorablesettlement could result in higher payments and additionalcharges to income above the amounts reserved.

*We may lose keypersonnel, and therefore, our business may suffer.*

Our operations are dependent on the continued effortsof our officers and executive management. In addition, we are dependent on theperformance and productivity of our local managers and field personnel. Ourability to attract and retain business is significantly affected by localrelationships and the quality of service rendered. The loss of those keyofficers and members of executive management who have acquired significantexperience in our industry may cause a significant disruption to our business.Moreover, the loss of our key managers and field personnel may jeopardizeexisting customer relationships with businesses that continue to use our servicesbased upon past relationships with these local managers and field personnel.The loss of such key personnel could materially adversely affect ouroperations, because it may result in an inability to establish and maintaincustomer relationships and otherwise operate our business.

*We are a defendantin a variety of litigation and other actions from time to time, which may havea material adverse effect on our business, financial condition and results ofoperations.*

We and our subsidiaries are regularly involved in avariety of litigation arising out of our business. Occasionally, thislitigation can be material. We cannot assure you that our insurance will coverall claims that may be asserted against us. Should the ultimate judgments orsettlements exceed our insurance coverage, they could have a material adverseeffect on our results of operations, financial position and cash flows. We alsocannot assure you that we will be able to obtain appropriate types or levels ofinsurance in the future or that adequate replacement policies will be availableon acceptable terms, if at all.

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

The market pricefor our common stock has been and may continue to be volatile. For example,during the fiscal year ended December 31, 2006, the prices of our commonstock as reported on the New York Stock Exchange ranged from a high of $11.41to a low of $6.76. Our stock price can fluctuate as a result of a variety offactors, including factors listed in these “Risk Factors” and others, many ofwhich are beyond our control. These factors include:

·       actualor anticipated variations in our quarterly operating results;

·       announcementof new services by us or our competitors;

·       announcementsrelating to strategic relationships or acquisitions;

·       changesin financial estimates or other statements by securities analysts; and

·       changesin general economic conditions.

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

In conducting our business, we are required to pay anumber of payroll and related expenses, including unemployment taxes, workers’compensation and medical insurance for our personnel. Unemployment insurancepremiums paid by employers typically increase during periods of increasedlevels of unemployment. Workers’ compensation costs may increase in the futureif states have raised benefit levels and liberalized allowable claims. Attemptsto increase revenue from light industrial customers may expose us to increasedworkers’ compensation claims and higher costs. Future earnings could beadversely affected if we are not able to increase the fees charged to customersto offset increased costs related to unemployment insurance or workers’compensation benefits.

*We are subject tobusiness risks associated with operations in Canada, which could make thisoperation significantly more costly.*

Operation in thismarket is subject to risks inherent in international business activities,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.

*We may be exposedto employment-related claims and costs that could have a material adverseaffect on our business, financial condition and results of operations.*

We employ and placepeople in the workplaces of other businesses. Attendant risks of such activitythat could increase our cost of doing business include:

·       possibleclaims of discrimination and harassment;

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

·       misuseor misappropriation of customer funds or proprietary information; and

·       paymentof workers’ compensation and other similar claims.

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Although we maintain insurance coverage for generalliability, errors and omissions and employee theft, such insurance coverage maynot be adequate in scope or amount to cover any such liability. A failure ofany of our personnel to observe our policies and guidelines intended to reduceexposure to these risks could have a material adverse effect upon us. We cannotassure that we will not experience such problems in the future.

We retain a portion of the risk under our workers’compensation, general liability, professional liability and employmentpractices liability insurance programs, and health insurance benefits programs.Changes in the estimates of these accruals are charged or credited to earningsin the period determined, and therefore a large fluctuation in any givenquarter could materially adversely affect earnings in that period.

*We are dependentupon availability of qualified personnel, and may not be able to attract andretain sufficient numbers of qualified personnel necessary to succeed.*

We depend upon our ability to attract qualifiedpersonnel who possess the skills and experience necessary to meet the staffingrequirements of our customers or to successfully bid for new customer projects.We must continually evaluate and upgrade our base of available qualifiedpersonnel to keep pace with changing customer needs and emerging technologies. Competitionfor individuals with proven professional or technical skills currently exists. Wecould have difficulty attracting and retaining sufficient numbers of qualifiedpersonnel necessary for our business to succeed.

*Managing orintegrating any future acquisitions may strain our resources.*

In the future, we may acquire other businesses toexpand our service offerings, broaden our customer base or expand ourgeographic presence. Acquisitions involve a number of additional risks,including the diversion of management’s attention from our existing operations,the failure to retain key personnel or customers of an acquired business, theassumption of unknown liabilities of the acquired business for which there areinadequate indemnifications, the potential impairment of acquired intangibleassets and the ability to successfully integrate the business. We couldexperience financial or other setbacks if any of the businesses that we acquirehave liabilities or problems of which we are not aware. Further, we cannotassure you that any future acquired businesses will generate anticipatedrevenues or earnings. As a result, the anticipated benefits from future acquisitionsmay not be achieved.

*Failure to meetcertain covenant requirements under our revolving lines of credit could impactpart or all of our 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 to borrowagainst and as a result, our liquidity and financial condition may be adverselyaffected.

**Item 1B.**               UNRESOLVEDSTAFF COMMENTS

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 December 31, 2006. As a result,no issues remain unresolved.

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**Item 2.**                        PROPERTIES

Our corporate headquartersare located at 2050 Spectrum Boulevard, Fort Lauderdale, Florida, in a 125,000square-foot building owned by us. In addition, we lease approximately 70,000square feet in Alpharetta, Georgia for operating functions. All other fieldlocations 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 Staffing Services and our Professional Servicesoperating segments. We believe that our facilities are adequate for our needs.

**Item 3.**                        LEGALPROCEEDINGS

In the ordinary course of our business, we are or maybe threatened with or named as a defendant in various lawsuits. We maintaininsurance in such amounts and with such coverages and deductibles as we believeare reasonable and prudent. The principal risks that we insure against areworkers’ compensation, personal injury, bodily injury, property damage,professional malpractice, errors and omissions and fidelity losses. Ourmanagement does not expect that the outcome of any pending lawsuits relating tosuch matters, individually or collectively, will have a material adverse effecton our financial condition, results of operations or cash flows.

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 SpherionCorporation in the U.S. District Court of the Southern District of New York. Glidepathand Jeimon Holdings, investors in the entity that acquired the Cyber Centerbusiness of Spherion Technology (UK) Limited, a subsidiary of SpherionCorporation, in 2002, sued Spherion for fraud, negligent misrepresentation,aiding and abetting breach of fiduciary duty and unjust enrichment and seek$32.0 million in damages, and treble for punitive damages, plus attorneys’fees, expert fees and costs. Glidepath and Jeimon Holdings allege that anindividual who was an officer of Spherion Technology (UK) fraudulently inducedthem to invest in a corporation formed to purchase the Cyber Center business,while he remained in the employ of Spherion Technology (UK) and was to be paidan incentive bonus for the sale by us. They allege that he misled them as tohis employment status at the time, as to the prospects for the Cyber Center,and as to whether the newly formed corporation was assuming the indebtedness ofSpherion Technology (UK) associated with the Cyber Center business. They allegethat in doing so, he was acting as our agent. We intend to vigorously defendthis matter. Although this claim is in the preliminary stages, we have a reserveof $0.1 million related to this matter. We do not have insurance coverage forthis claim.

**Item 4.**                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of securityholders during the fourth quarter of the fiscal year ended December 31,2006.

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**PART II**

**Item 5.**                        MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

***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:

| **2006**       | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $          | 11.41      |     | $          | 8.94    |       |
| Second Quarter |       | 10.94      |       | 7.81     |       |
| Third Quarter  |       | 9.13       |       | 6.80     |       |
| Fourth Quarter |       | 7.90       |       | 6.76     |       |
|                |            |            |            |          |            |         |            |  |  |

 

| **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     |       |
|                |            |            |            |          |            |         |            |  |  |

 

On January 26, 2007, there were approximately2,258 holders of record of our common stock.

We did not pay cash dividends in 2006 and 2005, 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.

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 of Equity Securities***

On February 20, 2007,the Board of Directors authorized the Company to repurchase shares of itscommon stock as needed to mitigate the dilutive impact of shares issued underour various employee benefit plans. The repurchases are limited to a maximum of50,000 shares of common stock per week.

***Performance Graph***

The following graphsets forth the cumulative total stockholder return on our Common Stock, thecumulative total return of the NYSE composite index and the cumulative totalreturn of our Peer Group Index (the “Peer Group Index”), each for the periodbeginning December 31, 2002 and ending December 31, 2006. The totalcumulative return on investment (change in stock price plus reinvesteddividends, if any) for us, the NYSE composite index and the Peer Group Indexassumes that a $100 investment was made on December 31, 2001. We have notdeclared any dividends in the period represented in this performance graph.

The Peer Group Index is comprised of the followingpublicly traded companies: Adecco S.A.; Kelly Services, Inc.; ManpowerInc.; MPS Group, Inc.; and Robert Half International Inc.

The data for thisperformance graph was compiled for us by Standard and Poor’s. The stock priceperformance shown on this graph is not necessarily indicative of future priceperformance of our Common Stock.

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**Comparisonof Cumulative Five Year Total Return**

****

| ** **            | ** ** | **Fiscal Years** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2001**              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Spherion  Corporation |       | $                     | 100.00     |   | $ | 61.67 |   | $ | 101.22 |   | $ | 85.63 |   | $ | 102.04 |   | $ | 75.74 |   |
| NYSE Composite  Index |       | 100.00                |       | 78.89 |   | 101.27 |   | 115.36 |   | 123.38 |   | 145.41 |   |
| Peer Group            |       | 100.00                |       | 72.29 |   | 112.67 |   | 111.46 |   | 115.34 |   | 152.89 |   |
|                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 remaining call center was retained in the first quarter of2006. As a result of our decision to retain this call center, all financialactivity related to this call center has been reclassified from discontinuedoperations to continuing operations within the Staffing Services for allperiods presented.

| ** **                                  | ** ** | **Fiscal Years**                                                                                 | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **(in thousands, except per share data  and operating locations)** | ** ** |
| ** **                                  | ** ** | **2006(1)**                                                                                           | ** ** | **2005** | ** ** | **2004(2)** | ** ** | **2003(3)** | ** ** | **2002(4)** | ** ** |
| **Statement of Operation Data:**            | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                    |       | $                                                                                                     | 1,933,059  |   | $ | 1,980,574 |   | $ | 2,039,861 |   | $ | 1,733,761 |   | $ | 1,771,119 |   |
| Gross profit                                |       | 454,908                                                                                               |       | 435,784 |   | 425,948 |   | 388,128 |   | 419,453 |   |
| Earnings (loss) from  continuing operations |       | 22,589                                                                                                |       | 20,213 |   | 14,774 |   | (1,585 | ) | (219,172 | ) |
| Net earnings (loss)                         |       | 54,682                                                                                                |       | 12,029 |   | 35,829 |   | (13,913 | ) | (903,272 | ) |
| Earnings (loss) per share—Basic:       |       |                                                                                                  |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from  continuing operations |       | $                                                                                                     | 0.39       |   | $ | 0.33 |   | $ | 0.24 |   | $ | (0.03 | ) | $ | (3.69 | ) |
| Net earnings (loss) per  share              |       | 0.96                                                                                                  |       | 0.20 |   | 0.59 |   | (0.23 | ) | (15.20 | ) |
| Earnings (loss) per share—Diluted:     |       |                                                                                                  |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from  continuing operations |       | $                                                                                                     | 0.39       |   | $ | 0.33 |   | $ | 0.24 |   | $ | (0.03 | ) | $ | (3.69 | ) |
| Net earnings (loss) per  share              |       | 0.95                                                                                                  |       | 0.20 |   | 0.57 |   | (0.23 | ) | (15.20 | ) |
| **Weighted Average Shares:**                | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                       |       | 57,212                                                                                                |       | 60,938 |   | 61,036 |   | 59,951 |   | 59,417 |   |
| Diluted                                     |       | 57,784                                                                                                |       | 61,430 |   | 62,313 |   | 59,951 |   | 59,417 |   |
| **Additional Data (end of period):**        | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                |       | $                                                                                                     | 693,387    |   | $ | 742,644 |   | $ | 830,266 |   | $ | 864,834 |   | $ | 863,695 |   |
| Long-term debt, net of  current portion     |       | $                                                                                                     | 2,377      |   | $ | 3,735 |   | $ | 4,766 |   | $ | 98,073 |   | $ | 105,250 |   |
| Working capital                             |       | $                                                                                                     | 207,269    |   | $ | 129,893 |   | $ | 119,832 |   | $ | 225,489 |   | $ | 280,583 |   |
| Operating locations                         |       | 660                                                                                                   |       | 659 |   | 716 |   | 811 |   | 822 |   |

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(1)          The 2006 resultsincluded net earnings from discontinued operations of $32.1 million.

(2)          The 2004 fiscal yearcontains 53 weeks. All other years contain 52 weeks. The 2004 results includedpre-tax restructuring and other charges of $8.4 million and earnings fromdiscontinued operations of $21.1 million.

(3)          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.

(4)          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.

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

***Organization of Information***

Management’sDiscussion and Analysis provides a narrative on our financial performance andcondition that should be read in conjunction with the accompanying ConsolidatedFinancial Statements. 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 has a network of 660locations within North America. Our locations are company-owned, licensedor franchised. As of December 31, 2006, we had 486 company-ownedlocations, 93 licensed locations and 81 franchised locations.

The Company is organizedaround two operating segments—Staffing Services and Professional Services. TheStaffing 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, salesand marketing, human resources and administrative. See the *Operations Overview* section of Part Iof this Annual Report on Form 10-K for a further description of ouroperating segments.

***ExecutiveSummary***

The following is abrief summary of our primary 2006 objectives and accomplishments:

·       *Achieving growth by expanding the depth and breadthof our services with existing accounts.*Overall revenue decreased2.4% during 2006 compared with the prior year but was higher in the third andfourth quarters than in the prior year. A decrease due to the intentional exitin 2005 of certain staffing clients who did not meet minimum profitabilitythresholds and the loss of a large contract at the start of the second quarterof 2005 affected year over year comparisons. Demand for permanent placementservices remained strong with growth of 13.2% compared with the prior year. Revenuesfrom small to mid-sized accounts (customers that do business with Spherion of$5 million or less, 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

annually) grew 10.9% yearover year in Staffing Services and 15.3% in Professional Services. We continueto focus on providing additional services to existing accounts, particularlyfor higher value professional and recruitment outsourcing business.

·       *Targeting new accounts by providing integrated services.*During2006, we continued to acquire new small to mid-sized accounts. The targetedsmall to mid-sized customer segment comprised 54.0% of our revenue for thetwelve months ended December 31, 2006, and grew 12.1% for the twelvemonths ended December 31, 2006. This customer segment made up 47.0% oftotal revenue in 2005.

·       *Continuingto improve operating leverage.*Overall, gross profit margin was23.5%, an increase of 150 basis points compared with the prior year. Theincrease in gross profit margin is primarily due to (i) the decision in2005 to reduce certain low priced business, (ii) a shift in product mixfrom Staffing Services to Professional Services (Professional Services nowcomprises 25.5% of total revenue in 2006 compared with 22.7% in 2005), (iii) ahigher proportion of permanent placement revenue (3.8% of our 2006 revenue, anincrease of 50 basis points from the prior year) and (iv) lower employeebenefit costs, including workers’ compensation costs. Earnings from continuingoperations as a percentage of revenue was 1.8%, an increase of 30 basis pointscompared with the prior year. The improvements in gross profit were partiallyoffset by increases in selling, general and administrative expenses of $18.4million from the prior year primarily due to higher costs associated with additionalrecruiter and sales headcount, stock option expense, and litigation relatedaccruals.

In 2007 we plan tofocus on three key operating objectives:

·       First,continue to grow small and mid-sized account segment:

-          Continue to emphasizeaddition of new accounts;

-          Expand services atexisting accounts, particularly Professional Services;

-          Maintain premium pricingand margin compared with market; and

-          Continue stabilizationtrend within large accounts.

·       Second,emphasize higher margin services:

-          Invest in ProfessionalServices segment to increase recruiter and sales staff;

-          Exploit market-leadingrecruitment outsourcing services; and

-          Continue to shiftoverall company revenue mix toward higher margin services.

·       Third,continue improving operating leverage:

-          Tightly control selling,general and administrative expenses, by limiting growth in selling, general andadministrative expenses to our growth in gross profit;

-          Reduce capital spendingto less than half of the prior year level while we maximize the return fromprior years’ investments in systems and infrastructure; and

-          HoldDays Sales Outstanding (DSO, a measure of how quickly accounts receivable arecollected) stable after a four-day reduction in 2006.

19

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

***Operating Results***

***Consolidated Operating Results***

***Fiscal 2006 compared with 2005***

·       Revenue in 2006 was $1.93billion, down 2.4%.

-          Theintentional exit in 2005 of lower margin staffing clients, the loss of a largecontract in early 2005 and some decreases in large national accounts reducedrevenues.

-          Small to mid-sized accountsgrew 12.1% in 2006 and reached 54.9% of total revenues in the fourth quarter.Professional Service revenues increased 9.4% and overall permanent placementgrew 13.2%.

-          United States of Americatemporary employment increased 2.6% in 2006 as estimated by the Bureau of LaborStatistics. Revenue gains with targeted customers were more than offset by thenoted exits and losses, as such, the Company did not keep pace with the overallmarket.

·       Gross profit in 2006 was$454.9 million, up 4.4% despite a 2.4% revenue decrease. Gross profit marginincreased to 23.5% in 2006 compared with 22.0% last year. Gross profit marginsincreased due to:

-          An increase in highermargin services including professional staffing, permanent placement andrecruitment outsourcing services in 2006 (80 basis points).

-          Better temporarystaffing pay/bill spreads due to the increase in small to mid-sized accounts(20 basis points).

-          Lower employee benefitcosts, including workers’ compensation costs (50 basis points).

·       Selling,general and administrative expenses were $422.8 million, up 4.5%; as apercentage of revenues these costs were 21.9%, up from 20.4%. Costs as apercentage of revenues were impacted as follows:

-          Within StaffingServices, we allowed personnel costs to grow in order to accelerate the growthof small to mid-sized accounts and to stabilize our large accounts. We also hadhigher costs for billable recruiters and staff to service increased recruitmentoutsourcing revenues.

-          For ProfessionalServices, expenses increased due to the hiring and training of new sales staff alongwith higher commissions due to increased permanent placement revenues.

-          New accountingregulations required expensing of stock options of $3.5 million.

·       Netinterest income was $2.1 million, an increase of 141.1% from the prior year dueprimarily to the retirement of convertible notes in October 2005 andhigher cash balances in 2006.

·       Restructuringand other charges (credits) were $(0.2) million in 2006 versus $1.8 million in2005. The charge in 2005 was largely related to staff reductions associatedwith a contract loss.

