SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]      Annual  Report  Pursuant to Section 13 or 15(d) of the  Securities  and
         Exchange Act of 1934 For the fiscal year ended December 31, 1998

                                       OR

[ ]      Transition Report Pursuant to Section 13 or 15(d) of the Securities and
         Exchange Act of 1934 
         For the transition period from __________ to ___________

                                            Commission file number
                                            COMFORCE Corporation:  1-6081
                                            COMFORCE Operating, Inc.: 333-43341

                              COMFORCE Corporation
                                       and
                            COMFORCE Operating, Inc.
             (Exact name of registrant as specified in its charter)

                                          COMFORCE Corporation: 36-23262248
             Delaware                     COMFORCE Operating, Inc.: 11-3407855
 (State or other jurisdiction of          (IRS Employer Identification No.)
  incorporation or organization)

415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York        11797  
        (Address of principal executive offices)                (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

                                                         Name of Each Exchange
                           Title of Each Class           on Which Registered 

COMFORCE Corporation:      Common stock, $.01 par value  American Stock Exchange

COMFORCE Operating, Inc.:  None

Securities registered pursuant to Section 12(g) of the Act:

COMFORCE Corporation:      None

COMFORCE Operating, Inc.:  None

                        (Cover page continued next page)


<PAGE>

                             (Cover page continued)

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  registrant's   knowledge,  in  the  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

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

State the aggregate  market value of the voting stock held by  nonaffiliates  of
the registrant at March 24, 1999:

COMFORCE Corporation:      $48,788,959

COMFORCE Operating, Inc.:  Not Applicable

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

COMFORCE Corporation:
                                                           Outstanding at
                           Class                           March 24, 1999
                           -----                           --------------

                           Common stock, $.01 par value    16,202,080



COMFORCE Operating, Inc.:     COMFORCE  Corporation  owns all of the 100  issued
                              and outstanding shares of Common Stock of COMFORCE
                              Operating, Inc.


Documents Incorporated by Reference: None



                                        2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

Overview

     COMFORCE  Corporation  ("COMFORCE")  is a  leading  provider  of  specialty
staffing, consulting and outsourcing services primarily to Fortune 500 companies
for   their   information   technology,   telecommunications,   scientific   and
engineering-related  needs.  COMFORCE  Operating,  Inc. ("COI"),  a wholly-owned
subsidiary of COMFORCE,  was formed for the purpose of  facilitating  certain of
the  Company's  financing  transactions  in  November  1997.  Unless the context
otherwise  requires,  the term the "Company" refers to COMFORCE,  COI and all of
their direct and indirect subsidiaries.

     Through  a  national  network  of  67  offices  (47  company-owned  and  20
licensed),  the Company recruits and places highly skilled contingent  personnel
and provides  financial and  outsourcing  services for a broad  customer base of
over 2,300 companies,  including Boeing Corporation,  Microsoft  Corporation and
Sun  Microsystems.  The  Company's  labor  force  includes  over 8,000  billable
employees (on a full-time  equivalent basis),  consisting  primarily of computer
programmers,   systems   consultants  and  analysts,   engineers,   technicians,
scientists, researchers and skilled office support personnel. Since entering the
staffing services business in 1995, COMFORCE has grown  significantly  through a
combination of acquisitions and internal growth.

Services

     The Company  provides a wide range of staffing,  consulting,  financial and
outsourcing services.  The Company's extensive proprietary database and national
presence  enable it to draw from a wealth of  resources  to link  highly-trained
computer,  telecommunications  and  other  professionals,  as well  as  clerical
personnel,  with  businesses  that need  highly  skilled  labor.  The  Company's
services  are designed to give its  customers  maximum  flexibility  and maximum
choice.  The Company's  professionals are available on a short-term or long-term
basis. The Company's  services permit businesses to increase the volume of their
work without increasing fixed overhead and permanent personnel costs.

     The  Company  operates  its  Staff  Augmentation   business  through  three
divisions  --  Information  Technology,   Telecom  and  Staffing  Services.  The
Company's outsourcing and consulting services are provided through its Financial
Services  Division.  A  description  of the types of  services  provided by each
division follows.

COMFORCE Information Technologies

     The Company's IT division  provides highly skilled  programmers,  help desk
personnel,  systems  consultants  and analysts,  software  engineers and project
managers for a wide range of technical  assignments,  including  client  server,
mainframe,  desktop  services,  Internet/Intranet  and MIS. In addition to these
staffing  services,  the IT  division  also  provides  non-recruited  payrolling
services to certain of its customers.  These  services  consist of acting as the
employer for workers identified by the customer, preparing payrolls, withholding
taxes, and tracking hours, vacation and sick days. In addition,  these employees
participate in the Company's benefit programs rather than those of the customer.

     The  Company's  IT  customers  include  Microsoft  Corporation,   BellSouth
Telecommunications,  Inc.,  Boeing  Information  Services,  Inc.,  Eastman Kodak
Company, Tyson Foods, Inc., First Union Corporation,  NationsBanc Services, Inc.
and MCI Telecommunications Corporation.

COMFORCE Telecom

     The Company's Telecom division provides skilled personnel to plan,  design,
engineer, install and maintain wireless and wireline telecommunications systems,
including cellular,  PCS, microwave,  radio,  satellite and other networks.  The
telecommunications industry has grown rapidly in recent years, fueled in part by
the rising demand for wireless telecommunications services.

                                        3

<PAGE>

     The  Telecom  division's  customers  include  AT&T  Corporation,   Northern
Telecom,   Inc.,  Harris   Corporation,   Lucent   Technologies,   Inc.,  Reltec
Corporation,  ALCATEL Network Systems, Inc., Motorola,  Inc., Sprint Corporation
and Omnipoint Corporation.

COMFORCE Staffing Services

     The Company's  Staffing Services division operates in two areas,  Technical
Services and Professional Services.

     Technical  Services.  The  Technical  Services  portion  of  the  Company's
Staffing Services division provides staffing for national laboratory research in
such areas as environmental  safety,  alternative  energy source development and
laser technology,  and provides  highly-skilled labor meeting diverse commercial
needs in the  avionics  and  aerospace,  architectural,  automotive,  energy and
power,  pharmaceutical,  marine  and  petrochemical  fields.  The  Company  also
provides  non-recruited   payrolling  services  to  certain  Technical  Services
customers.

     The  Company's   Technical   Services  customers  include  Boeing  Company,
Westinghouse  Electric  Corporation,   McDonnell  Douglas  Corporation  and  the
National  Department of Energy  National  Research  Laboratories  at Los Alamos,
Sandia and Lawrence Livermore.