·       Oureffective tax rate from continuing operations was 34.3% and increasedmoderately from the prior year rate of 33.6%. State and local taxes increasedand there is only a partial benefit for 2006 stock option expense; theseincreases were largely offset by higher employment tax credits as well as therecognition of previously unbenefited tax loss carry forwards.

20

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

·       Earningsfrom continuing operations were $0.39 per share for 2006 compared with $0.33 inthe prior year. Earnings from continuing operations were impacted by stockoption expense for the 2006 period in the amount of $3.2 million, net of tax,or $0.05 per share.

·       Discontinuedoperations had a pre-tax loss of $2.0 million in 2006 as a result of theresolution of certain purchaser claims for previously sold operations in theAsia/Pacific region. Discontinued operations had net earnings of $32.1 million,which includes a tax benefit of $30.9 million related to the resolution ofcertain international tax matters.

·       DSO decreased to50 days at the end of 2006 compared with 54 days at the end of 2005.

***Fiscal 2005 compared with 2004***

·       Revenuein 2005 was $1.98 billion, down 2.9% or 1.7% after considering the impact ofthe 53rd week in 2004.

-          The loss of a largecontract and intentional exit of lower margin staffing clients affected yearover year comparisons.

-          Permanent placementservices grew 18.2%.

-          Temporary staffingrevenue grew 2.1%, which was slower than the Bureau of Labor Statisticsestimated 6.6% increase in the number of temporary employees compared with 2004due to the noted customer losses.

·       Grossprofit was $435.8 million, up 2.3% from 2004 despite lower revenues. Grossprofit margin increased to 22.0% in 2005 compared with 20.9% in 2004. Grossprofit margins increased due to:

-          Lower workers’compensation costs due to improvements in prior year loss estimates (20 basispoints) and lower costs for current year losses (20 basis points).

-          Higher temporarystaffing pay/bill spreads within Staffing Services (40 basis points).

-          Lower employee benefits(15 basis points).

-          A shift in revenue mixtoward permanent placement services (15 basis points).

·       Selling,general and administrative expenses were $404.5 million, up 0.7% from 2004. Asa percentage of revenues, these costs were 20.4% and 19.7% in 2005 and 2004 andincreased due to:

-          Higher recruiterheadcount and costs in the Professional Services segment and higher advertisingexpense.

-          Partially offsettingcost increases were lower unallocated corporate costs of $6.8 million, dueprimarily to the completion of the implementation of our enterprise-wideinformation system late in 2004.

·       Netinterest income was $0.9 million compared with net interest expense of $1.9million in 2004. The change was due to the retirement of convertible notes in October 2005and August 2004 and the increase in cash throughout 2005.

·       Restructuringand other charges decreased by $6.6 million to $1.8 million in 2005 versus $8.4 millionin 2004. The 2004 costs include the termination of the employment contract ofour former chief executive officer.

21

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

·       Oureffective tax rate from continuing operations was 33.6% and was lower than theU.S. Federal Statutory tax rate of 35.0% due primarily to (i) the impactof work opportunity and other employment tax credits, (ii) the recognitionof previously unrecognized net operating loss benefits and (iii) thereduction of state tax reserves due to the favorable resolution of severalstate income tax audits. For 2004, there was a tax benefit of $2.6 million onpre-tax income of $12.2 million or an effective rate of 21.2% as adjustments tostate and local tax reserves and employment tax credits more than offset taxespayable on current year income.

·       Discontinuedoperations incurred pre-tax losses of $13.1 million in 2005, whichincludes losses primarily from call center operations of $5.9 million andan estimated loss on sale of $5.7 million related primarily toindemnifications and other matters associated with the previously sold UnitedKingdom and Asia/Pacific staffing operations. Discontinued operations resultedin a loss of $0.13 per share compared with earnings of $0.34 per share inthe 2004 period which included the favorable resolution of an international taxmatter in the amount of $25.3 million.

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

***Discontinued Operations***

For the fiscal years ended December 31, 2006, January 1,2006 and December 31, 2004, discontinued operations through the dates oftheir disposition, as applicable, had pre-tax operating losses of $2.0 million,$7.4 million and $9.9 million, respectively.

See Note 15, “DiscontinuedOperations,” in the accompanying Consolidated Financial Statements for furtherdiscussion.

***Restructuring and Other Charges***

Thefollowing is a summary of restructuring activities (in thousands):

| ** **                                       | ** ** | **Fiscal Years** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Staffing Services                                |       | $                     | 363        |   | $ | 1,840 |   | $ | 543 |   |
| Professional Services                            |       | 106                   |       | 49 |   | 1,537 |   |
| Corporate                                        |       | 899                   |       | 341 |   | 1,351 |   |
| Reversal of over  accrual                        |       | (582                  | )          | (175 | ) | (672 | ) |
| Restructuring                                    |       | 786                   |       | 2,055 |   | 2,759 |   |
| Other charges  (credits)                         |       | (963                  | )          | (292 | ) | 5,636 |   |
| Total  restructuring and other charges (credits) |       | $                     | (177       | ) | $ | 1,763 |   | $ | 8,395 |   |

 

See Note 14, “Restructuringand Other Charges,” in the accompanying notes to the Consolidated FinancialStatements for further discussion.

***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 restructuring and other charges. Allmaterial intercompany revenues and expenses have been eliminated. Additionally,amounts related to discontinued operations have been excluded from the 

22

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

segment information belowand are presented as discontinued operations in the Consolidated Statements ofEarnings.

During the first quarter of 2006, we decided to retainthe remaining call center that was held for sale and have reclassified allfinancial activity related to this center from discontinued operations tocontinuing operations in the Staffing Services segment for all periodspresented. This call center contributed revenues of $11.1 million, $8.9 millionand $7.1 million for 2006, 2005 and 2004, respectively, and segment operatingprofit (loss) of $1.1 million, $0.9 million and $(0.4) million, respectively. SeeNote 15, “Discontinued Operations,” in the accompanying notes to theConsolidated Financial Statements for further discussion.

Information on operatingsegments and a reconciliation to earnings from continuing operations beforeincome taxes and discontinued operations for the periods indicated were asfollows (in thousands):

| ** **            | ** ** | **Fiscal Years** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **            | ** ** | ** **            | ** ** | **% of  Total** | ** ** | ** ** | ** ** | **% of  Total** | ** ** | ** ** | ** ** | **% of  Total** | ** ** |
| **Revenue:**          | ** ** | ** **            | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Staffing Services     |       | $                     | 1,440,386  |   |   | 74.5 | % |   | $ | 1,530,395 |   |   | 77.3 | % |   | $ | 1,630,279 |   |   | 79.9 | % |   |
| Professional Services |       | 492,673               |       |   | 25.5 | % |   | 450,179 |   |   | 22.7 | % |   | 409,582 |   |   | 20.1 | % |   |
| **Total**             |       | $                     | 1,933,059  |   |   | 100.0 | % |   | $ | 1,980,574 |   |   | 100.0 | % |   | $ | 2,039,861 |   |   | 100.0 | % |   |

 

| ** **                                                                                 | ** ** | ** ** | ** ** | **% of  Revenues** | ** ** | ** ** | ** ** | **% of  Revenues** | ** ** | ** ** | ** ** | **% of  Revenues** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|
| **Gross  Profit:**                                                                         | ** ** | ** ** | ** ** |                    | ** ** | ** ** |       | ** **              | ** ** |       | ** ** | ** **              |       | ** ** | ** ** |   | ** ** | ** ** |   |
| Staffing Services                                                                          |       | $          | 293,366    |                    |       | 20.4       | %          |                    | $          | 292,641    |       |                    | 19.1       | % |   | $ | 297,484 |   |   | 18.2 | % |   |
| Professional Services                                                                      |       | 161,542    |       |                    | 32.8       | %          |       | 143,143                 |       |       | 31.8       | %                       |       | 128,464 |   |   | 31.4 | % |   |
| **Total**                                                                                  |       | $          | 454,908    |                    |       | 23.5       | %          |                    | $          | 435,784    |       |                    | 22.0       | % |   | $ | 425,948 |   |   | 20.9 | % |   |
| **Segment Operating Profit:**                                                              | ** ** | ** ** | ** ** |                    | ** ** | ** ** |       | ** **              | ** ** |       | ** ** | ** **              |       | ** ** | ** ** |   | ** ** | ** ** |   |
| Staffing Services                                                                          |       | $          | 24,565     |                    |       | 1.7        | %          |                    | $          | 26,342     |       |                    | 1.7        | % |   | $ | 24,792 |   |   | 1.5 | % |   |
| Professional Services                                                                      |       | 23,279     |       |                    | 4.7        | %          |       | 19,236                  |       |       | 4.3        | %                       |       | 19,769 |   |   | 4.8 | % |   |
| **Total**                                                                                  |       | 47,844     |       |                    | 2.5        | %          |       | 45,578                  |       |       | 2.3        | %                       |       | 44,561 |   |   | 2.2 | % |   |
| Unallocated corporate costs                                                                |       | (15,541    | )          |                    |       |       |       | (13,832                 | )          |       |       |                    |       | (20,637 | ) |   |   |   |   |
| Amortization expense                                                                       |       | (201       | )          |                    |       |       |       | (416                    | )          |       |       |                    |       | (543 | ) |   |   |   |   |
| Interest expense                                                                           |       | (1,965     | )          |                    |       |       |       | (3,205                  | )          |       |       |                    |       | (5,766 | ) |   |   |   |   |
| Interest income                                                                            |       | 4,055      |       |                    |       |       |       | 4,072                   |       |       |       |                    |       | 3,815 |   |   |   |   |   |
| Restructuring, impairment and other                                                        |       | 177        |       |                    |       |       |       | (1,763                  | )          |       |       |                    |       | (9,236 | ) |   |   |   |   |
| Earnings from  continuing operations  before income taxes and discontinued operations |       | $     | 34,369     |                    |       |       |       |                    | $     | 30,434     |       |                    |       |   |   | $  | 12,194 |   |   |   |   |   |

 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

***Segment Operating Results***

***Staffing Services***

Informationon the Staffing Services segment’s skill sets and service lines for the periodsindicated were as follows (in thousands):

| ** **                           | ** ** | **Fiscal Years** | ** ** |
|--------------------------------------|------------|------------------|------------|
| ** **                           | ** ** | **2006**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** **       | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Revenue by Skill*:**               |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Clerical                             |       | $                | 908,070    |   |   | 63.0 | % |   | $ | 944,432 |   |   | 61.7 | % |   | $ | 1,029,797 |   |   | 63.2 | % |   |
| Light industrial                     |       | 532,316          |       |   | 37.0 | % |   | 585,963 |   |   | 38.3 | % |   | 600,482 |   |   | 36.8 | % |   |
| Segment revenue                      |       | $                | 1,440,386  |   |   | 100.0 | % |   | $ | 1,530,395 |   |   | 100.0 | % |   | $ | 1,630,279 |   |   | 100.0 | % |   |
| **Revenue  by Service:**             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary staffing                   |       | $                | 1,231,301  |   |   | 85.5 | % |   | $ | 1,312,515 |   |   | 85.7 | % |   | $ | 1,310,755 |   |   | 80.4 | % |   |
| Managed services*                    |       | 187,268          |       |   | 13.0 | % |   | 200,141 |   |   | 13.1 | % |   | 304,773 |   |   | 18.7 | % |   |
| Permanent placement                  |       | 21,817           |       |   | 1.5 | % |   | 17,739 |   |   | 1.2 | % |   | 14,751 |   |   | 0.9 | % |   |
| Segment revenue                      |       | $                | 1,440,386  |   |   | 100.0 | % |   | $ | 1,530,395 |   |   | 100.0 | % |   | $ | 1,630,279 |   |   | 100.0 | % |   |
| **Gross  Profit Margin by Service:** |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (As % of Applicable  Revenue)        |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary staffing                   |       | 17.3             | %          |   |   |   |   | 16.8 | % |   |   |   |   | 15.7 | % |   |   |   |   |
| Managed services                     |       | 31.5             | %          |   |   |   |   | 27.3 | % |   |   |   |   | 25.2 | % |   |   |   |   |
| Permanent placement                  |       | 100.0            | %          |   |   |   |   | 100.0 | % |   |   |   |   | 100.0 | % |   |   |   |   |
| Total Staffing  Services             |       | 20.4             | %          |   |   |   |   | 19.1 | % |   |   |   |   | 18.2 | % |   |   |   |   |

----

*******                   **Managed services revenue andrevenue by skill for 2005 and 2004 have not been adjusted for the movement ofcertain managed services contracts within Staffing Services during the secondquarter of 2005 to temporary staffing within Professional Services. The impactof the movement of these customers was $4.0 million and $14.1 millionin 2006 and 2005, respectively. Management responsibility for these contractsmoved to Professional Services.

***Fiscal 2006 Compared with 2005***

*Revenues*—Staffing Services revenuedecreased 5.9% to $1.44 billion in 2006 from $1.53 billion in the prior year. Thedecrease is primarily due to the loss or intentional exit of business forcustomers that did not meet minimum profitability thresholds, decreases atcertain large accounts and the loss of a large managed services contract at thestart of the second quarter of 2005. Partially offsetting these decreases wasthe 10.9% growth in our targeted small to mid-sized customers and growth in ourrecruitment outsourcing business.

·       Byskill—Clerical revenue decreased 3.9% and light industrial revenue decreased 9.2%from prior year levels. The decrease in clerical revenue was primarily due tothe loss of a large account at the beginning of the second quarter of 2005partially offset by revenue growth from small to mid-sized accounts. Bothclerical revenue and light industrial revenue were impacted by a decrease inrevenue from large accounts in the technology, medical and telecommunicationsindustries combined with new accounts starting-up at a slower pace thanbusiness that was exited or lost in 2005.

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

·       Byservice—Temporary staffing revenues decreased 6.2% compared with the prior yeardue to a decrease in revenue from large accounts and the loss of business whichdid not meet profitability thresholds as described above. Managed servicesrevenue decreased 6.4% from prior year levels due to the loss in 2005 of onelarge managed service customer and the movement of $4.0 million in revenue forlocally based technology services contracts from this operating segment to ourProfessional Services segment, partially offset by an 88.1% increase inrecruitment outsourcing. Permanent placement revenues increased 23.0% over theprior year due to the addition of recruiters, particularly in Canada.

*Gross Profit*—Gross profit of $293.4million in the current year increased from $292.6 million in the prior year inspite of the decrease in revenue. The overall gross profit margin was 20.4% in2006 compared with 19.1% in the prior year. The increase of 130 basis points inthe overall gross profit margin was primarily due to growth of permanentplacement and recruitment outsourcing services (60 basis points), lower payrolltaxes and employee benefit costs, including workers’ compensation and paid timeoff (60 basis points) and improved pay/bill spreads (10 basis points).

*SegmentOperating Profit*—Staffing Services segment operating profitwas $24.6 million compared with $26.3 million in the prior year. The decreasefrom prior year was due to higher operating expenses of $2.5 million on aslight increase in gross profit dollars. The increased operating expenses wereprimarily from higher costs associated with an increase in sales staff trainedto increase small to mid-sized revenue, stock option expense, highercommissions due to increased permanent placement revenues and an increase inlitigation costs. Operating expenses as a percentage of revenue increased to18.7% compared with 17.4% in theprior year as our revenue growth did not meet our internal goals. During thefourth quarter we undertook actions to reduce spending in the Staffing Servicesgroup.

*Outlook—**Our* major focus in2007 will be profitable revenue growth and increasing our operationaleffectiveness. We are continuing to focus our resources on small and mid-sizedcustomers where pricing tends to be more favorable and where our sales effortshave shown the most success. In our larger account base we will continue ourfocus on stabilizing revenues. The market for recruitment outsourcingopportunities appears to be good and we continue to win new business. We aretaking steps to improve our efficiency in both the field and administration toreduce our expense structure. Despite these efforts, there is no assurance thatrevenues or segment operating profit will grow in 2007. 

Our workers’ compensation expense has decreased as apercentage of revenues over each of the past three years. This is due to acombination of declines in light industrial staffing, higher managementcontrol, legislative changes in some states which have lowered our costs andestimation of lower losses based on actuarial studies. Our workers’compensation expense for these periods includes actuarial estimates for currentyear losses as well as favorable adjustments to estimates for prior year losses.While the amount of favorable adjustments for prior year losses has not variedsignificantly from 2005 to 2006, it is not likely that these adjustments willcontinue at the same level in 2007. The amount of prior year loss adjustmentsincluded in income for 2006 was $8.1 million.

***Fiscal 2005 Compared with 2004***

*Revenues*—Staffing Services revenuedecreased 6.1% to $1.53 billion in 2005 from $1.63 billion in 2004, or 5.0% after considering the impact of the 53rd week in 2004. Revenue decreases are primarilydue to a decrease in managed services of $104.6 million, which includes theloss of one large managed service customer and several smaller contractsprimarily as the result of the intentional exit of certain staffing clientsthat did not meet minimum profitability thresholds, lower outplacement revenuesdue to a slowdown in corporate downsizing trends, the movement of $14.1 millionin revenue for locally based 

25

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

technology services contractsfrom this segment to our Professional Services segment. In this segment,revenues from our largest customers decreased while revenues from our small tomid-sized customers increased due to our focus in targeted growth with smalland mid-sized customers. Customers in the telecommunications, IT,manufacturing, media and pharmaceutical industries represented our largestrevenue decrease. This decrease was partially offset by higher growth in thetransportation, service, retail and food services industries.

·       Byskill—Clerical revenue decreased 8.3% and light industrial revenue decreased2.4% from prior year levels. The decrease in clerical revenues was primarilydue to decreases in managed services as discussed below.

·       Byservice—Managed services revenue decreased 34.3% 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. Permanent placement revenuesincreased 20.3% over the prior year due to the addition of recruiters. Temporarystaffing revenue improved slightly over the prior year despite the impactof the extra week in 2004. During2005 we focused on pricing discipline and our growth may have been somewhatlimited from potential and some existing customers that did not meet minimumpricing thresholds.

*Gross Profit*—Gross profit decreased 1.6%to $292.6 million from $297.5 million in the prior year. The overall grossprofit margin was 19.1% in 2005 compared with 18.2% in the prior year, or anincrease of 90 basis points. The increase in the gross profit margin wasprimarily due to (i) improved pay/bill spreads and recruitment processingoutsourcing growth (80 basis points) and (ii) a decrease in employeebenefit costs (60 basis points), particularly workers’ compensation due toimprovements in prior year loss estimates, improved safety programs, andfavorable law changes. These increases were partially offset by a shift in servicemix away from the managed services (30 basis points) and higher stateunemployment taxes (20 basis points).

*Segment Operating Profit*—Staffing Servicessegment operating profit was $26.3 million compared with $24.8 million in 2004.The increase from prior year was due to lower operating expenses of $6.4million offset by lower gross profits of $4.8 million. Operating expensesdecreased 2.3% compared with 2004. Decreases in operating expenses wereprimarily associated with cost reductions made due to the managed servicescustomer loss and lower outplacement activity. Operating expenses as apercentage of revenue increased to 17.4% compared with 16.7% in the prior year primarily due torevenue volume decreases at a higher rate than cost reductions.

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

***Professional Services***

Informationon the Professional Services segment’s skill sets and service lines for theperiods indicated were as follows (in thousands):

| ** **                          | ** ** | **Fiscal Years** | ** ** |
|-------------------------------------|------------|------------------|------------|
| ** **                          | ** ** | **2006**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | ** **       | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** | ** ** | ** ** | **% of Total** | ** ** |
| **Revenue  by Skill*:**             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Information Technology              |       | $                | 320,389    |   |   | 65.0 | % |   | $ | 288,309 |   |   | 64.1 | % |   | $ | 267,108 |   |   | 65.2 | % |   |
| Finance & Accounting       |       | 104,225          |       |   | 21.2 | % |   | 105,001 |   |   | 23.3 | % |   | 94,190 |   |   | 23.0 | % |   |
| Other                               |       | 68,059           |       |   | 13.8 | % |   | 56,869 |   |   | 12.6 | % |   | 48,284 |   |   | 11.8 | % |   |
| Segment Revenues                    |       | $                | 492,673    |   |   | 100.0 | % |   | $ | 450,179 |   |   | 100.0 | % |   | $ | 409,582 |   |   | 100.0 | % |   |
| **Revenue by Service:**             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary Staffing*                 |       | $                | 440,170    |   |   | 89.3 | % |   | $ | 402,286 |   |   | 89.4 | % |   | $ | 368,788 |   |   | 90.0 | % |   |
| Permanent Placement                 |       | 52,503           |       |   | 10.7 | % |   | 47,893 |   |   | 10.6 | % |   | 40,794 |   |   | 10.0 | % |   |
| Segment Revenues                    |       | $                | 492,673    |   |   | 100.0 | % |   | $ | 450,179 |   |   | 100.0 | % |   | $ | 409,582 |   |   | 100.0 | % |   |
| **Gross Profit Margin by Service:** |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (As % of  Applicable Revenue)       |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Temporary Staffing                  |       | 24.8             | %          |   |   |   |   | 23.7 | % |   |   |   |   | 23.8 | % |   |   |   |   |
| Permanent Placement                 |       | 100.0            | %          |   |   |   |   | 100.0 | % |   |   |   |   | 100.0 | % |   |   |   |   |
| Total  Professional Services        |       | 32.8             | %          |   |   |   |   | 31.8 | % |   |   |   |   | 31.4 | % |   |   |   |   |

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*                    Temporarystaffing revenue and revenue by skill for 2005 and 2004 have not been adjustedfor the movement of certain managed services contracts during the secondquarter of 2005 from within Staffing Services to Professional Services. Theimpact of the movement of these customers was $4.0 million and $14.1 millionin 2006 and 2005, respectively. Management responsibility for these contractsmoved to Professional Services.

***Fiscal 2006 Compared with 2005***

*Revenues*—ProfessionalServices revenue increased 9.4% to $492.7 million in 2006 from $450.2 millionin the prior year as customer demand continued to be strong in 2006. Revenuealso increased as a result of continued investments made in 2005 in additionalsales and recruiting staff. Most of the increase, $37.9 million, was intemporary staffing revenues and included $4.0 million due to the movement ofrevenue for locally based managed services contracts from our Staffing Servicessegment to this operating segment.

·       Byskill—IT increased 11.1% from the prior year due to increased permanentplacement and temporary staffing services and the movement of $4.0 million oflocally based technology services contracts from the Staffing Services segment.Revenues from finance and accounting decreased about 1.0% compared with theprior year. Revenues from other skills increased primarily due to increaseddemand in the human resources, legal and engineering sectors.

·       Byservice—Temporary staffing increased 9.4% primarily due to continued demand forIT personnel, and the movement of $4.0 million of locally based technologyservices contracts from Staffing Services. Permanent placement revenueincreased 9.6% to meet demand for IT skills combined with the 2005 increases inrecruiter headcount.

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

*Gross Profit*—Professional Services gross profit increased 12.9% to $161.5million from $143.1****million in theprior year. Gross profit margin was 32.8% in 2006 compared with 31.8%****in the prior year. This 100 basis pointincrease in gross profit margin was primarily due to higher temporary staffingpay/bill spreads (70 basis points) and lower employee benefit costs, includingworkers’ compensation costs (40 basis points). These increases were partiallyoffset by higher state unemployment taxes (10 basis points).

*Segment Operating Profit*—ProfessionalServices segment operating profit was $23.3 million compared with $19.2 millionin the prior year. The increase in operating profit was the result of theincrease in gross profits of $18.4 million partially offset by higher operatingexpenses of $14.4 million. Operating expenses as a percentage of revenuesincreased to 28.1% from 27.5% in the prior year. The increase in operatingexpenses was primarily due to increased commissions and incentive compensationas a result of higher volume and earnings, the hiring and training of new salesstaff and recruiters, increased candidate advertising expense and higher baddebt expense. The new sales staff and recruiters are expected to become fullyproductive by the first quarter of 2007.

*Outlook*—Over the past two years, we havemade substantial investments by adding recruiters to capitalize onopportunities in the marketplace and drive revenue and gross profit growth. Manyof the new recruiters require training and development for a period of monthsbefore they can produce sufficient revenues. If the recruiters do not becomeproductive in a reasonable time period, they are typically replaced and thetraining and development period begins again. Consequently, we expect newrecruiters may not reach targeted productivity for several months and costs maybe higher if we are not successful in hiring, training and retaining productiverecruiters. Growth in IT for 2007 is expected to continue, however, it willlargely depend on our ability to continue penetrating existing clientrelationships and customer project related spending. There is no assurance thatrevenues or segment operating profit for the Professional Services segment willcontinue to grow at the same pace.

***Fiscal 2005 Compared with 2004***

*Revenues*—ProfessionalServices revenue increased 9.9%, or $40.6 million, to $450.2 million in 2005from $409.6 million in the prior year, or 11.7% after considering the impact ofthe 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.

*Gross Profit*—Professional Services gross profit increased 11.4% to $143.1million from $128.5****million in thesame prior year period. The overall gross profit margin was 31.8% in 2005compared with 31.4%****in 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

the prior year. This40 basis point increase in gross profit margin is primarily due to loweremployee benefits and paid time off costs (90 basis points), and a change inservice mix as permanent placement has grown faster than temporary staffing (50basis points). These increases were partially offset by (i) the impactthat a change in customer mix had on overall pay/bill spreads; in 2005, wefocused on expanding our penetration within existing accounts which have lowerpricing (80 basis points) and (ii) higher state unemployment taxes (20basis points).

*Segment Operating Profit*—ProfessionalServices segment operating profit was $19.2 million compared with $19.8 millionin the prior year. The decrease in operating profit from the prior year was theresult of the increase in gross profits of $14.6 million, described above,being more than 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.

***Unallocated corporate costs***

*2006 compared with 2005*—Unallocatedcorporate costs were $15.5 million and $13.8 million in 2006 and 2005,respectively. Unallocated corporate costs in2005 benefited by $0.8 million from the favorable resolution of litigationmatters.

*2005 compared with 2004*—Unallocatedcorporate costs decreased $6.8 million to $13.8 million. The decrease isprimarily due to lower costs as a result of the impact of our enterprise-wideinformation system which was completed during 2004.

***Liquidity and Capital Resources***

***Cash Flows***

As of December 31,2006, we had total cash resources available of $54.6 million (an increaseof $24.5 million from January 1, 2006). Cash flows from operating,investing and financing activities, as reflected in the accompanyingConsolidated Statements of Cash Flows, are summarized as follows (inthousands):

| ** **                                            | ** ** | **Fiscal Years** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash Provided By (Used  In):                          |       |                  |       |   |   |   |   |
| Operating activities                                  |       | $                     | 46,085     |   | $ | 72,285 |   | $ | 6,077 |   |
| Investing activities                                  |       | 7,959                 |       | 18,740 |   | 33,997 |   |
| Financing activities                                  |       | (29,470               | )          | (66,148 | ) | (56,322 | ) |
| Effect of exchange rates                              |       | (97                   | )          | 132 |   | 154 |   |
| Net increase (decrease)  in cash and cash equivalents |       | $                     | 24,477     |   | $ | 25,009 |   | $ | (16,094 | ) |

 

***Operating cash flows***

Operating cash flows for 2006 of $46.1 million werecomprised of $54.7 million of earnings, plus non-cash depreciation andamortization of $22.2 million, non-cash deferred income tax expense of $26.9million and non-cash share-based compensation of $3.7 million partially offsetby an increase in working capital items of $61.1 million. The $61.1 millionincrease in working capital items is due to (i) a reduction in the accruedincome taxes of $29.7 million as we recorded a non-cash tax benefit indiscontinued operations 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

related to the resolutionof certain international tax matters, (ii) a reduction in self-insurancereserves due to payments and better loss experience, (iii) the payment orreversal of litigation and disposition related accruals, (iv) theinvestment in a mutual fund portfolio of $15.2 million, classified within otherassets, to match funds on the company’s non-qualified deferred compensationliability and (v) lower current liabilities. These items were partiallyoffset by lower receivables due to a 4-day improvement in DSO and thereceipt of a $4.5 million income tax refund.

Operating cash flows for 2005 of $72.3 million wereprimarily comprised of earnings of $12.0 million, plus non-cash depreciationand amortization of $21.9 million, non-cash deferred income tax expense of $6.3million, the accrual for loss on disposal of discontinued operations of $5.7million and lower working capital items of $21.4 million. Working capital wasreduced primarily due to (i) lower accounts receivable as we lowered DSOfrom 60 days at the end of December 2004 to 54 days as of January 1,2006 and as we collected accounts receivable from higher revenues in the priorperiod, and (ii) the receipt of an income tax refund of $7.5 million. Reductionsin accounts receivable and tax refunds received were partially offset byincreases in payouts for accounts payable and accrued liabilities.

Operating cash flows for2004 of $6.1 million were primarily comprised of earnings, excluding thegain on disposal of discontinued operations, of $8.8 million plus non-cashexpenses for depreciation and amortization of $28.8 million andrestructuring and other charges of $10.5 million, offset by working capitalusage 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.

***Investingcash flows***

Cash provided by investing activities for 2006 of $8.0million was primarily due to net withdrawals of $29.7 million from insurancedeposits with our workers’ compensation insurance carrier due to claim paymentsmade and the receipt of about $15.0 million of cash deposits upon issuance of aletter of credit. Capital expenditures of $22.7 million primarily relate tonetwork upgrades to improve bandwidth within our offices and front and backoffice software initiatives to improve productivity and enhance our abilitiesto work with customers and candidates.

Cash provided by investing activities for 2005 of$18.7 million was primarily due to net withdrawals of $19.1 million from ourinsurance deposits for claim payments, proceeds from a note receivable from the2004 sale of our Australian subsidiary, proceeds from the dispositions of ourcall centers of $1.4 million, and collections on franchise notes, partiallyoffset by capital expenditures of $9.7 million. Capital expenditures wereprimarily for further enhancements to our enterprise-wide information systemand for client and candidate facing software improvements.

Cash provided by investing activities for 2004 of$34.0 million was primarily due to proceeds from the sale of discontinuedoperations of $43.7 million, offset by capital expenditures of$12.1 million. Proceeds from the sale of discontinued operations (net ofcash sold) included $2.0 million, $13.7 million, $25.4 millionand $2.6 million from the sale of our operations in The Netherlands,Asia/Pacific region, United Kingdom and the court reporting business,respectively. Capital expenditures included the investment in ourenterprise-wide information system, which amounted to $5.8 million.

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

The level of our capitalexpenditures has varied significantly over the past three years. We completedthe implementation of our enterprise-wide information system in 2004. During2005 we had reduced capital expenditures as we concentrated on operating thesystem efficiently. In 2006, we enhanced the system to improve speed andcustomer and candidate capabilities. For 2007, we anticipate a reduced capitalexpenditure level of between $8.0 million and $10.0 million as wefocus on maximizing the efficiency of the system. These capital expendituresare expected to be funded through operating cash flow or through borrowingsunder our existing revolving lines of credit.

***Financingcash flows***

Financing cash used for 2006 of $29.5 million wasprimarily due to the repurchase of common stock of $28.3 million.

Financing cash used for 2005 of $66.1 million wasprimarily 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.

Financing cash used for2004 of $56.3 million was primarily due to the retirement of the remaining41¤2%convertible subordinated notes in the amount of $89.7 million, partiallyoffset by net borrowings from lines of credit used to fund working capital.

***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 December 31, 2006 and January 1, 2006, therewere no amounts outstanding under this facility. Our total availability was$159.6 million (calculated as eligible receivables of $204.3 million,less: amounts outstanding, if any, letters of credit of $16.7 million anda one week payroll reserve of $28.0 million). Interest on this line ofcredit is based upon the duration of the loan, availability under the line andother conditions and would have been approximately 6.9% (LIBOR plus a spread)or approximately 8.0% (prime plus a spread) as of December 31, 2006. Wepay an unused line fee in the range of 0.25% to 0.38% per annum that isdetermined by the unused portion of the revolving line of credit as well as aletter of credit fee of 0.25% per annum. 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 offinancing (approximately $11.2 million at current exchange rates). As of December 31,2006 and January 1, 2006, there were no borrowings outstanding under thisfacility. As of December 31, 2006, the interest rate for amounts borrowedon this facility would have approximated 7.0% (Canadian prime plus a spread). Acommitment fee of 0.5% per annum is payable based on the unused portion of therevolving line of credit. We guarantee the Canadian dollar revolving line ofcredit.

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 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

and related parties. Failureto meet compliance with one or more of these covenants in the future couldaffect the amount of availability we have to borrow against and as a result,our liquidity and financial condition may be adversely affected. At December 31,2006, 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 loss” in the accompanying ConsolidatedStatements of Earnings.

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 $24.1 million in aportfolio of mutual funds at December 31, 2006, which are included in “Othercurrent assets” and “Other assets” in the accompanying Consolidated BalanceSheets based on expected timing of distribution. The investment balanceincreased from $12.9 million as of January 1, 2006 and was 100% comprisedof company-owned life insurance. The Company terminated these policies andinvested cash in order to provide an investment balance equal to the deferredcompensation liability. Earnings or losses from these investments offsetearnings or losses in participant accounts. These investments could be used tosatisfy general corporate purposes. We have insurance deposits in the amount of$49.7 million at December 31, 2006. These deposits are invested inshort-term money market funds and are required to be maintained underagreements with our insurance carriers. These funds are not available tosatisfy general corporate purposes but are used to pay claims.

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

| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| Debt obligations                |       | $                                         | 1,309      |   | $ | 1,009 |   | $ | 300 |   | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Capital lease  obligation       |       | 3,466                                     |       | 1,188 |   | 636 |   | 636 |   | 636 |   | 370 |   |   | — |   |   |
| Operating lease  obligations(1) |       | 54,676                                    |       | 21,438 |   | 14,333 |   | 9,273 |   | 5,124 |   | 3,208 |   |   | 1,300 |   |   |
| Purchase  obligations(2)        |       | 79,626                                    |       | 25,394 |   | 15,715 |   | 14,910 |   | 14,898 |   | 8,694 |   |   | 15 |   |   |
| Total                           |       | $                                         | 139,077    |   | $ | 49,029 |   | $ | 30,984 |   | $ | 24,819 |   | $ | 20,658 |   | $ | 12,272 |   |   | $ | 1,315 |   |   |

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(1)          Operating leaseobligations for rent and equipment are expected to be offset by future subleaseincome of $3.1 million in 2007, $3.1 million in 2008, $3.0 million in2009, $1.0 million in 2010 and $0.6 million in 2011 and thereafter.

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

***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, expenses and the disclosure of contingencies.Due to the 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

inherent uncertaintyinvolved in making estimates, actual results reported in future periods may bematerially different from those estimates. The following policies are thosethat we consider to be the most critical. See Note 1, “Summary ofSignificant Accounting Policies,” for further description of these and allother accounting policies.

*Allowancefor Doubtful Accounts—**Management*analyzes agedreceivables 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 changing economy or a change in our customers’ financial positions,which could result in charges or credits to amounts recorded in selling,general and administrative expenses.

*IntangibleAssets—**As*required by Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets,” goodwill and other intangible assets with indefinite livesare not amortized, and are tested for impairment on an annual basis, or earlierif an event occurs or circumstances change that would reduce the fair value ofa reporting unit below its carrying amount. Performing an impairment testinvolves estimating the fair value of a reporting unit, which requires us tomake assumptions about future market conditions and our ability to perform asplanned. When we are able, we use external data in our assumptions. However, asa practical matter there are times when we have little or no external data andas such, we use the information that is available to us without undue cost andeffort in making those assumptions. Spherion performs its annual impairmenttest of intangible assets as of its November month-end. The 2006, 2005 and2004 tests did not indicate the existence of impairment. Although these annualimpairment tests did not result in impairment, due to the judgment inherent inestimating the fair value of a reporting unit, there could be charges in futureyears to operations for up to the full value of our goodwill balance, which iscurrently $49.7 million, if the markets in which we operate decline, ifthe market values of competitors decrease or we are unable to execute ourbusiness strategy.

*Accrued self insurance losses*—**Weretain a portion of the risk under our workers' compensation, generalliability/professional liability, employment practices liability insuranceprograms and health insurance benefits programs.  Estimated losses for workers' compensation,general liability and employment practices liability have been discounted at4.8% and 4.4% at December 31, 2006 and January 1, 2006, respectively.  Recording reserves for self insured lossesinvolves a considerable amount of judgment. In developing the reserves we use estimates from external actuaries formost of our accruals where the accruals are sufficiently material, there is anadequate population of claims upon which to prepare actuarial estimates and theclaims develop over a longer period of time. For all other accruals we base our reserves on internal estimates.  Factors that can affect our reserves are asfollows:

·       Thecost of benefits under the workers' compensation programs are regulated understate law and are subject to change. Legislation can have a significant impact on our ability to controlcosts related to the amount and frequency of service, the amount of benefitspaid if the employee is unable to work and our ability to put the employee backto work.  As legislation changes, ourestimated liabilities will change.  

·       Lossestimates from actuaries are primarily based on the historical pattern oflosses.  Changes in loss patterns mustoften be consistently exhibited over a period of time before they are fullyreflected in the reserves.  Claims canalso take a number of years to fully develop until the final loss 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

is known.  Changes to loss estimates reserve levels canoccur several years after the loss has occurred.  

·       Changesin the cost of health care services, claims processing costs, or increasedlitigation could affect the adequacy of these estimated liabilities.  

·       Prolongedchanges in interest rates for risk-free U.S. governmental bonds could alsoaffect the discount rate used in estimating these liabilities.  An increase or decrease of 1.0% in thediscount rate would result in a reduction or increase, respectively, to pre-taxexpense of approximately $1.0 million. 