     Professional  Services. The Company offers Professional Services through 10
Company-owned  and  20  licensed  locations.  The  Professional  Services  group
provides  highly  specialized  professional  chemists,  biologists,   engineers,
laboratory  instrumentation  operators,  technicians  and  others  to  companies
involved in pharmaceutical,  environmental,  biotech and processing  businesses.
The Company also recruits and trains skilled clerical personnel who provide more
traditional services for medical, legal and accounting professionals.

     The Company's Professional Services customers include R.R. Donnelley & Sons
Co., Estee Lauder Companies, Inc. and Dial Corporation,  as well as many smaller
companies such as independent medical providers and accounting firms.

COMFORCE Financial Services

     Through the  Financial  Services'  Pro  Unlimited  subsidiary,  the Company
provides  confidential  consulting  and  conversion  services to companies  that
require  assistance in complying  with  regulations  associated  with the use of
independent  contractors,  returning  retirees and  consultants.  The  Company's
consulting services incorporate a proprietary  liability and risk scoring system
to assess the likelihood of a governmental  authority  reclassifying  a client's
independent contractors as employees. If appropriate, the Company may become the
employer  of some or all of the  workers of these  clients  (on a  non-recruited
basis) and, in such cases,  will provide various  services for these  employees,
including preparing payrolls,  withholding taxes and tracking hours and vacation
and sick days. Pro Unlimited has become an industry leader,  generating over $80
million in sales for the year ended December 31, 1998.

     The Financial  Services division also provides payroll funding services and
back office support to  approximately  100  independent  consulting and staffing
companies.  The Company's back office services  include  payroll  processing and
billing,  preparation of various management reports and analysis, payment of all
federal,  state and local payroll taxes and  preparation and filing of quarterly
and annual payroll tax returns for the contingent  personnel employed and placed
by independently  owned and operated staffing and consulting  firms.  Contingent
personnel  placed by such  independent  staffing  and  consulting  firms  remain
employees of such firms.  In providing  payroll  funding  services,  the Company
purchases the accounts  receivable of  independent  staffing  firms and receives
payments directly from these firms' clients.  The Company pursues the collection
of those receivables; however, the amount of any account receivable which is not
collected within a specified period after billing is charged back by the Company
to such firm.

Customers

     The Company provides staffing,  consulting and outsourcing services to over
2,300   customers   including    telecommunication    equipment   manufacturers,
telecommunication  service providers (wireline and wireless),  computer software
and hardware manufacturers,  aerospace and avionics firms,  utilities,  national
laboratories, pharmaceutical companies, cosmetics

                                        4

<PAGE>

companies,  health care  facilities,  educational  institutions  and  accounting
firms.  Services to Fortune 500 companies  represent a majority of the Company's
revenues.

     In certain cases, the Company's  contracts with its customers  provide that
the Company will have the first opportunity to supply the personnel  required by
that customer. Other staffing companies not under contract with the customer are
then offered the  opportunity to supply  personnel only if the Company is unable
to meet the customer's requirements.

     The Company generally  invoices its customers  weekly.  Customers of the IT
division,  the Telecom  division and the  Professional  Services group generally
obtain  the  Company's  services  on a purchase  order  basis,  while  Technical
Services  and  Financial  Services  customers  generally  enter  into  long-term
contracts with the Company.

     During the year ended December 31, 1998, Boeing  Corporation  accounted for
approximately  10% of the  Company's  revenues,  and the largest four  customers
represented approximately 31% of the Company's revenues.

Sales and Marketing

     The Company  services its customers  through a network of 47  company-owned
and 20 licensed branch offices located in 25 states across the United States and
its corporate  headquarters  located in Woodbury,  New York. The Company's sales
and marketing  strategy is focused on increasing its share of existing  customer
business,  expanding its business with existing customers through  cross-selling
to customers  currently  serviced by only one of the Company's  divisions and by
establishing  relationships  with new customers.  The Company solicits customers
through  personal  sales  presentations,   telephone   marketing,   direct  mail
solicitation,  referrals from  customers,  and advertising in a variety of local
and national  media  including the Yellow Pages,  magazines,  newspapers,  trade
publications and through the Company's home page on the World Wide Web.

     The  strategy  focuses  on  national   accounts  that  are  coordinated  by
management at the corporate level to provide a consistent, focused strategy, but
are primarily  serviced on a local level through the Company's branch locations.
The national  accounts,  as well as local accounts serviced by the Company,  are
targeted by account  managers at the branch  offices,  permitting the Company to
capitalize on the local  expertise and established  relationships  of its branch
office employees.

     The Company has  developed  several  value-added  marketing  tools that are
available  to its sales and  marketing  staff.  Through  its  Vendor-on-Premises
programs,  the Company coordinates personnel services by establishing an on-site
office to assist in the procurement and management of the customer's  workforce.
The  Company's  RightSourcing(sm) program evaluates the  performance  level of a
customer's  department,  function,  or  project,  recommends  ways  to  increase
cost-effectiveness and workforce efficiency through specific staffing strategies
and  tailors  a  program  to  meet  specific   staffing  needs  and  established
performance  standards.  The Company's sales and marketing staff is then able to
use the Company's  proprietary  database and other sources to provide contingent
personnel  to meet  the  customer's  staffing  needs  identified  through  these
programs.

Information Systems

     The Company is currently in the process of implementing  the  PeopleSoft(R)
Enterprise Resource Planning system,  which the Company believes is becoming the
industry standard.  When  PeopleSoft(R) is fully operational,  which the Company
anticipates  will occur in the second  quarter of 1999,  the  Company  will have
consolidated  its back office  operations  from three  locations to one and will
also have  largely  integrated  the  management  information  systems  of its 10
acquired companies.

     The  Company  is  also  in the  process  of  implementing  the  EZAccess(R)
recruiting and database  software system to consolidate the resume  databases of
its acquired  companies.  The Company  believes  that this  software  will allow
easier,  faster and more accessible  updating of its resume database and posting
of  job  openings  on a  national  basis.  As a  result,  the  Company  believes
EZAccess(R) will facilitate  recruiting efforts and improve customer service and
may generate incremental revenues. This system is currently operating in certain
locations,  and the Company  intends to phase the rest of its locations into the
EZAccess(R) system during 1999.


                                        5

<PAGE>


Recruiting and Training of Billable Employees

     The Company's success depends on its ability to effectively and efficiently
match skilled  personnel  with specific  customer  assignments.  The Company has
established an extensive  national resume  database of over 175,000  prospective
employees with expertise in the disciplines  served by the Company.  To identify
qualified  personnel  for  inclusion  in this  database,  the  Company  solicits
referrals from its existing  personnel and customers,  places  advertisements in
local newspapers, trade magazines, its home page on the World Wide Web and other
Internet  sites,  and otherwise  actively  recruits  through the  Internet.  The
Company  continuously  updates its  proprietary  database to reflect  changes in
personnel   skill  levels  and   availability.   Upon   receipt  of   assignment
specifications,   the  Company  searches  the  database  to  identify   suitable
personnel.  Once an  employee's  skills are matched to the  specifications,  the
Company  considers  other  selection  criteria  such  as  interpersonal  skills,
availability and geographic  preferences to ensure there is a proper fit between
the employee and the assignment being staffed. The Company can search its resume
database  by a number  of  different  criteria,  including  specific  skills  or
qualifications, to match the appropriate employee with the assignment.

     Management  believes that the Company will be better  positioned to attract
recruits by making extensive training opportunities  available to its employees.
The  Company  frequently  agrees to bear a  portion  of the  training  costs for
training contingent  personnel in a particular IT discipline needed by a client.
To meet those demands, the Company employs  Internet-based  educational programs
to train  employees in the latest  developments  in IT,  telecommunications  and
other  technologies.  The Company also maintains a training  facility in Dallas,
Texas, where Telecom staffers are trained to install and test telecommunications
equipment,  and provides a telephone  hot line to assist its clerical  employees
with software problems or questions.

     The Company  believes it has a  competitive  advantage  in  attracting  and
retaining specialty staffing and consulting personnel as it provides assignments
with high-profile  customers that make use of advanced  technology and offer the
employees the opportunity to obtain additional experience that can enhance their
skills and overall  marketability.  The Company also offers flexible  schedules,
wages and, depending on the contract or assignment, paid holidays, vacation, and
certain benefit plan opportunities to attract and retain qualified personnel.

Competition

     The contingent  staffing and consulting  industry is very  competitive  and
fragmented.  There are relatively limited barriers to entry, particularly in the
more traditional sectors of the industry,  and new competitors  frequently enter
the market.  The Company's  competitors vary depending on geographic  region and
the nature of the  service(s)  being  provided.  The Company  faces  substantial
competition from both larger firms possessing  substantially  greater financial,
technical and marketing  resources than the Company and smaller,  regional firms
with a strong presence in their respective local markets.

     Management  believes that the availability  and quality of candidates,  the
effective monitoring of job performance, the scope of geographic service and the
price of service are the principal elements of competition.  The availability of
quality  contingent  personnel is an especially  important facet of competition.
The Company  believes its ability to compete also depends in part on a number of
competitive   factors  outside  its  control,   including  the  ability  of  its
competitors  to hire,  retain and  motivate  skilled  technical  and  management
personnel and the extent of its competitors' responsiveness to customer needs.

Employees

     The Company currently  employs  approximately 500 full-time staff employees
and has  approximately  8,000  billable  employees  (on a  full-time  equivalent
basis).  In  addition  to  employees  on  assignment,  the  Company  maintains a
proprietary database of over 175,000 prospective employees with expertise in the
disciplines  served by the  Company.  Billable  employees  are  employed  by the
Company on an as-needed basis dependent on customer demand and are paid only for
time  they  actually  work.   Non-billable   administrative   personnel  provide
management,  sales and marketing and other  services in support of the Company's
staffing services.


                                        6

<PAGE>

Licensed Offices

     The Company has granted  licenses  to operate  Uniforce  offices.  The most
recent  license for a new office was granted in July 1992,  and the Company does
not  presently  expect to grant  more  licenses.  Licensees  recruit  contingent
personnel and promote their  services to both existing and new clients  obtained
through  the  licensees'  marketing  efforts.   Performance  of  the  contingent
personnel and overall service quality is the direct responsibility of licensees.
As  licensees  are  ultimately   responsible  for  the  collection  of  accounts
receivable,  they must conform to strict credit and  collection  practices.  The
Company and the licensees share the gross profits from each licensed office.

Regulations

     Contingent  staffing and consulting services firms are generally subject to
one or more of the following types of government  regulations:  (1) registration
of  the  employer/employees;   (2)  licensing,   record  keeping  and  recording
requirements; and (3) substantive limitations on operations. Contingent staffing
and consulting  firms are the legal employers of their workers.  Therefore,  the
Company is governed by laws regulating the employer/employee  relationship, such
as   tax   withholding   or   reporting,    social   security   or   retirement,
antidiscrimination  and  workers'  compensation.   In  addition,  the  Company's
licenses are considered to be franchises,  which are subject to regulation, both
by the Federal Trade Commission and a number of states.

Forward Looking Statements

     Various  statements  made  in this  Item 1 and  elsewhere  in  this  Report
concerning  the  manner in which the  Company  intends  to  conduct  its  future
operations,  and potential  trends that may impact future results of operations,
are forward-looking  statements.  The Company may be unable to realize its plans
and objectives due to various important factors,  including, but not limited to,
the following factors:

     More than 50% of the Company's  total assets are intangible  assets.  These
intangible  assets  substantially  represent  amounts  attributable  to goodwill
recorded  in  connection  with  the  Company's  acquisitions  and are  generally
amortized  over a five to  forty  year  period.  This  amortization  results  in
significant  annual charges.  Various factors could impact the Company's ability
to generate  the  earnings  necessary  to support  this  amortization  schedule,
including  (1)  fluctuations  in the  economy,  (2) the  degree  and  nature  of
competition, (3) demand for the Company's services and (4) the Company's ability
to recruit and place staffing  professionals and maintain gross margins.  If the
Company fails to generate earnings necessary to support the amortization charge,
an  impairment  of the asset may occur.  The  resulting  write-off  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

     The  contingent  staffing and  consulting  industry is highly  competitive.
Heightened  competition for customers as well as for contingent  personnel could
adversely  impact  the  Company's  business  in  several  ways,   including  the
following:  The  Company  may face the need to reduce  its  current  fee  scales
without  being able to reduce the  personnel  costs of its  billable  employees.
Large, traditional staffing companies have begun to enter the specialty staffing
and consulting sector; as a result,  margins may decrease,  particularly for the
less  highly  skilled  personnel  in  that  sector.  Barriers  to  entry  in the
contingent   staffing  business  are  low,  and  the  Company  could  experience
competition from additional competitors entering the business.

     The  Company  has  a  high  level  of  debt,  which  could  have  important
consequences to investors, including the following: The Company will have to use
a  substantial  portion of its cash flow from  operations  to service  its debt,
rather than for  operations or growth.  The Company could be more  vulnerable to
economic  downturns  and less able to take  advantage  of  significant  business
opportunities and react to changes in market or industry conditions. The Company
may not be able to obtain  additional  financing  for working  capital,  capital
expenditures, debt service requirements or other purposes.