Management reviews these assumption and relatedreserves and changes in the estimates of these accruals are charged or creditedto operations in the period determined. Due to the judgment used in recording these reserves, the ultimateamount of reserves that are needed could differ significantly from our originalestimate and could result in charges or credits to amounts recorded in cost ofservices and/or selling, general and administrative expenses.

*Share-BasedCompensation—**We*recognize compensation expensefor all share-based payments by estimating the fair value of options at grantdate using the Black-Scholes-Merton option-pricing model. Calculating the fairvalue of share-based payment awards requires the input of subjectiveassumptions, including the expected life of the share-based payment awards andstock price volatility. Management bases expected life on historical exerciseand post-vesting employment-termination experience, and expected volatility onhistorical realized volatility trends. The assumptions used in calculating thefair value of share-based payment awards represent management’s best estimates,but these estimates involve inherent uncertainties and the application ofmanagement’s judgment. As a result, if factors change and we use differentassumptions, our share-based compensation expense could be materially differentin the future. In addition, we are required to estimate the expected forfeiturerate and only recognize expense for those shares expected to vest. If ouractual forfeiture rate is materially different from our estimate, the share-basedcompensation expense could be significantly different from what we haverecorded in the current period and could result in subsequent increases ordecreases in compensation expense. See Note 2 to the Consolidated FinancialStatements for a further discussion on share-based compensation.

*Income Taxes*—Deferredtax assets and liabilities are determined based on the difference between thefinancial statements and tax basis of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected toreverse.  Our provision for income taxesis based on domestic and international statutory income tax rates and taxplanning opportunities in the jurisdictions in which we operate.  Significant judgment is required indetermining income tax provisions as well as deferred tax asset and liabilitybalances, including the estimation of valuation allowances and the evaluationof tax positions.

At December 31, 2006, wehad a net deferred tax asset of $134.3 million, net of a valuationallowance of $29.7 million.  Net deferredtax assets are primarily comprised of net deductible temporary differences, netoperating loss carryforwards and tax credit carryforwards that are available toreduce taxable income in future periods. The net deferred tax asset was evaluated under the guidelines of SFASNo. 109, “Accounting for Income Taxes,” and a determination on the basisof objective factors was made that the asset will be realized through futureyears’ taxable earnings.  These objectivefactors include historical taxable income, normalized for non-recurring incomeand expense items.  The determination ofthe amount of valuation allowance to be provided on recorded deferred taxassets involves estimates regarding the timing and amount of the reversal of taxabletemporary differences, expected future taxable income and the impact of taxplanning strategies.  A valuationallowance is required when it is more likely than not 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

that allor a portion of a deferred tax asset will not be realized.  In assessing a valuation allowance, weconsider all positive and negative evidence available at the time, includingpast operating results, projections of future taxable income and thefeasibility of ongoing tax planning strategies. The current valuation allowance relates primarily to foreign tax creditcarryforwards, the benefit on capital loss carryforwards and the benefit onstate net operating loss carryforwards that are not expected to berealized.  If we determine that future taxableearnings will be insufficient to recover the deferred tax assets, we will berequired to write-off all or a portion of the remaining net deferred tax assetby a charge to earnings.

***New Accounting Pronouncements***

See Note 1, “Summaryof Significant Accounting Policies,” in the accompanying Consolidated FinancialStatements for discussion of New Accounting Pronouncements.

***Inflation***

Our monetary assets,consisting primarily of cash and receivables, are not affected by inflationbecause they are short-term. Our non-monetary assets, consisting primarilyof intangible assets, goodwill and prepaid expenses and other assets, arenot affected significantly by inflation. We believe that replacement costs ofequipment, furniture and leasehold improvements will not materially affect ouroperations. However, the rate of inflation affects our cost of service andexpenses, such as those for employee compensation, which may not be readilyrecoverable in the price of services offered by us.

***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-Kmay include “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 prospects could bematerially 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 December 31, 2006, approximately$48.7 million of cash and cash equivalents were invested in money marketmutual funds. These financial instruments are not considered to be subject tointerest rate risk due to their short duration. Our exposure to interest raterisk related to debt has been minimized since we have no outstanding variabledebt as of December 31, 2006 and January 1, 2006.

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 natural 

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**Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS–(Continued)**

offsets. To the extentthis is not practicable, exposure areas which are considered for hedging areforeign currency denominated receivables and payables, intercompany loans andfirm committed transactions. We use financial instruments, principally forwardexchange contracts, in our management of foreign currency exposures. We do notenter into forward contracts for trading purposes. In estimating the fair valueof derivative positions, we utilize quoted market prices, if available, orquotes obtained from external sources.

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 $49.7 million and $78.0 million as of December 31, 2006and January 1, 2006, respectively. Company-owned life insurancepolicies are carried at fair market value which approximated $12.9 millionas of January 1, 2006. 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. These assets, which totaled$24.1 million at December 31, 2006, are stated at fair market value.

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 No.** |
|--------------------------------------------------------------------------------------------|---------------------------------------------|-------------------|
| Management’s Report on  Internal Control over Financial Reporting                     |                                        | 38                |   |
| Reports of Independent  Registered Public Accounting Firm                                  |                                        | 39                |   |
| Consolidated Statements of Earnings                                                        |                                        | 42                |   |
| Consolidated Balance Sheets                                                                |                                        | 43                |   |
| Consolidated Statements of Stockholders’  Equity                                      |                                        | 44                |   |
| Consolidated Statements of  Cash Flows                                                     |                                        | 45                |   |
| Notes to Consolidated Financial  Statements:                                               |                                        |              |   |
| Note 1.                                                                                    | Summary of Significant  Accounting Policies |              | 46 |   |
| Note 2.                                                                                    | Share-Based Compensation                    |              | 51 |   |
| Note 3.                                                                                    | Income Taxes                                |              | 54 |   |
| Note 4.                                                                                    | Short-Term and Long-Term  Debt Obligations  |              | 56 |   |
| Note 5.                                                                                    | Financial Instruments and  Fair Values      |              | 57 |   |
| Note 6.                                                                                    | Goodwill                                    |              | 57 |   |
| Note 7.                                                                                    | Property and Equipment                      |              | 58 |   |
| Note 8.                                                                                    | Employee Savings and  Investment Plans      |              | 58 |   |
| Note 9.                                                                                    | Stockholder Rights Plan                     |              | 59 |   |
| Note 10.                                                                                   | Stockholders’ Equity                   |              | 60 |   |
| Note 11.                                                                                   | Earnings Per Share                          |              | 60 |   |
| Note 12.                                                                                   | Commitments and Contingencies               |              | 60 |   |
| Note 13.                                                                                   | Variable Interest Entities                  |              | 62 |   |
| Note 14.                                                                                   | Restructuring and Other  Charges            |              | 63 |   |
| Note 15.                                                                                   | Discontinued Operations                     |              | 64 |   |
| Note 16.                                                                                   | Segment Information                         |              | 65 |   |
| Note 17.                                                                                   | Quarterly Financial Data                    |              | 67 |   |
| Consolidated Financial  Statement Schedule for the Fiscal Years Ended 2006, 2005 and 2004: |                                        |              |   |
| Schedule  II—Valuation and Qualifying Accounts                                        |                                        | 69                |   |

 

37

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**Management’s Reporton 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 December 31, 2006. Management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 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 December 31,2006, 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 ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets 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 financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2006, 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 December 31,2006, based on the criteria established in *InternalControl-Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission.

39

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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 December 31, 2006 of the Company andour report dated February 23, 2007 expressed an unqualified opinion onthose financial statements and financial statement schedule.

DELOITTE &TOUCHE LLP

Certified PublicAccountants

Fort Lauderdale, FloridaFebruary 23, 2007

40

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board ofDirectorsand Stockholders of Spherion Corporation

FortLauderdale, Florida

We have audited the accompanying consolidated balancesheets of Spherion Corporation and subsidiaries (the “Company”) as of December 31,2006 and January 1, 2006, and the related consolidated statements ofearnings, stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 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 the Company’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 December 31, 2006 and January 1,2006, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 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 the Company’s internal control overfinancial reporting as of December 31, 2006, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 23, 2007 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an unqualified opinionon the effectiveness of the Company’s internal control over financialreporting.

DELOITTE & TOUCHELLPCertified Public Accountants

Fort Lauderdale, FloridaFebruary 23, 2007

41

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**SPHERION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

**(in thousands, except per shareamounts)**

| ** **                                                                           | ** ** | **Fiscal Years Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **December 31,**            | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **                                                                           | ** ** | **2006**                         | ** ** | **2006** | ** ** | **2004** | ** ** |
| Revenues                                                                             |       |                             | $          | 1,933,059 |   |   | $ | 1,980,574 |   |   | $ | 2,039,861 |   |   |
| Cost of services                                                                     |       |                             | 1,478,151  |   |   | 1,544,790 |   |   | 1,613,913 |   |   |
| Gross profit                                                                         |       |                             | 454,908    |   |   | 435,784 |   |   | 425,948 |   |   |
| Selling, general  and administrative expenses                                        |       |                             | 422,806    |   |   | 404,454 |   |   | 401,608 |   |   |
| Interest expense                                                                     |       |                             | 1,965      |   |   | 3,205 |   |   | 5,766 |   |   |
| Interest income                                                                      |       |                             | (4,055     | ) |   | (4,072 | ) |   | (3,815 | ) |   |
| Restructuring and  other charges (credits)                                           |       |                             | (177       | ) |   | 1,763 |   |   | 8,395 |   |   |
| Provision for  write-down of assets                                                  |       |                             | —     |   |   | — |   |   | 959 |   |   |
| Other loss                                                                           |       |                             | —     |   |   | — |   |   | 841 |   |   |
|                                                                                 |       |                             | 420,539    |   |   | 405,350 |   |   | 413,754 |   |   |
| Earnings from  continuing operations before income taxes and discontinued operations |       |                             | 34,369     |   |   | 30,434 |   |   | 12,194 |   |   |
| Income tax  (expense) benefit                                                        |       |                             | (11,780    | ) |   | (10,221 | ) |   | 2,580 |   |   |
| Earnings from continuing operations before  discontinued operations                  |       |                             | 22,589     |   |   | 20,213 |   |   | 14,774 |   |   |
| Earnings (loss)  from discontinued operations, net of tax                            |       |                             | 32,093     |   |   | (8,184 | ) |   | 21,055 |   |   |
| Net earnings                                                                         |       |                             | $          | 54,682 |   |   | $ | 12,029 |   |   | $ | 35,829 |   |   |
| Earnings per  share-Basic*:                                                          |       |                             |       |   |   |   |   |   |   |   |   |
| Earnings from continuing operations before  discontinued operations                  |       |                             | $          | 0.39 |   |   | $ | 0.33 |   |   | $ | 0.24 |   |   |
| Earnings (loss) from discontinued operations                                         |       |                             | 0.56       |   |   | (0.13 | ) |   | 0.34 |   |   |
|                                                                                 |       |                             | $          | 0.96 |   |   | $ | 0.20 |   |   | $ | 0.59 |   |   |
| Earnings per  share-Diluted*:                                                        |       |                             |       |   |   |   |   |   |   |   |   |
| Earnings from continuing operations before  discontinued operations                  |       |                             | $          | 0.39 |   |   | $ | 0.33 |   |   | $ | 0.24 |   |   |
| Earnings (loss) from discontinued operations                                         |       |                             | 0.56       |   |   | (0.13 | ) |   | 0.34 |   |   |
|                                                                                 |       |                             | $          | 0.95 |   |   | $ | 0.20 |   |   | $ | 0.57 |   |   |
| Weighted-average  shares used in computation of earnings per share:                  |       |                             |       |   |   |   |   |   |   |   |   |
| Basic                                                                                |       |                             | 57,212     |   |   | 60,938 |   |   | 61,036 |   |   |
| Diluted                                                                              |       |                             | 57,784     |   |   | 61,430 |   |   | 62,313 |   |   |

----

****                    Earningsper share amounts are calculated independently for each component and may notadd due to rounding.*

See Notes to Consolidated Financial Statements.

42

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**SPHERION CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**(in thousands, except sharedata)

| ** **                                                                                                  | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                  | ** ** | **2006**              | ** ** | **2006**            | ** ** |
| **Assets**                                                                                                  | ** ** |                  | ** ** | ** **          |       | ** ** | ** ** |
| Current Assets:                                                                                             |       |                  |       |                |       |   |   |
| Cash and cash  equivalents                                                                                  |       |                  | $          | 54,640              |       |   | $ | 30,163 |   |
| Receivables, less allowance  for doubtful accounts of $3,354 and $4,708, respectively                       |       |                  | 274,185    |                |       | 294,330 |   |
| Deferred tax asset                                                                                          |       |                  | 11,462     |                |       | 9,155 |   |
| Insurance deposit                                                                                           |       |                  | 24,501     |                |       | 24,914 |   |
| Other current assets                                                                                        |       |                  | 16,414     |                |       | 18,906 |   |
| Total current assets                                                                                        |       |                  | 381,202    |                |       | 377,468 |   |
| Goodwill                                                                                                    |       |                  | 49,703     |                |       | 48,861 |   |
| Property and equipment,  net of accumulated depreciation of $93,723 and $114,038, respectively              |       |                  | 87,291     |                |       | 88,562 |   |
| Deferred tax asset                                                                                          |       |                  | 122,867    |                |       | 152,084 |   |
| Insurance deposit                                                                                           |       |                  | 25,177     |                |       | 53,115 |   |
| Other assets                                                                                                |       |                  | 27,147     |                |       | 22,554 |   |
|                                                                                                        |       |                  | $          | 693,387             |       |   | $ | 742,644 |   |
| **Liabilities and Stockholders’  Equity**                                                              | ** ** |                  | ** ** | ** **          |       | ** ** | ** ** |
| Current Liabilities:                                                                                        |       |                  |       |                |       |   |   |
| Accounts payable and  other accrued expenses                                                                |       |                  | $          | 78,368              |       |   | $ | 93,570 |   |
| Accrued salaries, wages  and payroll taxes                                                                  |       |                  | 59,062     |                |       | 62,619 |   |
| Accrued insurance  reserves                                                                                 |       |                  | 22,368     |                |       | 27,503 |   |
| Accrued income tax  payable                                                                                 |       |                  | 3,512      |                |       | 51,792 |   |
| Current portion of  long-term debt and other short-term borrowings                                          |       |                  | 2,068      |                |       | 3,141 |   |
| Accrued restructuring  and other current liabilities                                                        |       |                  | 8,555      |                |       | 8,950 |   |
| Total current  liabilities                                                                                  |       |                  | 173,933    |                |       | 247,575 |   |
| Long-term debt, net of  current portion                                                                     |       |                  | 2,377      |                |       | 3,735 |   |
| Accrued insurance  reserves                                                                                 |       |                  | 20,292     |                |       | 28,119 |   |
| Deferred compensation                                                                                       |       |                  | 18,984     |                |       | 16,818 |   |
| Other long-term  liabilities                                                                                |       |                  | 6,659      |                |       | 7,892 |   |
| Total liabilities                                                                                           |       |                  | 222,245    |                |       | 304,139 |   |
| Commitments and contingencies (see Notes 12 and 15)                                                         |       |                  |       |                |       |   |   |
| Stockholders’ Equity:                                                                                  |       |                  |       |                |       |   |   |
| Preferred stock, par  value $0.01 per share; authorized, 2,500,000 shares; none issued or  outstanding |       |                  | —     |                |       | — |   |
| Common stock, par value  $0.01 per share; authorized, 200,000,000; issued 65,341,609 shares                 |       |                  | 653        |                |       | 653 |   |
| Treasury stock, at cost,  8,777,220 and 6,510,739 shares, respectively                                      |       |                  | (77,856    | )                   |       | (56,299 | ) |
| Additional paid-in  capital                                                                                 |       |                  | 844,735    |                |       | 845,056 |   |
| Accumulated deficit                                                                                         |       |                  | (300,060   | )                   |       | (354,742 | ) |
| Accumulated other  comprehensive income                                                                     |       |                  | 3,670      |                |       | 3,837 |   |
| Total stockholders’  equity                                                                            |       |                  | 471,142    |                |       | 438,505 |   |
|                                                                                                        |       |                  | $          | 693,387             |       |   | $ | 742,644 |   |

 

See Notes toConsolidated Financial Statements.

43

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**SPHERION CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**For Fiscal Years Ended December 31,2006, January 1, 2006 and December 31, 2004**

**(amounts in thousands)**

| ** **                                                                                                                                          | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                                          | ** ** | ** ** | ** ** | ** **   | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                                                                          | ** ** | **Common** | ** ** | **Treasury** | ** ** | **Paid-In**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                          | ** ** | **Stock**  | ** ** | **Stock**    | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income**        | ** ** | **Total**  | ** ** |
| **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 |   |
| Comprehensive income:                                                                                                                               |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                                          |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | 54,682 |   |   |   | — |   |   | 54,682 |   |
| Other comprehensive  income:                                                                                                                        |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation adjustments arising during the period                                                                                 |       |       | —     |         |       |           | —     |            |       |              | —     |       |       |   | — |   |   |   | (167 | ) |   | (167 | ) |
| Comprehensive income                                                                                                                                |       |       |       |         |       |           |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   | 54,515 |   |
| Proceeds from  exercise of employee stock options, including tax benefit                                                                       |       |       | —     |         |       |           | 2,728      |            |       |              | (456       | )          |       |   | — |   |   |   | — |   |   | 2,272 |   |
| Proceeds from  issuance of shares under Employee Stock Purchase Plan                                                                           |       |       | —     |         |       |           | 710        |            |       |              | (179       | )          |       |   | — |   |   |   | — |   |   | 531 |   |
| Treasury stock  reissued and compensation earned in connection with deferred  compensation                                                     |       |       | —     |         |       |           | 3,340      |            |       |              | (3,155     | )          |       |   | — |   |   |   | — |   |   | 185 |   |
| Treasury stock  purchases                                                                                                                           |       |       | —     |         |       |           | (28,335    | )               |       |              | —     |       |       |   | — |   |   |   | — |   |   | (28,335 | ) |
| Share-based  compensation expense                                                                                                                   |       |       | —     |         |       |           | —     |            |       |              | 3,469      |       |       |   | — |   |   |   | — |   |   | 3,469 |   |
| **Balance  as of December 31, 2006**                                                                                                           |       |       | $          | 653          |       |           |       | $               | (77,856    | )                 |       |       | $          | 844,735 |   |   |   | $ | (300,060 | ) |   |   | $ | 3,670 |   |   | $ | 471,142 |   |

 

See Notes toConsolidated Financial Statements.