     The agreements governing the public debt obligations of the Company contain
restrictions   that  affect  the   Company's   ability  to  incur   debt,   make
distributions,  make acquisitions,  create liens, make capital  expenditures and
affiliate payments and pay dividends. In particular, the indenture governing the
12% Senior  Notes due 2007 issued by COI (the "COI  Notes")  contains a covenant
which,  subject to certain  exceptions,  permits  COI to make  distributions  to
COMFORCE only if it meets a specified ratio of cash flow to interest expense and
then only to a limited extent pursuant to a formula permitting distribution of a
portion of net income,  capital  contributions to COI and certain other amounts.
In addition, the Credit Facility requires the Company to

                                        7

<PAGE>

meet specified  financial ratios and tests.  Events beyond the Company's control
may affect its ability to comply with these covenants and restrictions,  and the
Company may not achieve  operating  results that will comply with the  financial
ratios and tests.  A default  under any of the  Company's  financing  agreements
could have a material adverse effect on its business and financial  condition if
it is not cured or waived.

     Additional  important  factors that could cause the Company to be unable to
realize its plans and  objectives  are  described  under  "Risk  Factors" in the
Registration  Statement on Form S-3 of the Company filed with the Securities and
Exchange  Commission  on  March  19,  1999  (Registration  No.  333-74689).  The
disclosure  under "Risk Factors" in the  Registration  Statement may be accessed
through the Web site  maintained by the  Securities  and Exchange  Commission at
"http://www.sec.gov."  In addition, the Company will provide,  without charge, a
copy of such "Risk  Factors"  disclosure to each  stockholder of the Company who
requests  such  information.  Requests  for  copies  should be  directed  to the
attention  of Linda  Annicelli,  Vice  President of  Administration  at COMFORCE
Corporation,  415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797,
telephone 516-437-3300.

     See also the cautionary statements regarding the forward-looking disclosure
concerning  the Company's  Year 2000  readiness set forth under "--Year 2000" in
Item 7.


ITEM 2.  PROPERTIES

     The Company  leases its 47 offices.  Excluding the Company's  headquarters,
these leases are for office space ranging in size from  approximately 150 square
feet to approximately  15,600 square feet and have remaining lease terms of from
less  than  one  year  to  five  years.  The  Company's   headquarters  occupies
approximately 23,500 square feet and the lease term for this space extends until
2006. The Company owns no real estate,  except for an  approximately  700 square
foot condominium.

     The Company  believes that its  facilities are adequate for its present and
reasonably  anticipated  future business  requirements,  except to the extent of
future  acquisitions of existing  businesses.  In the case of such acquisitions,
the  Company  expects  to assume the leases of  businesses  acquired  or, to the
extent possible,  consolidate such operations with existing offices. The Company
does not anticipate difficulty locating additional facilities, if needed.


ITEM 3.  LEGAL PROCEEDINGS

     In  January  1997,  Austin A.  Iodice,  who served as the  Company's  Chief
Executive Officer,  President and Vice Chairman while the Company was engaged in
the jewelry  business,  and Anthony  Giglio,  who performed the functions of the
Company's Chief  Operating  Officer while the Company was engaged in the jewelry
business,  filed separate suits against the Company in the Connecticut  Superior
Court alleging that the Company had breached the terms of management  agreements
entered  into with them by failing to honor  options to  purchase  Common  Stock
awarded to them in connection with the management of the jewelry  business under
the  terms of such  management  agreements  and the  Company's  Long-Term  Stock
Investment  Plan.  The suits  allege  that the  plaintiffs  are  entitled  to an
unspecified amount of damages.  The Company believes that the option to purchase
370,419  shares  granted to Mr.  Iodice  (through  Nitsua,  Ltd., a  corporation
wholly-owned  by him) and the option to purchase  185,210  shares granted to Mr.
Giglio,  each  having an  exercise  price of $1.125 per share,  expired in 1996,
three  months  after  Messrs.  Giglio and Iodice  ceased to be  employed  by the
Company.  Messrs.  Giglio  and  Iodice  maintain  that they were  agents and not
employees  of the Company and that the options  continue to be  exercisable.  In
October 1998,  plaintiffs  filed  motions for partial  summary  judgment,  which
motions  were  denied by the court in March  1999.  The  parties  continue to be
engaged in the discovery  phase of the case. The Company  intends to continue to
vigorously defend itself against these suits.

     As  reported in the  Company's  prior  10-K,  Rhotech  was granted  summary
judgment  with  respect  to all claims  made  against it in a case filed in U.S.
District Court,  Central  District of California,  against Rhotech and Technical
Staff Associates,  Inc. The judgment in Rhotech's favor was subsequently  upheld
on appeal.

     The  Company  is  a  party  to  routine  contract  and   employment-related
litigation  matters in the  ordinary  course of its  business.  No such  pending
matters, individually or in the aggregate, if adversely determined, are believed
by management to be material to the business, results of operations or financial
condition of the Company.  The Company maintains  general  liability  insurance,
property insurance,  automobile insurance, employee benefit liability insurance,
fidelity insurance and directors' and

                                        8

<PAGE>

officers'  liability  insurance.  The  Company is  generally  self-insured  with
respect to workers'  compensation,  but maintains umbrella workers' compensation
coverage to limit its maximum exposure to such claims.

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

         None.


                                        9

<PAGE>


                                     PART II

ITEM 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
MATTERS

     The  Company's  Common  Stock is  traded  on the  American  Stock  Exchange
(AMEX:CFS).  The high and low sales prices for the Common Stock,  as reported by
the American  Stock  Exchange in the Monthly  Market  Statistics for the periods
indicated, were as follows:


                                                            High      Low
                                                            ----      ---

1997      First Quarter..............................   $ 14       $ 6 1/8 
          Second Quarter.............................      7 1/2     4
          Third Quarter..............................      9 5/16    5 7/8 
          Fourth Quarter.............................      9 3/8     6
1998      First Quarter..............................      9         6 9/16
          Second Quarter.............................     11 7/16    7 1/8 
          Third Quarter..............................      9 3/4     4 5/8 
          Fourth Quarter.............................      6 3/16    3 1/2 

1999      First Quarter (through March 24, 1999).....      6 1/4     3 11/16 

     The last  reported  sale  price of the Common  Stock of the  Company on the
American  Stock  Exchange on March 24,  1999 was $4 1/4. As of such date,  there
were approximately 5,000 shareholders of record.

     The Company  anticipates  that it will not pay cash dividends on the Common
Stock for the foreseeable future and that it will retain its earnings to finance
future  growth.  The  declaration  and payment of  dividends  by the Company are
subject  to the  discretion  of its  Board  of  Directors  and  compliance  with
applicable law. Any  determination  as to the payment of dividends in the future
will depend upon, among other things, general business conditions, the effect of
such  payment  on the  Company's  financial  condition  and  other  factors  the
Company's Board of Directors may in the future consider relevant.  The revolving
credit facility  entered into with Heller  Financial,  Inc., as lender and agent
for other participating  lenders (the "Credit Facility"),  prohibits the payment
of cash  dividends.  In  addition,  the  terms of the COI Notes  restrict  COI's
payment of dividends to the Company,  which is expected to be the only source of
funds from which the Company could pay dividends.  No dividends were declared or
paid on the Common Stock during 1997 or 1998.