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**SPHERION CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**(amounts in thousands)

| ** **                                                                              | ** ** | **Fiscal Years Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                              | ** ** | **December 31,**            | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **                                                                              | ** ** | **2006**                         | ** ** | **2006** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                            |       |                             | $          | 54,682 |   |   |   | $ | 12,029 |   |   |   | $ | 35,829 |   |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities:    |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Discontinued  operations (gain) loss on disposal, net of income tax                     |       |                             | (2,438     | ) |   |   | 6,665 |   |   |   | (27,053 | ) |   |
| Loss on retirement  of debt                                                             |       |                             | —     |   |   |   | — |   |   |   | 841 |   |   |
| Depreciation and  amortization                                                          |       |                             | 22,198     |   |   |   | 21,906 |   |   |   | 28,844 |   |   |
| Deferred income  tax expense (benefit)                                                  |       |                             | 26,910     |   |   |   | 6,313 |   |   |   | (8,864 | ) |   |
| Restructuring and  other charges                                                        |       |                             | 750        |   |   |   | 1,763 |   |   |   | 10,508 |   |   |
| Share-based  compensation                                                               |       |                             | 3,654      |   |   |   | 939 |   |   |   | 1,018 |   |   |
| Other non-cash  charges                                                                 |       |                             | 1,410      |   |   |   | 1,253 |   |   |   | (1,014 | ) |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Receivables, net                                                                        |       |                             | 20,224     |   |   |   | 62,767 |   |   |   | (69,210 | ) |   |
| Other assets                                                                            |       |                             | (6,283     | ) |   |   | 2,551 |   |   |   | (2,158 | ) |   |
| Income tax  receivable                                                                  |       |                             | 4,613      |   |   |   | 8,484 |   |   |   | 17,844 |   |   |
| Accounts payable,  income taxes payable, accrued liabilities and other liabilities |       |                             | (79,635    | ) |   |   | (52,385 | ) |   |   | 19,492 |   |   |
| Net cash provided  by operating activities                                              |       |                             | 46,085     |   |   |   | 72,285 |   |   |   | 6,077 |   |   |
| Cash flows from investing activities:                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from sale  of discontinued operations                                          |       |                             | 1,004      |   |   |   | 1,376 |   |   |   | 43,745 |   |   |
| Acquisitions, net  of cash acquired                                                     |       |                             | (1,186     | ) |   |   | (887 | ) |   |   | (312 | ) |   |
| Capital  expenditures, net                                                              |       |                             | (22,677    | ) |   |   | (9,651 | ) |   |   | (12,050 | ) |   |
| Insurance reimbursements                                                                |       |                             | 29,713     |   |   |   | 19,054 |   |   |   | 3,855 |   |   |
| Surrender of  company-owned life insurance policies, net                                |       |                             | —     |   |   |   | 4,179 |   |   |   | — |   |   |
| Note receivable  proceeds from sale of Australian subsidiary                            |       |                             | —     |   |   |   | 3,781 |   |   |   | — |   |   |
| Other                                                                                   |       |                             | 1,105      |   |   |   | 888 |   |   |   | (1,241 | ) |   |
| Net cash provided  by investing activities                                              |       |                             | 7,959      |   |   |   | 18,740 |   |   |   | 33,997 |   |   |
| Cash flows from financing  activities:                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Debt repayments,  net                                                                   |       |                             | (3,139     | ) |   |   | (5,642 | ) |   |   | (798 | ) |   |
| Retirement of  convertible notes                                                        |       |                             | —     |   |   |   | (8,000 | ) |   |   | (90,323 | ) |   |
| (Repayments)  borrowings of lines of credit, net                                        |       |                             | —     |   |   |   | (32,085 | ) |   |   | 29,407 |   |   |
| Proceeds from  exercise of employee stock options                                       |       |                             | 2,007      |   |   |   | 3,605 |   |   |   | 5,654 |   |   |
| Purchases of  treasury stock and other, net                                             |       |                             | (28,338    | ) |   |   | (24,026 | ) |   |   | (262 | ) |   |
| Net cash used in  financing activities                                                  |       |                             | (29,470    | ) |   |   | (66,148 | ) |   |   | (56,322 | ) |   |
| Effect of exchange  rates on cash and cash equivalents                                  |       |                             | (97        | ) |   |   | 132 |   |   |   | 154 |   |   |
| Net increase  (decrease) in cash and cash equivalents                                   |       |                             | 24,477     |   |   |   | 25,009 |   |   |   | (16,094 | ) |   |
| Cash and cash  equivalents, beginning of period                                         |       |                             | 30,163     |   |   |   | 5,154 |   |   |   | 21,248 |   |   |
| Cash and cash  equivalents, end of period                                               |       |                             | $          | 54,640 |   |   |   | $ | 30,163 |   |   |   | $ | 5,154 |   |   |
| Supplemental cash flow  information:                                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| *Cash  (received) paid during the year for:*                                            | * *   |                             |       |   | * * |   |   |   |   |   |   |   |   |
| Income taxes                                                                            |       |                             | $          | (3,248 | ) |   |   | $ | (5,072 | ) |   |   | $ | (13,157 | ) |   |
| Interest                                                                                |       |                             | $          | 1,316 |   |   |   | $ | 1,935 |   |   |   | $ | 4,926 |   |   |
| *Non-cash  activities:*                                                                 | * *   |                             |       |   | * * |   |   |   |   |   |   |   |   |
| Accrual of fixed  asset purchases                                                       |       |                             | $          | 900 |   |   |   | $ | 3,209 |   |   |   | $ | 757 |   |   |
| Short-term notes  payable for purchase of software and related costs                    |       |                             | $          | 709 |   |   |   | $ | 714 |   |   |   | $ | 4,042 |   |   |
| Deferred purchase  price from the sale of discontinued operations                       |       |                             | $          | — |   |   |   | $ | 120 |   |   |   | $ | 3,160 |   |   |

 

See Notes to Consolidated Financial Statements.

 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

***Business—******Spherion*********Corporation provides temporarystaffing services, managed services and permanent placement services andcurrently operates in the United States of America and Canada. Temporarystaffing is a service where Spherion’s employees work at customer locations andunder the supervision of customer personnel. Temporary staffing servicesinclude 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 has anetwork of 660 locations.

***Principles ofConsolidation*****—**Theaccompanying Consolidated Financial Statements include the accounts of SpherionCorporation, its wholly-owned subsidiaries and certain other entities itis required to consolidate (“Spherion”). All material intercompany transactionsand balances have been eliminated.

In accordance with Financial Accounting StandardsBoard (“FASB”) Interpretation (“FIN”) No. 46 (“FIN 46R”), “Consolidationof Variable Interest Entities,” Spherion consolidates variable interestentities (VIE’s) for which it is the primary beneficiary. VIE’s are generallyentities that lack sufficient equity to operate without additional financialsupport from other parties or are entities whose equity holders do not haveadequate decision making authority. The primary beneficiary of a VIE is theparty that absorbs the majority of the entity’s expected losses orreceives the majority of the residual 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 preparation of financial statements in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Due to the inherent uncertaintyinvolved in making estimates, actual results reported in future periods may bematerially different from those estimates.

***Fiscal Year*****—**Effective in 2005, Spherion changed its fiscal year end bytwo days from 52 or 53 weeks ending on the last Friday in December to 52or 53 weeks ending on the last Sunday in December. This change conformsSpherion’s reporting periods to its normal weekly business cycle. This changedid not have a material impact on Spherion’s quarterly or annual results ofoperations, cash flows or financial position. The fiscal years ended in December 31,2006 (“Fiscal year 2006” or “2006”), January 1, 2006, and December 31,2004 had 52, 52 and 53 weeks, 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*****—**Accountsreceivable are carried at the amount estimated to be collectible. Accordingly,allowances are provided for accounts receivable estimated to be uncollectible 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

based on management’s bestestimates based on historical write-off levels and other factors. Recoveriesare recognized in the period they are received. The ultimate amount of accountsreceivable that become uncollectible could differ from those estimated.

***Investments*****—**Spherion maintains investments in mutual funds to offsetthe cost of providing its non-qualified deferred compensation plans (See Note8, “Employee Savings and Investment Plans”). These investments are classifiedas trading securities and are reported at fair value with gains and lossesincluded in earnings during the period incurred. The specific identificationmethod is used to determine the cost of investments sold. These investments areincluded in “Other current assets” and “Other assets” in the accompanyingConsolidated Balance Sheets. Spherion did not have any investments inavailable-for-sale securities as of December 31, 2006 or January 1,2006.

***Goodwill and OtherIntangible Assets*****—**Goodwilland other intangible assets are accounted for in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets.” This statement requires that goodwill and other intangibleassets with indefinite lives should not be amortized, but should be tested forimpairment 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. Trade names and other intangibleassets are amortized on a straight-line basis over a period of approximately5 years. See Note 6, “Goodwill,” 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*****—**Asrequired by SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” long-lived assets should be tested for recoverabilitywhenever events or circumstances indicate that their carrying amount may not berecoverable. Spherion evaluates the recoverability of long-lived assets atleast annually to determine whether an adjustment to carrying values or arevision to estimated useful lives is appropriate if and/or when an event orcircumstance arises that would require it to do so. If the estimated futurecash flows are projected to be less than the carrying value, an impairmentwrite-down would be recorded, measured by the amount of the asset’s carryingvalue in excess of fair value. The estimated future cash flows of an asset orasset group are calculated on an undiscounted basis.

***AccruedSelf-Insurance Losses*****—**Spherionretains a 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 and employment practices liabilitylosses have been discounted at 4.8% and 4.4% at December 31, 2006 and January 1,2006, respectively, and are based on actuarial estimates. While managementbelieves that the amount recorded for the liabilities is adequate, there can beno assurance that changes to management’s estimates may not 

47

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

occur due to limitationsinherent in the estimation process. Changes in the estimates of these accrualsare charged or credited to earnings in the period determined. Spherionpartially funds its workers’ compensation liability with an insurance depositthat was $49.7 million and $78.0 million at December 31, 2006and January 1, 2006, respectively, and is included in “Insurance deposit”in the accompanying Consolidated Balance Sheets. The deposit will be used tofund claims and cannot be used for general corporate purposes.

***Foreign CurrencyTranslation*****—**Spherion’sCanadian operation uses the Canadian dollar as its functional currency. Assetsand liabilities of this operation are translated at the exchange rates ineffect on the balance sheet date. Amounts included in Spherion’s Statements ofEarnings are translated at the average exchange rates for the year. The impactof currency fluctuation is included in stockholders’ equity as part ofaccumulated other comprehensive income.

***Revenue Recognition*****—**Spherion records revenues from sales of services by itscompany-owned and licensed operations and from royalties earned on salesof services by its franchised operations. Staffing and managed service revenuesand the related labor costs are recorded in the period in which services areperformed. Permanent placement revenues are recognized upon candidate startdate. Allowances are established to estimate losses due to placed candidatesnot remaining employed for Spherion’s guarantee period. Spherion followsEmerging Issues Task Force (“EITF”) 99-19, “Reporting Revenue Gross as aPrincipal versus Net as an Agent” in the presentation of revenues and expenses.This guidance requires Spherion to assess whether it acts as a principal in thetransaction or as an agent acting on behalf of others. In situations whereSpherion is the principal in the transaction and has the risks and rewards ofownership, the transactions are recorded gross in the Consolidated Statementsof Earnings.

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 the franchiseeprovides the service. Franchise royalties, which are included in revenues, were$8.6 million, $9.0 million, and $8.4 million for the 2006, 2005and 2004 fiscal years, respectively. The second form of franchising agreement isa licensee agreement where Spherion acts as the principal in customertransactions through direct contractual relationships with the customers,owning related customer receivables and being the legal employer of thetemporary employee and the licensee acts as Spherion’s agent providing certainsales and recruiting services. Accordingly, sales and costs of servicesgenerated by the licensed operation are recorded in Spherion’s ConsolidatedStatements of Earnings. Spherion pays the licensee a commission for acting asSpherion’s agent and this commission is based on a percentage of gross profitfrom the office managed by the licensee and averaged 72%, 70% and 68% for thefiscal years ended 2006, 2005 and 2004, respectively, of the licensed offices’gross profit. The licensee is responsible for establishing their officelocation and paying related administrative and operating expenses, such asrent, utilities and salaries of the licensee’s sales and service employees.

Except in the circumstance where Spherion is requiredto consolidate certain licensees’ operations (see Note 13, “VariableInterest Entities,” for further discussion), Spherion’s Consolidated Statementsof Earnings reflect the licensee commission as an expense, but do not includethe rent, utilities and salaries of the licensee’s full-time office employeessince these expenses are the responsibility of the licensee. Spherion hascredit risk for sales to its customers through licensee arrangements asSpherion pays all direct costs associated with providing temporary servicesbefore related accounts receivable are collected. Spherion has partiallymitigated this risk by making the licensee responsible to reimburse Spherion upto 100% of uncollected accounts receivable (bad debts are deducted from commissionpayments); however, 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

Spherion bears the loss incases where the licensee does not have sufficient financial wherewithal toreimburse uncollected amounts.

***Income Taxes*****—**Deferred taxes arise from temporary differences between thetax basis of an asset or liability and its reported amount in the ConsolidatedFinancial Statements. Valuation allowances on deferred tax assets are recordedto the extent it is more likely than not that a tax benefit will not berealized. See Note 3, “Income Taxes,” for further discussion.

***Earnings Per Share*****—**Basic earnings (loss) per share is computed by dividingSpherion’s earnings (loss) by the weighted-average number of shares outstandingduring the period. When the effects of the common stock equivalents are notanti-dilutive, diluted earnings per share is computed by dividing Spherion’snet earnings plus after-tax interest on the convertible notes, if applicable,by the weighted-average number of shares outstanding and the impact of alldilutive potential common shares, primarily stock options, convertible notes,restricted stock and deferred stock units. During 2004 and 2005, Spherionrepaid its convertible subordinated notes and convertible promissory notes,respectively. The dilutive impact of stock options is determined by applyingthe “treasury stock” method and the dilutive impact of the convertible notes isdetermined by applying the “if converted” method. See Note 11, “EarningsPer Share,” for further discussion.

***DerivativeFinancial Instruments*****—**Fromtime to time, Spherion enters into foreign exchange forward contracts as partof the management of its foreign currency exchange rate exposures. Thesefinancial instruments are not held for trading purposes and none of theinstruments are leveraged. All financial instruments are put into place tohedge specific exposures. Gains and losses on foreign currency forwardcontracts offset gains and losses resulting from the underlying transactions. Spherionaccounts for its 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. Amountsreceivable or payable under the agreements are included in “Other currentassets” or “Other current liabilities” in the accompanying Consolidated BalanceSheets.

***Share-BasedCompensation*****—**EffectiveJanuary 2, 2006, Spherion adopted the provisions of SFAS No. 123(revised 2004, “SFAS No. 123R”), “Share-Based Payment,” using the modifiedprospective transition method. Under this transition method, the compensationcost recognized beginning January 2, 2006 includes compensation cost for (i) allshare-based payments granted prior to, but not yet vested as of January 2,2006, based on the grant-date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, “Accounting for Stock BasedCompensation,” and (ii) all share-based payments granted subsequent to January 1,2006 based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123R. Prior period amounts have not been restatedto recognize compensation cost in the Consolidated Statements of Earnings. UnderSFAS No. 123R, compensation cost is measured at the grant date based onthe value of the award and is recognized in the statement of earnings over thevesting period.

Prior to fiscal year 2006, employee stock options wereaccounted for under the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,”**and its related interpretations, and were granted atmarket value. Accordingly, compensation expense for stock option awards forprior periods was not recognized in the Consolidated Statements of Earnings. SeeNote 2, “Share-Based Compensation,” for further discussion.

***New AccountingPronouncements and Interpretations*****—**In September 2006,the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.” SAB 108 requires that public 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

companies utilize adual-approach to assessing the quantitative effects of financial misstatements.This dual approach includes both an income statement focused assessment and abalance sheet focused assessment. Financial statements would require adjustmentwhen a misstatement is material. Correcting prior year financial statements forimmaterial errors would not require previously filed reports to be amended. SAB108 is effective for fiscal years ending after November 15, 2006. Theadoption of SAB 108 did not have an effect on Spherion’s financial condition orresults of operations.

In September 2006, SFAS No. 157, “Fair ValueMeasurements,” was issued. SFAS No. 157 addresses the definition of fairvalue, the methods used to measure fair value, and the expanded disclosuresabout fair value measurements. SFAS No. 157 applies whenever otherstandards require (or permit) assets or liabilities to be measured at fairvalue but does not expand the use of fair value in any new circumstances. Theprovisions of SFAS No. 157 are effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. Spherion does not believe the adoption of SFAS No. 157will have a material impact on its financial condition or results ofoperations.

In June 2006, FIN No. 48(“FIN 48”), “Accounting forUncertainty in Income Taxes—An Interpretation of FASB Statement No. 109,”was issued. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with SFAS No. 109,“Accounting for Income Taxes.” FIN48 prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This interpretation requires the recognition of theimpact of a tax position in the Consolidated Financial Statements, if thatposition is more likely than not of being sustained on audit, based on thetechnical merits of the position. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The provisions of FIN 48 are effective forSpherion first quarter 2007. Spherion is currently evaluating the impact ofadopting FIN 48.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

**2.**                 SHARE-BASEDCOMPENSATION

As aresult of adopting SFAS No. 123R on January 2, 2006, earnings fromcontinuing operations before income taxes and net earnings as of December 31,2006 were reduced by $3.5 million pre-tax ($3.0 million after-tax) andearnings per share was reduced by $0.05 per share. This reflects the impact ofthe expense from stock options and employee stock purchases previously notrequired to be included in the Consolidated Statements of Earnings. Thefollowing table reflects pro forma net loss and loss per share for the fiscalyears 2005 and 2004, had the Company applied the fair value approach of SFAS No. 123,as reported in the footnotes to the Company’s Consolidated Financial Statements(in thousands, except per share amounts):

| ** **                                                                                                                                   | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Net earnings, as  reported                                                                                                                   |       | $                     | 12,029     |   | $ | 35,829 |   |
| Add: Deferred  stock unit expense included in reported net earnings, net of related tax  effects                                             |       | 572                   |       | 620 |   |
| Deduct: Total  stock-based employee compensation expense determined under SFAS No. 123 for  all awards, net of related tax effects |       | (2,489                | )          | (3,577 | ) |
| Pro forma net  earnings                                                                                                                      |       | $                     | 10,112     |   | $ | 32,872 |   |
| Earnings per share:                                                                                                                          |       |                  |       |   |   |
| Basic—as reported                                                                                                                       |       | $                     | 0.20       |   | $ | 0.59 |   |
| Basic—pro forma                                                                                                                         |       | $                     | 0.17       |   | $ | 0.54 |   |
| Diluted—as  reported                                                                                                                    |       | $                     | 0.20       |   | $ | 0.57 |   |
| Diluted—pro forma                                                                                                                       |       | $                     | 0.16       |   | $ | 0.53 |   |

 

In May 2006, Spherion’s stockholders approved theadoption of the 2006 Stock Incentive Plan, which replaced the 2000Stock Incentive Plan and the Deferred Stock Plan effective July 1, 2006. Underthe 2006 Stock Incentive Plan, options to purchase Spherion’s common stock maybe granted to employees and outside directors of Spherion and its subsidiariesfor periods not to exceed seven years at a price that is not less than 100% offair market value on the date of grant. The 2006 Stock Incentive Plan also allowsother types of stock-based awards including common stock, performance shares,performance units, restricted stock and stock appreciation rights, althoughthere are limitations on the amount of full value awards that can be granted. Allawards of stock options, deferred stock units and other stock-based awardsgranted on or after July 1, 2006 will be issued under the 2006Stock Incentive Plan. As of December 31, 2006, Spherion had 5,260,459shares reserved for future grants under the 2006 Stock Incentive Plan. Additionally,any shares subject to awards under the 2000 Stock Incentive Plan that arecancelled, forfeited or expired will be available for re-grant underthe 2006 Stock Incentive Plan. Spherion expects to satisfy option exerciseswith treasury stock. The Company may from time to time repurchase shares tooffset the dilutive impact of shares issued to employees under Spherion’svarious employee benefit plans.