                                       10

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following  table sets forth selected  historical  financial data of the
Company as of and for each of the five years in the period  ended  December  31,
1998. The Company  derived the statement of operations and balance sheet data as
of and for each of the five years in the period ended December 31, 1998 from its
audited historical  consolidated  financial  statements.  Prospective  investors
should  read  this  selected  historical  financial  data  in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" in Item 7 and the Company's financial statements and notes beginning
on page F-2.

<TABLE>
<CAPTION>
                                                                 1994           1995           1996           1997           1998
                                                              ---------      ---------      ---------      ---------      ---------
                                                                              (in thousands except per share data)
<S>                                                           <C>            <C>            <C>            <C>            <C>      
Statement of Operations Data: (1)
Net sales of services ...................................          --        $   2,387      $  55,867      $ 216,521      $ 459,022
Cost of services ........................................          --            1,818         47,574        186,455        372,877
                                                              ---------      ---------      ---------      ---------      ---------
Gross profit ............................................          --              569          8,293         30,066         86,145
Selling, general and administrative expense .............     $     966            461          5,266         19,718         55,827
Restructuring charge ....................................          --             --             --            1,600           (211)
Depreciation and amortization ...........................          --              362            614          1,883          5,605
Stock compensation charge (2) ...........................          --            3,425           --             --             --
                                                              ---------      ---------      ---------      ---------      ---------
Operating income (loss) .................................          (966)        (3,679)         2,413          6,865         24,924
Other (income) expense:
Interest expense ........................................         1,316            585            201          4,588         21,490
Bridge and financing charges ............................          --             --             --            7,672           --
Other (income) expense, net .............................          --               33            (40)          (344)           (35)
                                                              ---------      ---------      ---------      ---------      ---------
Earnings (loss) from continuing operations
   before income taxes and extraordinary
   credit ...............................................        (2,282)        (4,297)         2,252         (5,051)         3,469
Provision (credit) for income taxes .....................          --               35            900         (1,351)         2,664
                                                              ---------      ---------      ---------      ---------      ---------
Income (loss) from continuing operations ................        (2,282)        (4,332)         1,352         (3,700)           805
Loss from discontinued operations (3) ...................       (16,220)       (17,211)          --             --             --
                                                              ---------      ---------      ---------      ---------      ---------
Income (loss) before extraordinary credit ...............       (18,502)       (21,543)         1,352           --              805
Extraordinary credit from net discharge of
   indebtedness (4) .....................................         8,965          6,657           --             --             --
                                                              ---------      ---------      ---------      ---------      ---------
Net income (loss) .......................................        (9,537)       (14,886)         1,352         (3,700)           805
Preferred stock dividends ...............................          --             --              325            737             21
Accretive dividend on Series F preferred
   stock ................................................          --             --              665           --             --
                                                              ---------      ---------      ---------      ---------      ---------
Income (loss) available to common
   stockholders .........................................     $  (9,537)     $ (14,886)     $     362      $  (4,437)     $     784
                                                              =========      =========      =========      =========      =========

Net income (loss) per share:
Continuing operations before accretive
   dividend .............................................     $   (0.72)     $   (0.95)     $    0.12      $   (0.33)     $    0.05
Discontinued operations .................................         (5.08)         (3.74)          --             --             --
                                                              ---------      ---------      ---------      ---------      ---------

Income (loss) before extraordinary credit
   and accretive dividend ...............................     $   (5.80)     $   (4.69)     $    0.12      $   (0.33)     $    0.05
Extraordinary credit ....................................          2.81           1.45           --             --             --
</TABLE>

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                                 1994           1995           1996           1997           1998
                                                              ---------      ---------      ---------      ---------      ---------
                                                                              (in thousands except per share data)
<S>                                                           <C>            <C>            <C>            <C>            <C>      
Accretive dividend on Series F preferred
   stock ................................................          --             --            (0.09)          --             --
                                                              ---------      ---------      ---------      ---------      ---------
Basic net income (loss) per share .......................     $   (2.99)     $   (3.24)     $    0.03      $   (0.33)     $    0.05
                                                              =========      =========      =========      =========      =========
Diluted net income (loss) per share .....................     $   (2.99)     $   (3.24)     $    0.03      $   (0.33)     $    0.05
                                                              =========      =========      =========      =========      =========

Basic weighted average shares ...........................         3,195          4,596         11,049         13,493         15,971
Plus dilutive effect of options, warrants and
   convertible securities ...............................          --             --            1,984           --              677
                                                              ---------      ---------      ---------      ---------      ---------
Diluted weighted average shares .........................         3,195          4,596         13,033         13,493         16,648
                                                              =========      =========      =========      =========      =========

Balance Sheet Data: (5)
Working capital (deficit) ...............................          --        $  (1,697)     $   8,012      $  59,762      $  65,563
Accounts receivable .....................................          --            1,698         12,042         72,865         81,680
Intangible assets, net ..................................          --            4,801         24,756        135,516        138,847
Total assets ............................................          --            8,536         43,366        235,934        246,082
Total debt, including current maturities ................          --              500          3,850        171,038        178,579
Preferred stock .........................................          --             --                2              1           --
Stockholders' equity ....................................          --            2,238         34,744         39,402         44,334
</TABLE>

-----------

(1)  Results for the year ended December 31, 1995 represent  results of COMFORCE
     Telecom,  Inc. from the date of its acquisition,  October 17, 1995. Results
     for the year ended December 31, 1996 represent  results of COMFORCE Telecom
     for the entire year, results of Williams Communications Services, Inc. from
     the acquisition date of March 3, 1996 through December 31, 1996, results of
     RRA, Inc. and certain related entities from the acquisition date of May 10,
     1996  through  December  31,  1996,  results of Force Five,  Inc.  from the
     effective date of  acquisition of July 31, 1996 through  December 31, 1996,
     results  of  AZATAR  Computer  Systems,  Inc.  from the  effective  date of
     acquisition  of November 1, 1996 through  December 31, 1996, and results of
     Continental  Field  Services  Corporation  and a  related  entity  from the
     effective  date of  acquisition  of November 8, 1996  through  December 31,
     1996. Results for the year ended December 31, 1997 represent results of RHO
     Company,  Incorporated  from the  acquisition  date of  February  28,  1997
     through December 31, 1997 and results of Uniforce  Services,  Inc. from the
     acquisition  date of November 26, 1997 through  December 31, 1997.  Results
     for  the  year  ended  December  31,  1998  represent  results  of  Camelot
     Consulting Group Inc., Camelot  Communications  Group Inc., Camelot Control
     Group Inc.  and  Camelot  Group  Inc.  (collectively,  "Camelot")  from the
     beginning of January 1998 through December 31, 1998. The Company's  jewelry
     operations   were   discontinued   effective  as  of  September  30,  1995.
     Accordingly,  selected  financial data of the Company's jewelry  operations
     for each of the two years in the period  ended  December 31, 1994 have been
     reclassified to discontinued operations.