Spherion also 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 provisions of SFAS No. 123R require the expense related toSpherion’s Employee Stock Purchase Plan be recorded in the ConsolidatedStatements of Earnings. The expense related to this plan was not material tothe Consolidated Statements of Earnings.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

Allshare-based compensation expense and tax benefits recognized in theConsolidated Statement of Earnings during the year were as follows (inthousands):

| ** **                                    | ** ** | **Fiscal Years** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Share-based  compensation expense             |       | $                     | 3,654      |   | $ | 939 |   | $ | 1,018 |   |
| Income tax  benefit                           |       | (494                  | )          | (367 | ) | (398 | ) |
| Share-based  compensation expense, net of tax |       | $                     | 3,160      |   | $ | 572 |   | $ | 620 |   |

 

Thefair value of each option grant is estimated using the Black-Scholes-Mertonoption pricing model. The fair value is then amortized over the requisitevesting periods of the awards. Use of this valuation model requires managementto make certain assumptions with respect to selected model inputs. Expectedvolatility was calculated based on the historical volatility of Spherion’sstock. The average expected life was based on the contractual term of theoption and expected employee exercise and post-vesting employment terminationbehavior. The risk-free interest rate is based on U.S. Treasury zero-couponissues with a remaining term equal to the expected life assumed at the date ofgrant. Forfeitures are estimated based on historical option forfeitures. Assumptionsused in the valuation model were as follows:

| ** **                             | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life (in  years)              |       | 4.2                   |       | 3.3 |   | 3.3 |   |
| Interest rate                          |       | 4.6                   | %          | 3.6 | % | 2.7 | % |
| Volatility                             |       | 49.0                  | %          | 52.0 | % | 55.0 | % |
| Expected  dividends                    |       | —                |       | — |   | — |   |
| Weighted average per  share fair value |       | $                     | 4.39       |   | $ | 3.14 |   | $ | 3.55 |   |
|                                        |            |                       |            |  |  |  |  |  |  |  |

 

The increase in the fair value of the options over theprior year is primarily due to increased exercise prices of options granted,longer expected lives based on the pattern of stock option exercises and higherinterest rates on U.S. Government securities.

Changes under these stock option plans for the fiscalyear-ended December 31, 2006 were as follows:

| ** **                                             | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**                  | ** ** | ** **              | ** ** |
|--------------------------------------------------------|------------|------------|------------|--------------|------------|-------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average**                   | ** ** | **Aggregate**           | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | **Average**  | ** ** | **Remaining**                 | ** ** | **Intrinsic**           | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual**               | ** ** | **Value***              | ** ** |
| ** **                                             | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Term (in years)** | ** ** | **(in thousands)** | ** ** |
| Outstanding at  January 1, 2006                   |       | 4,270,674  |       |         | $          | 9.98                          |       |                    |       |   |   |   |   |   |   |   |
| Granted                                                |       | 1,110,700  |       |         | 10.00      |                          |       |                    |       |   |   |   |   |   |   |
| Exercised                                              |       | (309,662   | )          |         | 7.04       |                          |       |                    |       |   |   |   |   |   |   |
| Forfeited                                              |       | (893,802   | )          |         | 11.66      |                          |       |                    |       |   |   |   |   |   |   |
| Outstanding at  December 31, 2006                 |       | 4,177,910  |       |         | $          | 9.85                          |       |                    |       | 6.6 |   |   |   | $ | 2,206 |   |   |
| Vested and  expected to vest at December 31, 2006 |       | 3,985,622  |       |         | $          | 9.87                          |       |                    |       | 6.5 |   |   |   | $ | 2,159 |   |   |
| Options exercisable at  December 31, 2006         |       | 2,696,070  |       |         | $          | 10.16                         |       |                    |       | 5.4 |   |   |   | $ | 1,846 |   |   |

----

*                    Theintrinsic value of an option is the excess of the market price at the balancesheet date of the underlying stock over the exercise price.

The total intrinsic value of options exercised as of December 31,2006, January 1, 2006, and December 31, 2004 was $0.3 million, $0.2 million, and $1.7 million, respectively.

52

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

As of December 31, 2006, there was $2.2 millionof total unrecognized compensation costs related to nonvested stock optionsgranted under the Plan. That cost is expected to be recognized over aweighted-average period of 0.8 years. The total fair value of stock optionsvested during the year ended December 31, 2006, January 1, 2006, and December 31,2004 was $4.2 million, $4.6 million, and $3.8 million, respectively.

Cash received from option exercises was$2.0 million, $3.6 million, and $5.7 million for the fiscal yearsended December 31, 2006, January 1, 2006, and December 31, 2004,respectively.

Spherionemployees and outside directors are eligible to receive grants of deferredstock units. Deferred stock units entitle the recipient to receive shares ofSpherion common stock at a future date after the recipient has met servicerequirements or Spherion has met financial targets. The majority of thedeferred stock units vest based upon attainment of performance criteria; theremainder vest over 1 to 7 years. If performance criteria are not met, theshares do not vest and recognized compensation cost, if any, is reversed toincome. The value of the deferred stock units is amortized to compensationexpense ratably over the vesting period and was $0.2 million,$0.9 million, and $1.0 million for the fiscal years ended December 31,2006, January 1, 2006, and December 31, 2004, respectively. Theprovisions of SFAS No. 123R did not materially change the accounting forthe deferred stock units. Changes in nonvested stock (deferred stock units) forthe fiscal year ended December 31, 2006 were:

| ** **                      | ** ** | ** ** | ** ** | **Weighted**   | ** ** |
|---------------------------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **Average**    | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Grant-Date** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **Shares**     | ** ** | **Fair Value** | ** ** |
| Nonvested at  beginning of year |       | 698,600    |       |           | $          | 9.07 |   |   |
| Granted                         |       | 225,949    |       |           | 9.59       |   |   |
| Vested                          |       | (286,913   | )          |           | 10.61      |   |   |
| Forfeited                       |       | (157,500   | )          |           | 8.99       |   |   |
| Nonvested at end of year        |       | 480,136    |       |           | $          | 8.42 |   |   |
|                                 |            |            |            |                |            |  |  |  |  |  |

 

As of December 31, 2006, total unrecognizedcompensation related to deferred stock units was $3.2 million; thepreviously recognized portion was $0.8 million. The unrecognized compensationcost related to deferred stock units that vest solely based on the passageof time is $0.5 million and is being recognized as a selling, general andadministrative expense over the vesting period. The unrecognized compensationcost related to deferred stock units that vest solely based on theattainment of performance criteria is $2.7 million of which $1.2 million isestimated to ultimately vest and is being recognized as a selling, general andadministrative expense over the vesting period. The remaining $1.5 millionrelated to deferred stock units that vest solely based on the attainmentof performance criteria is not being recognized as the performance criteria arenot estimated to be achieved. Total unrecognized compensation costs related todeferred stock units are expected to be recognized over a weighted-averageperiod of 2.1 years. The total fair value of deferred stock units vestedduring the year ended December 31, 2006, January 1, 2006, and December 31,2004 was $3.0 million, $0.4 million, and $1.5 million,respectively.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

**3.**                 INCOME TAXES

Incomefrom continuing operations before income taxes in the United States of Americaand outside the United States of America, along with the components of theincome tax provision (benefit), are as follows (in thousands):

| ** **                                              | ** ** | **Fiscal Years** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income from continuing  operations before income taxes: |       |                  |       |   |   |   |   |
| United States of America                                |       | $                     | 32,483     |   | $ | 28,880 |   | $ | 11,960 |   |
| Foreign                                                 |       | 1,886                 |       | 1,554 |   | 234 |   |
|                                                    |       | $                     | 34,369     |   | $ | 30,434 |   | $ | 12,194 |   |
| Current tax  (benefit) expense:                         |       |                  |       |   |   |   |   |
| Federal                                                 |       | $                     | (15,878    | ) | $ | 426 |   | $ | 1,724 |   |
| State                                                   |       | 430                   |       | 1,386 |   | 968 |   |
| Foreign                                                 |       | —                |       | 47 |   | 44 |   |
|                                                    |       | (15,448               | )          | 1,859 |   | 2,736 |   |
| Deferred tax  (benefit) expense:                        |       |                  |       |   |   |   |   |
| Federal                                                 |       | 25,336                |       | 7,685 |   | 355 |   |
| State                                                   |       | 1,607                 |       | 94 |   | (5,671 | ) |
| Foreign                                                 |       | 285                   |       | 583 |   | — |   |
|                                                    |       | 27,228                |       | 8,362 |   | (5,316 | ) |
| Total provision (benefit)  for income taxes             |       | $                     | 11,780     |   | $ | 10,221 |   | $ | (2,580 | ) |

 

Thefollowing table reconciles the United States federal income tax rate toSpherion’s effective tax rate:

| ** **                                           | ** ** | **Fiscal Years** | ** ** |
|------------------------------------------------------|------------|------------------|------------|
| ** **                                           | ** ** | **2006**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statutory rate                                       |       | 35.0             | %          | 35.0 | % | 35.0 | % |
| Increase (decrease) in  rate resulting from:         |       |             |       |   |   |   |   |
| State and local income taxes, net of federal benefit |       | 2.9              |       | 1.8 |   | (43.2 | ) |
| Work Opportunity Tax Credit                          |       | (6.4             | )          | (5.8 | ) | (18.1 | ) |
| Foreign income and withholding taxes                 |       | (0.8             | )          | 0.8 |   | 1.4 |   |
| Valuation allowance                                  |       | (2.3             | )          | — |   | — |   |
| Nondeductible meals and entertainment                |       | 1.3              |       | 1.4 |   | 4.4 |   |
| Share-based compensation expense                     |       | 2.4              |       | — |   | — |   |
| Company-owned life insurance                         |       | —           |       | (0.4 | ) | (3.3 | ) |
| Other, net                                           |       | 2.2              |       | 0.8 |   | 2.6 |   |
| Effective tax rate                                   |       | 34.3             | %          | 33.6 | % | (21.2 | )% |

 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

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

| ** **                                      | ** ** | **Fiscal Years** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current deferred tax  asset (liability):        |       |                  |       |   |   |
| Employee compensation and benefit plans         |       | $                     | 2,339      |   | $ | 3,216 |   |
| Self-insurance                                  |       | 7,065                 |       | 2,984 |   |
| Accrued expenses                                |       | 2,718                 |       | 2,846 |   |
| Other                                           |       | 1,820                 |       | 1,824 |   |
|                                            |       | 13,942                |       | 10,870 |   |
| Valuation allowance                             |       | (2,480                | )          | (1,715 | ) |
| Net current deferred tax asset                  |       | 11,462                |       | 9,155 |   |
| Non-current  deferred tax asset (liability):    |       |                  |       |   |   |
| Employee compensation and benefit plans         |       | 10,823                |       | 11,534 |   |
| Self-insurance                                  |       | 9,039                 |       | 16,726 |   |
| Depreciation                                    |       | (11,437               | )          | (11,260 | ) |
| Amortization                                    |       | 58,122                |       | 69,120 |   |
| Accrued expenses                                |       | 2,238                 |       | 3,957 |   |
| General business and other credits carryforward |       | 16,891                |       | 12,960 |   |
| Foreign tax credit carryforward                 |       | 18,813                |       | 19,625 |   |
| Loss carryforwards                              |       | 45,574                |       | 60,367 |   |
|                                            |       | 150,063               |       | 183,029 |   |
| Valuation allowance                             |       | (27,196               | )          | (30,945 | ) |
| Long-term deferred tax asset                    |       | 122,867               |       | 152,084 |   |
| Total                                           |       | $                     | 134,329    |   | $ | 161,239 |   |

 

At December 31, 2006, Spherion had a net deferredtax asset of $134.3 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 United States federal net operatingloss carryforward in the amount of $84.3 million expiring in 2024 andthereafter. Spherion has $214.0 million of state net operating losscarryforwards which expire over the next one to twenty years. Canadian netoperating loss carryforwards are available in the amount of $1.9 million,and expire between 2007 and 2013.

Spherion’s valuationallowance decreased by $3.0 million during 2006. 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 $18.8 million.In addition, we have recorded a valuation allowance against the full amount ofthe $6.9 million benefit on capital loss carry forward of $19.7 million. Thebenefits on foreign tax credits expire between 2011 and 2012. The benefits oncapital loss carryforwards expire between 2009 and 2011; and, 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

generalbusiness credits carried forward will expire between 2021 and 2026. Valuationallowances for state net operating loss carryforwards and other items accountfor remainder of the total $29.7 million. At December 31, 2006 and January 1,2006, there were no unremitted foreign earnings.

**4.**                 SHORT-TERM ANDLONG-TERM DEBT OBLIGATIONS

Asummary of short-term and long-term debt obligations is as follows (inthousands):

| ** **                                   | ** ** | **Fiscal Years** | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2006**         | ** ** | **2005** | ** ** |
| **Short-term debt obligations:**             | ** ** | ** **       |       |   | ** ** |
| Other debt, due  2007 and 2006, respectively |       | $                | 709        |   | $ | 1,338 |   |
| Current portion  of long-term debt           |       | 1,359            |       | 1,803 |   |
| Total short-term debt obligations            |       | $                | 2,068      |   | $ | 3,141 |   |
| **Long-term  debt obligations:**             | ** ** | ** **       |       |   | ** ** |
| Capital lease,  due through 2011             |       | $                | 3,136      |   | $ | 4,639 |   |
| Other debt, due through  2008                |       | 600              |       | 899 |   |
| Total long-term debt obligations             |       | 3,736            |       | 5,538 |   |
| Less current  portion of long-term debt      |       | (1,359           | )          | (1,803 | ) |
| Long-term debt,  net of current portion      |       | $                | 2,377      |   | $ | 3,735 |   |

 

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 December 31, 2006 and January 1,2006, there were no amounts outstanding under this facility. Total availabilityunder this facility was $159.6 million for the fiscal year ending December 31,2006 and is calculated as eligible receivables of $204.3 million, less:amounts outstanding, letters of credit of $16.7 million and a one week payrollreserve of $28.0 million. Interest on this line of credit is based uponthe duration of the loan, availability under the line and other conditions andwould have been approximately 6.9% (LIBOR plus a spread) or approximately 8.0%(prime plus a spread) as of December 31, 2006. Spherion pays an unusedline fee in the range of 0.25% to 0.38% per annum that is determined by theunused portion of the revolving line of credit as well as a letter of creditfee of 0.25% per annum. 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 $11.1 million at current exchange rates). As of December 31,2006 and January 1, 2006, there were no borrowings outstanding under thisfacility. As of December 31, 2006, the interest rate for amounts borrowedon this facility would have approximated 7.0% (Canadian prime plus a spread). Acommitment fee of 0.5% per annum is payable based on the unused portion of therevolving line of credit. Spherion guarantees the Canadian dollar revolvingline of credit.

Spherion’s lines of credit provide for certainaffirmative and negative covenants which may limit the total availability underthese revolving lines of credit based upon Spherion’s ability to meet thesecovenants. These covenants include, but are not limited to: a fixed chargecoverage ratio; limitations on capital expenditures; additional debt incurred;mergers, consolidations or sales; and transactions with subsidiaries andrelated parties. Failure to meet compliance with one of more of these covenantsin the future could affect the amount of availability Spherion has to borrowagainst and as a result, our liquidity 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

and financial conditionmay be adversely affected. At December 31, 2006, Spherion was incompliance with the requirements of these 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 loss” in theaccompanying Consolidated Statements of Earnings.

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 and imputed interest remaining at December 31,2006 was $3.1 million dollars and $0.3 million, respectively.

Aggregate futurematurities of long-term debt as of December 31, 2006 are $1.4 millionin 2007, $0.8 million in 2008, $0.6 million in 2009,$0.6 million in 2010 and $0.4 million in 2011.

**5.**                 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 assets approximates fair value due to theshort-term maturities of these instruments. Spherion’s insurance deposits arerestricted to the payment of claims and are carried at cost, which approximatesfair market value. Company-owned life insurance policies are carried at fairmarket value; no such policies were carried as of December 31, 2006 and asof January 1, 2006 such policies approximated $12.9 million.

In estimating the fair value of derivative positions,Spherion utilizes quoted market prices, if available, or quotes obtained fromoutside sources. As of December 31, 2006, Spherion had one outstandingforward contract to sell CAD$3.5 million in March 2007. This derivativehad a fair value or cost to unwind that is not material to Spherion’sconsolidated 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.

**6.**                 GOODWILL

Spherion has five reporting units with goodwill andperforms its annual impairment test of goodwill as of itsNovember month-end. The test for potential impairment is at the reportingunit level which is one level below an operating segment. Reporting units areaggregated for purposes of the impairment test only when the aggregationrules under SFAS No. 142, paragraph 30 are met. These rules permitreporting units with similar economic characteristics to be combined forpurposes of measuring impairment. The 2006, 2005 and 2004 test resultsindicated no impairment.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

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

| ** **                                  | ** ** | **Staffing  Services** | ** ** | **Professional  Services** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------------|------------|-----------|------------|
| **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 |   |
| Foreign currency  changes and other         |       | (61                    | )          |                       | —     |      |       | (61 | ) |
| Goodwill  additions during the period       |       | 541                    |       |                       | 487        |      |       | 1,028 |   |
| Net operating  loss tax benefit realization |       | (125                   | )          |                       | —     |      |       | (125 | ) |
| Transfer of  business activity*             |       | (6,724                 | )          |                       | 6,724      |      |       | — |   |
| **Balance at December 31,  2006**      |       | $                      | 33,775     |                       |       | $         | 15,928     |   |   | $ | 49,703 |   |

----

*                    Adjusted forthe movement of certain Managed Services contracts from within StaffingServices to Professional Services.

The net operating loss taxbenefit realization in both periods related to the utilization ofpre-acquisition net operating losses carry-forwards of Spherion’s Canadian operation.

**7.**                 PROPERTY ANDEQUIPMENT

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

| ** **                                          | ** ** | **Life**            | ** ** | **Fiscal Years** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **(in years)** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land                                                |       |                | —     |                  |       | $ | 4,167 |   | $ | 4,167 |   |
| Buildings                                           |       |                | 10-40      |                  |       | 21,506 |   | 21,478 |   |
| Equipment                                           |       |                | 3-8        |                  |       | 57,595 |   | 78,934 |   |
| Enterprise-wide  information system                 |       |                | 5-7        |                  |       | 63,283 |   | 58,912 |   |
| Software,  primarily third party purchased software |       |                | 5          |                  |       | 26,320 |   | 28,613 |   |
| Leasehold  improvements and other                   |       |                | 3-7        |                  |       | 8,143 |   | 10,496 |   |
|                                                |       |                |       |                  |       | 181,014 |   | 202,600 |   |
| Less: Accumulated  depreciation and amortization    |       |                |       |                  |       | (93,723 | ) | (114,038 | ) |
|                                                |       |                |       |                  |       | $ | 87,291 |   | $ | 88,562 |   |

 

Equipment includes capitallease assets of $3.1 million and $4.6 million as of December 31, 2006and January 1, 2006, respectively. Depreciation and amortization expenseof property and equipment including leased assets for the fiscal years 2006,2005 and 2004 amounted to $21.9 million, $21.3 million and$23.7 million, respectively.

**8.**                 EMPLOYEE SAVINGSAND INVESTMENT PLANS

Spherion has a voluntary employee savings plan (the “401(k) BenefitPlan”) covering substantially all eligible employees in the United States ofAmerica. 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, $0.7 million and$0.6 million for fiscal years 2006, 2005 

58

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

and 2004, respectively. Therewere approximately 1,500 participating employees in this plan as of December 31,2006.

Spherion also has avoluntary non-qualified deferred compensation plan for highly compensatedemployees who are not eligible to participate in Spherion’s 401(k) BenefitPlan. The plan is not funded, however, Spherion maintained investments of$24.1 million in a portfolio of mutual funds at December 31, 2006,which are included in “Other current assets” and “Other assets” in theaccompanying Consolidated Balance Sheets based on expected timing ofdistribution. The investment balance increased from $12.9 million as of January 1,2006 and was 100% comprised of company-owned life insurance. The Companyterminated these policies and invested cash in order to provide an investmentbalance equal to the deferred compensation liability. Earnings or losses fromthese investments offset earnings or losses in participant accounts. Theseinvestments could be used to satisfy general corporate purposes. The deferredcompensation liability and accumulated investment earnings or losses areaccrued. Such accrual amounted to $24.5 million and $24.3 million at December 31,2006 and January 1, 2006, respectively, the short-term portion is within “Othercurrent liabilities” in the accompanying Consolidated Balance Sheets. Employeedeferrals within this plan represented as deferred stock units of Spherion areincluded in additional paid-in capital within the stockholders’ equity sectionof the accompanying Consolidated Balance Sheets (rather than in “Otherlong-term liabilities”) as employees may only be paid out in shares of Spherionstock. There were approximately 170 employees participating in this plan as of December 31,2006.

**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 sharesof 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.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

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 committeereviewed the plan in 2006 and determined that the plan should be maintained. Thecommittee intends to review the plan again in 2009.

**10.**          STOCKHOLDERS’EQUITY

During May 2005, the Board of Directorsauthorized the repurchase of up to six million shares or approximately 10% ofthe Company’s outstanding common stock. Share repurchases were made from timeto time in open-market transactions or in privately negotiated transactions. Duringthe fiscal years ended December 31, 2006 and January 1, 2006,Spherion purchased 3.0 million and 3.0 million shares for approximately$28.3 million and $24.0 million at an average price per share of $9.54 and$7.87, respectively.

On February 20, 2007,the Board of Directors authorized the Company to repurchase shares of itscommon stock as needed to mitigate the dilutive impact of shares issued underour various employee benefit plans. The repurchases are limited to a maximum of50,000 shares of common stock per week.

**11.**          EARNINGSPER SHARE

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

| ** **                                  | ** ** | **Fiscal Years**                      | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **Earnings  From  Continuing  Operations** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Earnings  From  Continuing  Operations** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** | **Earnings  From  Continuing  Operations** | ** ** | **Shares** | ** ** | **Per  Share  Amount** | ** ** |
| Basic EPS                                   |       |                                       | $          | 22,589 |   |   | 57,212 |   |   | $ | 0.39 |   |   |   | $ | 20,213 | ** ** |   | 60,938 | ** ** |   | $ | 0.33 |   |   |   | $ | 14,774 |   |   | 61,036 |   |   | $ | 0.24 |   |   |
| Effect of Dilutive                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities:                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options and other dilutive securities |       |                                       | —     |   |   | 572 |   |   |   |   |   |   | — | ** ** |   | 492 |   |   |   |   |   |   | — |   |   | 877 |   |   |   |   |   |
| Convertible notes                           |       |                                       | —     |   |   | — |   |   |   |   |   |   | — | ** ** |   | — |   |   |   |   |   |   | — |   |   | 400 |   |   |   |   |   |
| Diluted EPS                                 |       |                                       | $          | 22,589 |   |   | 57,784 |   |   | $ | 0.39 |   |   |   | $ | 20,213 | ** ** |   | 61,430 |   |   | $ | 0.33 |   |   |   | $ | 14,774 |   |   | 62,313 |   |   | $ | 0.24 |   |   |

 

**12.**          COMMITMENTSAND CONTINGENCIES

Substantially all of Spherion’s operations areconducted in leased premises. Spherion also leases computers and otherequipment. Total lease expense for the fiscal years ended 2006, 2005 and 2004was $22.1 million for each year. Future minimum lease payments undernon-cancelable leases as of December 31, 2006 are $21.4 million,$14.3 million, $9.3 million, $5.1 million and $3.2 millionin the years 2007 through 2011, respectively, and $1.3 million thereafterwhich are partially offset by $10.8 million under future non-cancelablesubleases. Of these future minimum lease payments, $7.2 million has been 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

accrued as of December 31,2006, related to facility closures, in amounts of $1.6 million, $2.1 millionand $3.5 million which are included as part of “Accrued restructuring and othercurrent liabilities,” “Accounts payable and other accrued expenses” and “Otherlong-term liabilities” 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. See Note 15, “Discontinued Operations,” for furtherdiscussion.

We own 85% of our Canadian operation and have aput/call agreement with the minority interest shareholder, whereby the minorityinterest shareholder can put the remaining 15% interest in the business toSpherion any time or Spherion can call the remaining 15% interest any timeafter January 1, 2008. If the put orthe call were exercised, the purchase price would be primarily determined basedupon the net assets and gross profits from this operation. Based upon thesefactors, the estimated purchase price using 2006 operating results and netassets as of the end of the year would approximate $4.5 million.

Spherion had outstanding irrevocable letters of creditof approximately $16.5 million and surety bonds outstanding ofapproximately $0.2 million as of December 31, 2006. These instrumentsprimarily collateralize Spherion’s recorded obligations under workers’compensation insurance programs. The level of collateral required is determinedby the insurance carrier based on claims experience of the programs and mayvary from year to year. Spherion can collateralize its workers’ compensationliabilities with either letters of credit or deposits (See Note 5, “FinancialInstruments and Fair Values”).

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 andfidelity losses. Spherion’s management does not expect that the outcome of anypending lawsuits relating to such matters, individually or collectively, willhave a material adverse effect on Spherion’s financial condition, results ofoperations or cash flows.

Interim HealthCare Inc., Catamaran Acquisition Corp.and Cornerstone Equity Investors IV, L.P. filed an action against Spherion inthe Delaware Court of Chancery in 2001 related to the divestiture of InterimHealthCare (the “Healthcare Divestiture”). The same parties also sought damagesagainst Spherion in an action in Delaware Superior Court. The cases went totrial in December 2003 and in February 2005 the court issued its decisionrequiring Spherion to pay damages on one breach of contract claim in the amountof $1.1 million plus pre- and post-judgment interest and attorneys’ fees. Afterthe parties stipulated to the amount of pre-judgment interest and attorneys’fees, the judge entered an order of judgment in June 2005 directingSpherion to pay a total of approximately $1.7 million, and in August 2005this amount was paid to the plaintiffs. The plaintiffs appealed the ruling andin October 2005 the Delaware Supreme Court issued its opinion affirming thetrial court’s ruling in all respects.

On December 13, 2004, and as amended on January 13,2005 and October 31, 2005, Glidepath Holding B.V. and Jeimon Holdings N.V.filed an action against Spherion Corporation in the U.S. District Court of theSouthern District of New York. Glidepath and Jeimon Holdings, investors in theentity that acquired the Cyber Center business of Spherion Technology (UK)Limited, a subsidiary of Spherion Corporation, in 2002, sued Spherion forfraud, negligent misrepresentation, aiding and abetting breach of fiduciaryduty and unjust enrichment and seek $32.0 million in damages, and treble forpunitive damages, 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

plus attorneys’ fees,expert fees and costs. Glidepath and Jeimon Holdings allege that an individualwho was an officer of Spherion Technology (UK) fraudulently induced them toinvest in a corporation formed to purchase the Cyber Center business, while heremained in the employ of Spherion Technology (UK) and was to be paid anincentive bonus for the sale by Spherion. They allege that he misled them as tohis employment status at the time, as to the prospects for the Cyber Center,and as to whether the newly formed corporation was assuming the indebtedness ofSpherion Technology (UK) associated with the Cyber Center business. They allegethat in doing so, he was acting as Spherion’s agent. Spherion intends tovigorously defend this matter. Although this claim is in the preliminarystages, Spherion has a reserve of $0.1 million related to this matter. Spheriondoes not have insurance coverage for this claim.

In 2002, Spherion engaged in transactions thatgenerally had the effect of accelerating certain future tax deductions and losses,resulting in an increase in its 2002 tax refund. During 2006, based on eventsoccurring in the year, the Company determined that certain tax positionsrelating to transactions in prior years were now considered resolved or likelyto be sustained, and the balance sheet reserves were reversed. As a result,$31.9 million was reversed to tax benefit in discontinued operations. Additionally,$17.0 million was reversed to income and deferred tax assets were reduced by$16.7 million, with a resulting net impact on income tax expense fromcontinuing operations of $0.3 million. At December 31, 2006, reservesrelated to deductions taken on prior year tax returns were $2.9 million.

Twostates are examining Spherion’s prior year unemployment tax rates. In thesestates the rate is currently being examined and challenged, the claims raisedby the states approximate $3.1 million plus potential interest and penalties. Asof December 31, 2006, Spherion had $2.1 million accrued as its bestestimate of losses it expects to incur as a result of these challenges.

**13.**          VARIABLEINTEREST ENTITIES

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

| ** **                | ** ** | **Fiscal Years** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Number of VIE’s:     |       |                  |       |   |   |
| Consolidated              |       | 8                     |       | 7 |   |
| Not consolidated          |       | 1                     |       | 2 |   |
| Total VIE’s          |       | 9                     |       | 9 |   |
| Revenues (in  thousands): |       |                  |       |   |   |
| Consolidated              |       | $                     | 42,226     |   | $ | 57,343 |   |
| Not consolidated          |       | $                     | 4,362      |   | $ | 7,177 |   |

 

Spherion’s consolidated VIE’s (all of which arelicensees) provide light industrial and clerical staffing. Spherionconsolidated net assets were $1.8 million and $0.7 million at December 31,2006 and January 1, 2006. Each licensee’s loan is collateralized by theirrespective business and in the event of default on the loan, Spherion’s retainsthe right to take over their operations. General creditors of Spherion’slicensees do not have any recourse against Spherion.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

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 $0.1 million and $0.5 million as ofDecember 31, 2006 and January 1, 2006, respectively. All loan androyalty receivables are included in “Other current assets” and “Other assets”in the accompanying Consolidated Balance Sheets.

**14.**          RESTRUCTURINGAND OTHER CHARGES

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

| ** **                                       | ** ** | **Fiscal Years** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Staffing Services                                |       | $                     | 363        |   | $ | 1,840 |   | $ | 543 |   |
| Professional  Services                           |       | 106                   |       | 49 |   | 1,537 |   |
| Corporate                                        |       | 899                   |       | 341 |   | 1,351 |   |
| Reversal of over  accrual                        |       | (582                  | )          | (175 | ) | (672 | ) |
| Restructuring                                    |       | 786                   |       | 2,055 |   | 2,759 |   |
| Other charges  (credits)                         |       | (963                  | )          | (292 | ) | 5,636 |   |
| Total  restructuring and other charges (credits) |       | $                     | (177       | ) | $ | 1,763 |   | $ | 8,395 |   |

 

***Restructuring Charges***

During 2006, Spherion incurred restructuring chargesof $1.4 million for lease and severance-related costs. There were reversals of prioryear accruals of $0.6 million. The reversal of previously accrued amounts toincome was primarily a result of lower lease expense costs than initiallyanticipated. During the fourth quarter of 2006, Spherionrecorded $1.1 million for severancerelated costs for the elimination of 94 positions.

Restructuring charges for the fiscal 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 for the fiscal year ended December 31,2004. The charges consisted of severance charges of $2.1 million andfacility closure expenses and charges for asset write-offs for propertypreviously vacated of $1.3 million.

These charges were offsetby reversals of accruals of $0.2 million and $0.7 million for the fiscalyears ended January 1, 2006 and December 31, 2004, respectively, thatwere unnecessary primarily as the result of the resolution of uncertaintiesrelated to facility closures, sublease income exposure, lower broker fees,lower fixed asset write-offs and lower severance costs than initially anticipated,in which these amounts were reversed to income in the period they wereidentified.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

***Other Charges (Credits)***

During the fourth quarter of 2006, Spherion received$1.0 million in proceeds from a favorable legal settlement associated with apreviously written-off investment.

During the second quarter of 2005, Spherion identified$0.3 million of prior year accruals for facility closures that were unnecessaryand reversed these to income.

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

As of December 31,2006, the remaining accruals for facility closures of $1.6 million relate tolease payments on four closed locations that will be paid out through 2013 (netof applicable sublease income). These accruals are included within theConsolidated Balance Sheet in “Other current liabilities” or “Other long-termliabilities” based on the expected timing of the associated future payments.

**15.**          DISCONTINUEDOPERATIONS

During2004, Spherion assessed the profitability of its operations and made decisionsto exit five of its business units which included the staffing operations inthe United Kingdom, the Asia/Pacific region and the Netherlands, the callcenter outsourcing business and the court reporting business. Results from discontinued operations in theaccompanying Consolidated Statements of Earnings are as follows (in thousands):

| ** **                                        | ** ** | **2006**         | ** ** | **2005**     | ** ** | **2004**   | ** ** |
|---------------------------------------------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                        | ** ** | **Professional** | ** ** | **Staffing** | ** ** | ** ** | ** ** | **Professional** | ** ** | **Staffing** | ** ** | ** ** | ** ** | **Professional** | ** ** | **Staffing** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Services**     | ** ** | **Services** | ** ** | **Total**  | ** ** | **Services** | ** ** | **Services** | ** ** | **Total** | ** ** | **Services** | ** ** | **Services** | ** ** | **Total** | ** ** |
| Revenues                                          |       |             | $          |         |       |       |       | $ |   |   |   | $ |   |   |   | $ | — |   |   |   | $ | 11,535 |   |   | $ | 11,535 |   |   | $ | 185,922 |   |   |   | $ | 33,646 |   |   | $ | 219,568 |   |
| Pre-tax loss from  operations                     |       |             | $          | (1,389       | )          |       |       | $ | (657 | ) |   | $ | (2,046 | ) |   | $ | (1,008 | ) |   |   | $ | (6,367 | ) |   | $ | (7,375 | ) |   | $ | (5,172 | ) |   |   | $ | (4,724 | ) |   | $ | (9,896 | ) |
| Pre-tax (loss)  gain on disposal                  |       |             | 1,800      |         |       |       | 173        |   |   | 1,973 |   |   | (6,178 | ) |   |   | 499 |   |   | (5,679 | ) |   | 5,656 |   |   |   | (9,049 | ) |   | (3,393 | ) |
| Income tax benefit                                |       |             | 31,978     |         |       |       | 188        |   |   | 32,166 |   |   | 3,824 |   |   |   | 1,046 |   |   | 4,870 |   |   | 28,875 |   |   |   | 5,469 |   |   | 34,344 |   |
| Net (loss)  earnings from discontinued operations |       |             | $          | 32,389       |       |       |       | $ | (296 | ) |   | $ | 32,093 |   |   | $ | (3,362 | ) |   |   | $ | (4,822 | ) |   | $ | (8,184 | ) |   | $ | 29,359 |   |   |   | $ | (8,304 | ) |   | $ | 21,055 |   |

----

Results from the call centeroutsourcing business were previously reported in the Staffing Services segment;the remaining four businesses were previously reported within the ProfessionalServices segment.

Net earnings for the fiscal year ended December 31,2006 included (i) after-tax restructuring and other charges of $0.5million or $0.01 per share, (ii) reversal of foreign legal matters of $1.1million or $0.02 per share, and (iii) a tax benefit from the resolution ofcertain international tax matters of $29.7 million, or $0.51 per share.

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 share, (ii) estimated charges of $5.7 million, or$(0.09) per share, to increase or set-up reserves for working capitalsettlement and indemnification or other matters related to the 2004 disposal ofSpherion’s operations in the Asia/Pacific region and the United Kingdom, and (iii) atax benefit from operating activities of $3.8 million, or $0.06 per 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 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

benefit of $3.9 millionfor the estimated loss on sale of the call centers. As a result of thefinalization of the sale of the three call centers, the tax benefit wasadjusted by $0.8 million in 2005.

Summarized activity related to each business unitfollows:

The Netherlands: Sold in 2004 for cash proceeds of$2.0 million (net of cash sold of $0.5 million) resulting in a pre-tax loss onsale of $1.7 million. Subsequently settled and paid $0.6 million for anemployment liability in August 2005. Remaining exposure is for thepotential payment of social security taxes which are reserved in the amount of$0.2 million as of December 31, 2006.

The United Kingdom: Sold in 2004 for cash proceeds of$25.4 million (net of cash sold of $3.1 million), resulting in a pre-taxgain on the sale of $9.5 million, (net of a $2.6 million reserve for estimatedadjustments to the net proceeds). The reserve was increased by$1.6 million in 2005 for indemnification matters. We subsequently settledand paid the final working capital audit, indemnification matters andadministrative costs of $3.1 million in 2006 ($1.1 million less thanthe accrued liability, and therefore, this amount was reversed to income duringthe second quarter of 2006). Remaining exposure is for a facility lease which is reserved in the amount of $1.1 millionat December 31, 2006.

Court reporting: Sold in 2004 for cash proceeds of$2.6 million resulting in a pre-tax gain of $1.2 million. Subsequentlyreceived $1.0 million in final contingent proceeds in February 2006 as thepurchaser achieved revenue growth targets.

Call center outsourcing business: Decided in 2004 tosell four call centers and recorded a $9.5 million estimated loss on sale, pre-tax.Sold three call centers in 2005 for cash proceeds of $1.9 million resulting inan additional loss of $0.5 million, pre-tax. During 2006, a decision was made toretain the remaining call center and its activities are reported in continuingoperations for all periods presented. There are no known remaining exposureswith respect to these transactions.