(2)  Represents a non-recurring compensation charge related to the issuance of a
     35% common stock  interest in the Company to certain  individuals to manage
     the Company's entry into the technical staffing services business.

(3)  The loss from discontinued  operations for the year ended December 31, 1995
     includes a charge to operations of $12.9 million to write-off the remaining
     goodwill  of  the  Company's   discontinued  jewelry  operations  effective
     September  30, 1995  operations  and for the year ended  December  31, 1994
     includes a charge to operations of $10.8 million  representing  a write-off
     of goodwill of the Company's former New Dimensions subsidiary.

(4)  The 1995 and 1994 extraordinary  credits represent gains from net discharge
     of indebtedness under terms of the Company's debt settlement agreement with
     its bank related to the discontinued jewelry operations.


                                       12

<PAGE>


(5)  Balance  sheet  data  is not  presented  for  1994  as  information  is not
     meaningful  since the Company was not in the staffing  business during such
     year.


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The discussion set forth below  supplements  the  information  found in the
consolidated financial statements and related notes. The matters discussed below
and elsewhere in this Report contain  forward  looking  statements  that involve
risks and uncertainties,  many of which may be beyond the Company's control. See
"Forward  Looking  Statements"  in Item 1 of this  Report  for a  discussion  of
certain of such risks and uncertainties.

Overview

     Set forth below are  discussions  and analyses of financial  condition  and
results of  operations  of the  Company.  The Company  believes  that its future
operating results may not be directly comparable to historical operating results
because of the  Company's  increased  size,  related cost savings and  marketing
synergies.

     Since October  1995,  the Company has  completed 10  acquisitions.  Each of
these acquisitions has been accounted for on a purchase basis and the results of
operations  of  each  of the  businesses  acquired  have  been  included  in the
Company's historical financial statements from the date of acquisition.  Certain
of these acquisitions  provide for contingent  payments by the Company as a part
of the purchase  consideration  based upon the operating results of the acquired
businesses for specified future periods.  The acquisitions  were financed by the
Company  principally  through  its  issuance of debt and equity  securities  and
borrowings  under  credit  facilities.  As a result,  the  Company's  historical
results of operations  include bridge financing costs, which are not expected to
be incurred in future  periods,  and preferred stock  dividends.  All previously
issued  preferred  stock has been  repurchased  or redeemed by the  Company.  In
addition, as a result of its rapid growth through  acquisitions,  the discussion
and comparison of the Company's historical results of operations set forth below
may not be meaningful.

     Gross  margins on staffing  services  can vary  significantly  depending on
factors such as the specific services being performed, the overall contract size
and the amount of recruiting  required.  Margins on the  Company's  sales in the
technical  services sector are typically  significantly  lower than those in the
telecommunications,  information  technology  and  financial  services  sectors.
Consequently,  changes in the Company's  sales mix can be expected to impact the
overall gross margins generated by the Company.

     Staffing personnel placed by the Company are employees of the Company.  The
Company  is  responsible  for  employee  related  expenses  for  its  employees,
including workers' compensation,  unemployment compensation insurance,  Medicare
and Social  Security  taxes and general  payroll  expenses.  The Company  offers
health,  dental,  disability  and  life  insurance  to its  billable  employees.
Staffing and consulting  companies,  including the Company,  typically pay their
billable  employees  for their  services  before  receiving  payment  from their
customers, often resulting in significant outstanding receivables. To the extent
the Company  increases  revenues  through  acquisitions  and/or internal growth,
these receivables will grow and there will be greater requirements for borrowing
availability under its credit facilities to fund current operations.

Results of Operations

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

     Net sales of services of $459.0  million  for the year ended  December  31,
1998 were $242.0  million,  or nearly 112% higher than net sales of services for
the year ended  December 31, 1997. The increase in 1998 net sales of services is
attributable  principally  to the Company's  acquisition of Uniforce on November
26, 1997.

     Cost of  services  for the year ended  December  31,  1998 was 81.2% of net
sales of  services  compared  to cost of  services  of 86.1% for the year  ended
December 31, 1997. The cost of services decrease of 4.9% for 1998 is a result of
the Company's  business mix in that year, which reflected the full period impact
of acquisitions completed during 1997 as well as

                                       13

<PAGE>


growth in the Company's information technology, telecommunications and financial
services sectors. These sectors have historically generated higher gross margins
than the more mature technical staffing sector.

     Selling, general and administrative expenses as a percentage of revenue was
12.1% for the year ended December 31, 1998,  compared to 9.1% for the year ended
December 31, 1997. This percentage increase was principally  attributable to the
operations of the  Company's  Uniforce  subsidiary,  which was acquired in 1997.
Uniforce's selling,  general and administrative  fees, which include significant
licensee costs related to its franchise operations,  are substantially higher on
a percentage basis than those historically recorded by the Company. The licensee
costs included in selling, general and administrative fees were $6.9 million for
1998 and $0.5  million for 1997  (which  included  only one month of  Uniforce's
operations).

     Operating  income for the year ended  December 31, 1998 was $24.9  million,
compared to  operating  income of $6.9  million for the year ended  December 31,
1997. This increase was principally  attributable to the Company's completion of
the Rhotech and Uniforce acquisitions in 1997.

     The Company's  interest expense for 1998 is attributable to the interest on
the  Credit  Facility,  the COI Notes and  COMFORCE's  15%  Senior  Secured  PIK
Debentures (the "PIK  Debentures"),  all of which  obligations  were incurred in
November  1997.  For the year  ended  December  31,  1997,  interest  expense is
attributable  to  the  $25.2  million   principal  amount  of  the  Subordinated
Debentures  issued  by  the  Company  in  February  and  March  1997  (the  "Old
Subordinated  Debentures"),  the Company's credit facilities  outstanding during
the year and the COI  Notes and PIK  Debentures  issued in  November  1997.  The
amortization  of  the  costs  payable  on the  Old  Subordinated  Debentures  is
reflected in bridge and financing charges for 1997.

     The income tax provision for the year ended  December 31, 1998 was for $2.7
million  on pretax  income of $3.5  million,  compared  to a tax  credit of $1.4
million on a loss before taxes of $5.1  million for the year ended  December 31,
1997.  The  difference  between  the Federal  statutory  income tax rate and the
Company's  effective  tax rate  relates  primarily to state income taxes and the
nondeductibility  of amortization  expense  associated  with certain  intangible
assets.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     Net sales of services of $216.5  million  for the year ended  December  31,
1997  were  $160.6  million,  or  approximately  287%  higher  than net sales of
services for the year ended December 31, 1996. The increase in 1997 net sales of
services  is  attributable  principally  to  the  Company's  completion  of  six
acquisitions since the end of the first quarter of 1996.

     Cost of  services  for the year ended  December  31,  1997 was 86.1% of net
sales of  services  compared  to cost of  services  of 85.2% for the year  ended
December 31, 1996. The 1997 cost of services increase of 0.9% is a result of the
Company's  business  mix in 1997,  which  reflected  the  full  year  impact  of
acquisitions completed during 1996 as well as expansion in 1997 into more mature
technical  staffing  sectors.  These  more  mature  technical  staffing  sectors
historically generate gross margins substantially lower than  telecommunications
and information technology sectors, principally due to the nature of the related
contracts and competition in this sector.

     Selling, general and administrative expenses as a percentage of revenue was
9.1% for the year ended  December 31, 1997,  compared to 9.4% for the year ended
December 31, 1996. The decrease is principally  attributable to the acquisitions
completed during 1996 and 1997 which contributed increased net sales of services
with lower incremental selling, general and administrative costs.

     During  1997,  the  Company   recorded   merger,   integration   and  other
non-recurring charges totaling $1.6 million.  These non-recurring charges before
taxes consist of merger and integration  charges  resulting from the acquisition
of Uniforce,  and include  severance  costs of $690,000,  asset  write-downs  of
$210,000 and integration costs of $700,000.

     Operating  income for the year ended  December  31, 1997 was $6.9  million,
compared to  operating  income of $2.4  million for the year ended  December 31,
1996. This increase was principally  attributable to the Company's completion of
six  acquisitions  following  the end of the first  quarter of 1996 and prior to
December 31, 1997.


                                       14

<PAGE>


     For the year ended December 31, 1997,  interest  expense is attributable to
the Old Subordinated  Debentures,  the Company's credit  facilities  outstanding
during the year and the COI Notes and PIK Debentures issued in November 1997.

     Bridge and  financing  charges  for the year ended  December  31,  1997 are
attributable  principally to the amortization of bridge finance costs payable on
the Old  Subordinated  Debentures  issued by the Company in  February  and March
1997,  the  proceeds of which were used to  partially  fund the  acquisition  of
Rhotech  and for  working  capital  purposes,  and  the  write-off  of  deferred
financing fees on a prior credit  facility with Fleet  National Bank,  which was
repaid in November 1997.

     Income tax reflects a credit for the year ended  December 31, 1997 for $1.4
million  on a loss  before  income  taxes  of $5.1  million,  compared  to a tax
provision  of  $900,000  on pretax  income of $2.3  million  for the year  ended
December 31, 1996. This credit assumes that the Company will have taxable income
in future periods.  The difference between the Federal statutory income tax rate
and the Company's effective tax rate relates primarily to state income taxes and
the  nondeductibility of amortization expense associated with certain intangible
assets.

Financial Condition, Liquidity and Capital Resources

     The Company has historically  paid its billable  employees weekly for their
services  before  receiving  payment from its customers.  Additionally,  certain
statutory  payroll  and  related  taxes as well as  other  fringe  benefits  are
generally  paid by the Company  before the  Company  receives  payment  from its
customers. Consequently, a significant portion of the Company's cost of services
is normally paid by the Company prior to receiving  payment from its  customers.
Increases in the Company's net sales of services,  resulting  from  expansion of
existing offices or establishment of new offices, will require the employment of
additional cash resources.

     The debt service costs  associated with the borrowings  under the COI Notes
and the Credit Facility have significantly increased liquidity requirements. The
debt service costs  associated with the PIK Debentures may be satisfied  through
the issuance of new notes. To date, the Company has chosen to issue new notes to
pay these costs.

     Management of the Company believes that, based on the results of operations
and anticipated growth,  including growth through  acquisitions,  cash flow from
operations and funds  anticipated to be available under the Credit Facility will
be  sufficient  to  service  the  Company's  indebtedness,  to  fund  growth  at
anticipated levels and to meet anticipated working capital  requirements for the
foreseeable  future.  However,  various  factors,  including  those described or
referenced  under  "Forward-Looking  Statements"  in  Item 1 could  prevent  the
Company from realizing these objectives.

     As of December  31,  1998,  the Company had  outstanding  $23.2  million in
principal  amount of PIK Debentures  bearing  interest at a rate of 15%,  $110.0
million in principal  amount of COI Notes bearing  interest at a rate of 12% and
$45.4  million  outstanding  under the Credit  Facility  bearing  interest at an
average  rate  of 7.6%  per  annum.  See  Note 9 to the  Company's  consolidated
financial  statements for a summary of the terms of the PIK Debentures,  the COI
Notes and the Credit Facility.

     As of December 31, 1998,  approximately  $138.8  million,  or 56.4%, of the
Company's  total  assets  were  intangible   assets.   These  intangible  assets
substantially  represent amounts attributable to goodwill recorded in connection
with the  Company's  acquisitions  and will be amortized  over a five to 40 year
period,  resulting in an annual charge of  approximately  $4.3 million.  Various
factors could impact the Company's ability to generate the earnings necessary to
support  this  amortization   schedule,   including  the  factors  described  or
referenced under "Forward-Looking Statements" in Item 1.

     The Company is  obligated  under  various  acquisition  agreements  to make
earn-out payments to the sellers of acquired companies,  subject to the acquired
companies' meeting certain contractual  requirements.  The maximum amount of the
remaining  potential  earn-out payments is $5.3 million in cash and $2.0 million
in stock payable in the three-year  period from 1999 to 2001. The Company cannot
currently  estimate  whether it will be  obligated  to pay the  maximum  amount;
however,  the Company  anticipates  that the cash generated by the operations of
the acquired  companies  will provide all or a  substantial  part of the capital
required to fund the cash portion of the earn-out payments.

     During 1998, the Company's primary sources of funds to meet working capital
needs were cash from operations and borrowings under the Credit Facility.

                                       15

<PAGE>


     Cash and cash  equivalents  decreased  $1.9  million  during the year ended
December 31, 1998. Cash flows used in investing activities of $10.6 million were
in excess of cash flows  provided by  operating  activities  of $4.5 million and
cash flows provided by financing activities of $4.3 million.  Cash flows used in
investing  activities  were  principally  related  to the  purchase  of  Camelot
Consulting Group, Inc. and certain  affiliated  companies and additions to fixed
assets.   Cash  flows  provided  by  financing   activities   were   principally
attributable to net borrowings under the Credit Facility.