Asia/Pacific region: Soldin 2004 in two separate transactions to two different purchasers for total cashproceeds of $13.7 million (net of cash sold of $0.2 million) and a deferredpurchase price of $3.8 million which we received in 2005. Spherion incurred aloss on sale of $3.4 million in 2004 which included reserves associated withthe selling the business of $6.0 million. We paid $4.8 million of thesereserves, mostly for severance and transaction costs, in 2004. Bothtransactions required working capital audits and indemnifications associatedwith the sale and in 2005 we accrued $3.7 million for these matters, primarilyfor two tax indemnifications. Payments against the reserves for working capitaland administrative costs were $0.8 million in 2005. During 2006 we increasedthe reserves for a non-tax indemnification matter by $2.0 million. The two taxmatters were settled in 2006, one with a payment of $1.6 million and the othermatter was settled without cost and the reserve of $1.9 million was released toincome. The remaining reserve balance of $2.6 million at December 31, 2006relates to the non-tax indemnification matter.

**16.**          SEGMENTINFORMATION

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 the performanceof its operating segments and allocates resources based on revenue, grossprofit and segment operating profit. Segment operating profit is defined asincome 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

before unallocatedcorporate costs, amortization expense, interest expense, interest income,income taxes and restructuring and other charges. All 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 ofEarnings.

During the first quarter of 2006,****Spheriondecided to retain a call center operation previously classified as discontinuedoperations; results related to this call center operation have beenreclassified from discontinued operations to continuing operations in theStaffing Services segment for all periods presented. This call centercontributed revenues of $11.1 million, $8.9 million and $7.1 million andsegment operating profit (loss) of $1.1 million, $0.9 million and $(0.4)million for the fiscal years of 2006, 2005 and 2004, respectively. See Note 15, “Discontinued Operations,” forfurther discussion.

Informationon operating segments and a reconciliation to earnings from continuing operationsbefore income taxes are as follows (in thousands):

| ** **                                                                           | ** ** | **Fiscal Years** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues:**                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Staffing Services                                                                    |       | $                     | 1,440,386  |   | $ | 1,530,395 |   | $ | 1,630,279 |   |
| Professional Services                                                                |       | 492,673               |       | 450,179 |   | 409,582 |   |
| **Total**                                                                            |       | $                     | 1,933,059  |   | $ | 1,980,574 |   | $ | 2,039,861 |   |
| **Gross Profit:**                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Staffing Services                                                                    |       | $                     | 293,366    |   | $ | 292,641 |   | $ | 297,484 |   |
| Professional Services                                                                |       | 161,542               |       | 143,143 |   | 128,464 |   |
| **Total**                                                                            |       | $                     | 454,908    |   | $ | 435,784 |   | $ | 425,948 |   |
| **Segment Operating Profit:**                                                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Staffing Services                                                                    |       | $                     | 24,565     |   | $ | 26,342 |   | $ | 24,792 |   |
| Professional Services                                                                |       | 23,279                |       | 19,236 |   | 19,769 |   |
| **Total**                                                                            |       | 47,844                |       | 45,578 |   | 44,561 |   |
| Unallocated  corporate costs                                                         |       | (15,541               | )          | (13,832 | ) | (20,637 | ) |
| Amortization  expense                                                                |       | (201                  | )          | (416 | ) | (543 | ) |
| Interest expense                                                                     |       | (1,965                | )          | (3,205 | ) | (5,766 | ) |
| Interest income                                                                      |       | 4,055                 |       | 4,072 |   | 3,815 |   |
| Restructuring,  impairment and other                                                 |       | 177                   |       | (1,763 | ) | (9,236 | ) |
| Earnings from continuing  operations before income taxes and discontinued operations |       | $                     | 34,369     |   | $ | 30,434 |   | $ | 12,194 |   |

 

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

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

| ** **                 | ** ** | **Fiscal Years** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues:**              |       |                  |       |   |   |   |   |
| Temporary Staffing         |       | $                     | 1,671,471  |   | $ | 1,714,801 |   | $ | 1,679,543 |   |
| Managed Services           |       | 187,268               |       | 200,141 |   | 304,773 |   |
| Permanent Placement        |       | 74,320                |       | 65,632 |   | 55,545 |   |
| **Total**                  |       | $                     | 1,933,059  |   | $ | 1,980,574 |   | $ | 2,039,861 |   |
| **Depreciation  Expense:** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Staffing Services          |       | $                     | 16,213     |   | $ | 15,228 |   | $ | 16,699 |   |
| Professional Services      |       | 5,693                 |       | 6,093 |   | 6,990 |   |
| **Total**                  |       | $                     | 21,906     |   | $ | 21,321 |   | $ | 23,689 |   |
| **Total  Assets:**         |       |                  |       |   |   |   |   |
| Staffing Services          |       | $                     | 236,699    |   | $ | 253,266 |   | $ | 323,911 |   |
| Professional Services      |       | 93,132                |       | 97,863 |   | 102,104 |   |
| Corporate                  |       | 363,556               |       | 391,515 |   | 404,251 |   |
| **Total**                  |       | $                     | 693,387    |   | $ | 742,644 |   | $ | 830,266 |   |

 

Spherion has no singlecustomer representing greater than 10% of revenues. All operations and assetsare in North America.

**17.**          QUARTERLY FINANCIAL 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 2006 and 2005 fiscal years:

| ** **                  | ** ** | **2006**    | ** ** |
|-----------------------------|------------|-------------|------------|
| ** **                  | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                  | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Revenues                    |       | $           | 464,249    |   | $ | 472,714 |   | $ | 495,473 |   | $ | 500,623 |   |
| Gross profit                |       | 104,571     |       | 112,798 |   | 117,273 |   | 120,266 |   |
| Net earnings                |       | 2,903       |       | 3,611 |   | 8,359 |   | 39,809 |   |
| Basic earnings  per share   |       | 0.05        |       | 0.06 |   | 0.15 |   | 0.70 |   |
| Diluted earnings per  share |       | 0.05        |       | 0.06 |   | 0.15 |   | 0.70 |   |
|                             |            |             |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                         | ** ** | **2005**    | ** ** |
|------------------------------------|------------|-------------|------------|
| ** **                         | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                         | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Revenues                           |       | $           | 507,715    |   | $ | 479,091 |   | $ | 494,489 |   | $ | 499,279 |   |
| Gross profit                       |       | 105,463     |       | 105,267 |   | 110,531 |   | 114,523 |   |
| Net (loss)  earnings               |       | (1,228      | )          | 1,755 |   | 5,160 |   | 6,342 |   |
| Basic (loss)  earnings per share   |       | (0.02       | )          | 0.03 |   | 0.08 |   | 0.11 |   |
| Diluted (loss) earnings  per share |       | (0.02       | )          | 0.03 |   | 0.08 |   | 0.10 |   |
|                                    |            |             |            |  |  |  |  |  |  |  |  |  |  |

----

Quarterly and year-to-date computations of per shareamounts are made independently, therefore, the sum of per share amounts for thequarters may not equal per share amounts for the year.

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**SPHERION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)**

In the fourth quarter of 2006 an after-taxrestructuring credit of $0.3 million was recorded for proceeds from a favorable legal settlement and net of reduction forsupport staff. The net earnings from discontinued operationsincludes a tax benefit from the resolution of certain international tax mattersof $29.7 million, or $0.52 per share. The net earnings from continuingoperations includes a tax benefit related to the approval of the WorkOpportunity Tax Credit program of $1.7 million, or $0.03 per share.

In the first quarter of 2005 after-tax restructuringand other charges of $(1.1) million were incurred, or $(0.02) per share. Inthe fourth quarter of 2005, the net loss from discontinued operations includesestimated charges of $5.7 million, or $(0.09) per share, for working capitaland warranty matters related to the 2004 disposal of Spherion’s operations inthe United Kingdom and Asia/Pacific region. The net loss from discontinuedoperations also includes a tax benefit from operating activities of $3.8million, or $0.07 per share.

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

| ** **                                    | **Column A** | ** **            | ** ** | **Column B**   | ** ** | **Column C Additions** | ** ** | **Column D** | ** ** | **Column E**   | ** ** |
|-----------------------------------------------|-------------------|-----------------------|------------|---------------------|------------|----------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                    | ** **        | **Balance at**   | ** ** | ** **          | ** ** | **Transferred**                  | ** ** | ** **        | ** ** | **Balance at** | ** ** |
| ** **                                    | ** **        | **Beginning of** | ** ** | **Charged to** | ** ** | **(from) to Other**    | ** ** | ** **        | ** ** | **End of**     | ** ** |
| ** **                                    | **Description**   | ** **            | ** ** | **Period**          | ** ** | **Earnings**                     | ** ** | **Accounts**      | ** ** | **Deductions**      | ** ** | **Period** | ** ** |
| **Fiscal Year Ended  December 31, 2006** |              |                  |       |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowance for  Doubtful Accounts              |              |                  | $          | 4,708               |       |                             |       | $                 | 2,021      |                |       |   | $         — |   |   | $ | 3,375 |   |   |   | $ | 3,354 |   |   |
| Valuation  allowance on deferred tax assets   |              |                  | $          | 32,660              |       |                             |       | $                 | —     |                |       |   | $         — |   |   | $ | 2,984 |   |   |   | $ | 29,676 |   |   |
| **Fiscal Year Ended  January 1, 2006**   |              |                  |       |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowance for  Doubtful Accounts              |              |                  | $          | 7,077               |       |                             |       | $                 | 4,902      |                |       |   | $         — |   |   | $ | 7,271 |   |   |   | $ | 4,708 |   |   |
| Valuation  allowance on deferred tax assets   |              |                  | $          | 6,128               |       |                             |       | $                 | 26,532     |                |       |   | $         — |   |   | $ | — |   |   |   | $ | 32,660 |   |   |
| **Fiscal Year Ended  December 31, 2004** |              |                  |       |                |       |                             |       |              |       |                |       |   |   |   |   |   |   |   |   |   |
| Allowance for  Doubtful Accounts              |              |                  | $          | 6,671               |       |                             |       | $                 | 7,238      |                |       |   | $         — |   |   | $ | 6,832 |   |   |   | $ | 7,077 |   |   |
| Valuation allowance on  deferred tax assets   |              |                  | $          | 5,653               |       |                             |       | $                 | 475        |                |       |   | $         — |   |   | $ | — |   |   |   | $ | 6,128 |   |   |
|                                               |                   |                       |            |                     |            |                                  |            |                   |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this Annual Report. Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this Annual Report.

There has been no changein our internal control over financial reporting during the quarter ended December 31,2006, identified in connection with the evaluation referred to above, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol 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.**               OTHERINFORMATION

On February 20, 2007, we entered into an EmploymentAgreement with John D. Heins. The employment agreement provides for employmentat will and, accordingly, may be terminated by either party thereto at any timefor any reason. However, the employment agreements provide, among other things,that if we terminate the executive “without cause” (as such term is defined inthe agreements), the executive would receive a cash severance payment, payablein a lump sum, in an amount equal to his annual base salary, plus his proratedtarget annual incentive payment for the year in which termination occurs. Additionally,the employment agreement provides for base salary and annual incentive awardtargets (currently 60% of base salary) as determined from time to time at thesole discretion of the Compensation Committee. The form of Employment Agreementis filed as Exhibit 10.62 attached hereto. 

On February 20, 2007, we amended the EmploymentAgreement and Change in Control Agreement with William J. Grubbs to reflect hisnew title of Executive Vice President. The form of Employment Agreement isfiled as Exhibit 10.62 attached hereto. The form of Change in Control Agreementis filed as Exhibit 10.58 attached hereto.

On February 19, 2007, the Compensation Committee ofour Board of Directors approved the following cash incentive payments inaccordance with the 2006 incentive award plans for executive officers, copiesof which are filed as Exhibits 10.3 and 10.4 to our Form 10-K for the fiscalyear ended January 1, 2006: $468,366 to Roy G. Krause, $164,700 to William J.Grubbs, $125,377 to Lisa G. Iglesias, $159,377 to Mark W. Smith, and $174,291to Byrne Mulrooney who will depart our company in March. In addition, on thesame date the Compensation Committee approved a one-time cash payment of$50,000 to William J. Grubbs, in order to recognize his efforts in assumingresponsibility for our Professional Services division after the group’s formerpresident, Eric Archer, left our company in February 2006. The CompensationCommittee also approved a one-time cash payment of $80,000 to John D. Heins, inaccordance with the terms of his original offer of employment.

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The Compensation Committee also approved the followingequity award grants effective February 20, 2007 pursuant to our 2006 StockIncentive Plan, a copy of which is filed as Appendix C to the Company’s ProxyStatement dated April 7, 2006: 200,000 stock options and 100,000 deferredrestricted stock units to Roy G. Krause, 77,000 stock options and 34,000deferred restricted stock units to William J. Grubbs, 34,000 stock options and15,000 deferred restricted stock units to John D. Heins, 31,000 stock optionsand 13,000 deferred restricted stock units to Lisa G. Iglesias, and 63,000 stockoptions and 27,000 deferred restricted stock units to Mark W. Smith. All stockoptions have an exercise price equal to the fair market value of our commonstock on the date of grant, which was $8.88 per share. The options have aseven-year term and become exercisable in three equal annual installmentsbeginning with the first anniversary of the grant date. The form of Notice ofGrant of Stock Options and Option Agreement is filed as Exhibit 99.1 to ourForm 8-K filed on September 27, 2006. Deferred restricted stock units vest inthree equal annual installments beginning with the first anniversary of thegrant date, contingent on the Company meeting certain 2007 earnings per sharetargets. The form of Deferred Restricted Stock Unit Agreement is filed as Exhibit10.9 attached hereto, however information regarding the earnings per sharetargets has been omitted from the exhibit and provided separately to theSecurities and Exchange Commission.

On February 19, 2007, the Compensation Committee ofthe Board of Directors approved the following adjusted annual base salaries forthe following executives: $385,000 for William J. Grubbs, $273,000 for John D.Heins, $263,000 for Lisa G. Iglesias, and $340,000 to Mark W. Smith.

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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 December 31, 2006, wewill file and distribute our definitive proxy statement for our 2007 annualmeeting of stockholders containing the information required by such Items. Suchomitted information 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 December 31,2006:

**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 |       |                                       | 4,246,859  |                                        |       |                                            | $          | 9.69 |   |   |   | 5,260,459 |   |   |   |
| Equity  compensation plans not approved by security holders  |       |                                       | 831,696    |                                        |       |                                            | —     |   |   |   | — |   |   |   |
| Total                                                        |       |                                       | 5,078,555  |                                        |       |                                            | $          | 8.10 |   |   |   | 5,260,459 |   |   |   |
|                                                              |            |                                            |            |                                             |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 

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 ofRegulation S-K is omitted because, no later than 120 days from December 31,2006, we will file and distribute our definitive proxy statement for our 2006annual meeting of stockholders containing the information required by suchItem.

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**PART IV**

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

(a)           Items A through G andSchedule II are presented on the indicated pages of this Form 10-KAnnual Report:

(1)          FinancialStatements for Spherion Corporation and Subsidiaries:

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

 

(2)          Consolidated Financial Statement Schedule forFiscal Years Ended 2006, 2005 and 2004:

| Schedule II—Valuation and  Qualifying Accounts |   |   | 69 |   |   |
|-----------------------------------------------------|--------|--------|----|--------|--------|

 

Schedules not filed herewith are either notapplicable, the information is not material or the information is set forth inthe Consolidated Financial Statements or notes thereto.

(3)          Exhibits Required 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. |
| 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.                           |

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| 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 Corporation  Corporate Executives Management 2007 Variable Pay Plan, filed as  Exhibit 10.1 to Spherion’s Form 8-K filed on February 6, 2007,  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, Anne Szostak, and Barbara Pellow, 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, Ms. Szostak’s Indemnification Agreement is dated  March 21, 2005 and Ms. Pellow’s Indemnification Agreement is dated  October 6, 2006. |
| 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 to  Spherion’s Form 10-K for the fiscal year ended January 1,  2006 is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                               |
| 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  to Spherion’s Form 10-K for the fiscal year ended January 1,  2006 is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                         |
| 10.6*       |   | Spherion Corporation  2006 Stock Incentive Plan filed as Appendix C to Spherion’s Proxy Statement  dated April 7, 2006, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

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| 10.7*       |   | Spherion Corporation Director Deferred Restricted  Stock Unit Agreement filed as Exhibit 99.1 to Spherion’s Form 8-K  filed July 3, 2006, is incorporated herein by reference.                                                                                                                                       |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8*       |   | Spherion Corporation  revised form of Notice of Grant of Stock Options and Option Agreement filed  as Exhibit 99.1 to Spherion’s Form 8-K filed September 27,  2006, is incorporated herein by reference.                                                                                                            |
| 10.9*† |   | Spherion Corporation  form of Deferred Restricted Stock Unit Agreement based on Corporate EPS  Vesting Criteria, filed as Exhibit 10.9 attached hereto.                                                                                                                                                                             |
| 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 to Spherion’s  Form 10-K for the fiscal year ended January 1, 2006 is incorporated  herein by reference.                                                      |
| 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.                                                                                               |

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| 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. |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 to Spherion’s Form 10-K for the fiscal year  ended January 1, 2006, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                  |
| 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.                                                                                                                                                                                                 |
| 10.72*† |   | 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 Per Share”  in Note 11 of the Notes to Consolidated Financial Statements included 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           |   | Certification of Roy G.  Krause and Mark W. Smith 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 attached hereto.                                                                                 |

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*                    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.

(b)          EXHIBITS FILED WITH THIS FORM

| Exhibit   Number | ** ** | ** **                                                                                                                                                             | ** ** | **Exhibit Name** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 10.9*†      |       | Spherion Corporation  form of Deferred Restricted Stock Unit Agreement based on Corporate EPS  Vesting Criteria.                                                       |
| 10.58*           |       | Form of Restated  Change in Control Agreement by and between Spherion and the individuals  listed on Schedule A.                                                  |
| 10.62*           |       | Form of Restated  Employment Agreement by and between Spherion and the individuals listed on  Schedule A.                                                         |
| 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.                                                    |
| 31.2             |       | Rule 13a-14(a) Certification  in Accordance with Section 302 of the Sarbanes-Oxley Act of 2002.                                                    |
| 32               |       | Certification of Roy G.  Krause and Mark W. Smith pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

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*                    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.

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(c)           OTHERFINANCIAL STATEMENTS

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

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                        | SPHERION CORPORATION |
|------------------------|----------------------|
| February 23, 2007 | 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/ BARBARA PELLOW      |          | Director              |
| Barbara  Pellow         |          |
| /s/ M. ANNE  SZOSTAK    |          | Director              |
| M.  Anne Szostak        |          |
| /s/ A. MICHAEL  VICTORY |          | Director              |
| A.  Michael Victory     |          |

 

(Signed as to eachon February 23, 2007)

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

 

(Signed as to eachon February 23, 2007)

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