Year 2000

     The Company has  completed  a review of its  potential  Year 2000 issues by
examining all of its internal and third party  applications,  operating systems,
interfaces and hardware.  Independent of its Year 2000 compliance  program,  the
Company  initiated a major  system  conversion  beginning  in early 1998,  based
principally  on  industry-leading  PeopleSoft(R)  software,  in order to improve
access to business  information  through common,  integrated  computing  systems
nationwide. The Company's conversion to these new systems, which are expected to
make the Company's IT systems fully Year 2000 compliant, is now approximately 85
percent  complete and is expected to be completed  during the second  quarter of
1999.

     In assessing potential Year 2000 issues, the Company has established a Year
2000 committee, a compliance program and a budget. The committee has divided the
Company's Year 2000 compliance program into four sections: (1) systems inventory
and assessment,  (2) systems testing evaluation and monitoring,  (3) third party
suppliers and (4)  contingency  planning.  Systems  inventory and assessment has
been completed,  and the remaining  sections are expected to be completed by mid
1999. The Company  expects that all of its IT systems and non-IT systems will be
Year 2000 compliant prior to December 31, 1999. The Company  estimates the total
Year 2000  expenditures  which will be  incurred in the future will be less than
$1.0 million. Not included in these costs are the costs of conversion to the new
integrated  computing  systems,  which was undertaken  independently of its Year
2000 compliance initiative.

     As a  part  of  its  Year  2000  compliance  program,  the  Company  is  in
communication  with its  third-party  vendors and service  providers in order to
assess their Year 2000  readiness and seek to ensure that they will be Year 2000
compliant. The Company is in the process of advising its vendors that it expects
them to  provide  confirmation  of their Year 2000  readiness  during the second
quarter of 1999.  In the event the  Company  does not  believe  it has  received
reasonable  assurance  from its  vendors as to Year 2000  compliance  during the
second  quarter of 1999, the Company will seek to establish  relationships  with
vendors that are Year 2000 compliant.  With respect to the purchases of computer
systems,  or upgrades for existing computer systems,  the Company's policy is to
receive  Year  2000  certification  from  the  vendor  prior to  completing  the
purchase.

     The  statements  above which  express the  Company's  belief that Year 2000
problems  will  not  have  a  material  adverse  effect  on the  Company  may be
forward-looking  statements.  Although  management believes that the Company has
acted with  appropriate  diligence to address  potential  Year 2000  issues,  no
assurance  can be given that Year 2000  issues  will not  materially  affect its
business or  operations.  Factors which could  potentially  cause the Company to
suffer  business  interruptions  or other losses include the failure of its Year
2000  project  team  to  identify  latent  or  other   non-compliant   codes  or
technologies, the failure of any of the customers, vendors, service suppliers or
financial  institutions  with which the Company  deals to address their own Year
2000 problems or the  ineffectiveness  of any contingency  plans put in place by
the Company to mitigate the effects of  interruptions  in its  businesses due to
Year 2000 problems.

Seasonality

     The Company's  quarterly  operating  results are affected  primarily by the
number of billing  days in the quarter  and the  seasonality  of its  customers'
businesses.   Demand  for  services  in  the  technical   services   sector  has
historically  been lower during the  year-end  holidays  through  January of the
following  year,  showing  gradual  improvement  over the remainder of the year.
Although less pronounced than in technical services,  the demand for services in
the  telecommunications  and IT  sectors  is  typically  lower  during the first
quarter until customers'  operating budgets are finalized.  The Company believes
that the effects of  seasonality  will be less severe in the future if net sales
of services contributed by the information  technology,  telecommunications  and
financial services sectors continue to increase as a percentage of the Company's
consolidated net sales of services.


                                       16

<PAGE>


Other Matters

In June 1998,  the  Financial  Accounting  Standards  Board issued  statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities,"  effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. The Company does not expect the statement to have
a  significant  effect  on  its  current  financial   reporting  and  disclosure
requirements.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The  preponderance of the Company's  borrowings are fixed rate obligations.
During  1998,  only  approximately  15% of the  Company's  interest  expense was
attributable  to  variable  rate  loans,  all of which  were  under  the  Credit
Facility. Consequently,  management does not believe that any adjustments to the
rate under the  Credit  Facility  are  likely to have a  material  impact on its
results of operations in the immediate future.  The Company has not entered into
any swap  agreements  or other hedging  transactions  as a means of limiting its
exposure to interest rate fluctuations.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial Statements and Schedules as listed on page F-1.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

     None.

                                       17

<PAGE>


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information  required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange  Commission
on or before April 30, 1999 and is incorporated by reference herein.

ITEM 11.   EXECUTIVE COMPENSATION

     The information  required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange  Commission
on or before April 30, 1999 and is incorporated by reference herein.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange  Commission
on or before April 30, 1999 and is incorporated by reference herein.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  required by this section will be included in the Company's
Proxy Statement which will be filed with the Securities and Exchange  Commission
on or before April 30, 1999 and is incorporated by reference herein.


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  1.  Financial Statements as listed on page F-1.
     2.  Financial Statement Schedules as listed on page F-1.
     3.  Exhibits as listed on page E-1.

(b)  Reports on Form 8-K.

     No current  reports on Form 8-K were filed by the Company during the fourth
quarter of 1998.


                                       18

<PAGE>

                                   SIGNATURES


SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  each  registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.


COMFORCE Corporation


By:       /s/ John C. Fanning
         -----------------------------------------------------
         John C. Fanning, Chairman and Chief Executive Officer

Date: March 24, 1999


COMFORCE Operating, Inc.

By:       /s/ John C. Fanning
         -----------------------------------------------------
         John C. Fanning, Chairman and Chief Executive Officer

Date: March 24, 1999


                                       19

<PAGE>


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has been  signed  below  by the  following  persons  on  behalf  of each
registrant and in the capacities and on the dates indicated.


        SIGNATURE                         TITLE                      DATE
        ---------                         -----                      ----


/s/ John C. Fanning            Chairman, Chief Executive
---------------------------    Officer and Director
    John C. Fanning            (Principal Executive Officer)    March 24, 1999

/s/ Harry Maccarrone           Executive Vice President
---------------------------    and Director (Principal
    Harry Maccarrone           Accounting Officer)              March 24, 1999

/s/ Robert H.B. Baldwin, Jr.   Senior Vice President and
---------------------------    Chief Financial Officer
    Robert H.B. Baldwin, Jr.   (Principal Financial Officer)    March 24, 1999

/s/ Michael D. Madden          Vice Chairman and
---------------------------    Director                         March 24, 1999
    Michael D. Madden      

/s/ Marc Werner                Director                         March 24, 1999
---------------------------
    Marc Werner

/s/ Gordon Robinett            Director                         March 24, 1999
---------------------------
    Gordon Robinett

/s/ Daniel Raynor              Director                         March 29, 1999
---------------------------
    Daniel Raynor

                                       20

<PAGE>


COMFORCE Corporation and Subsidiaries
Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                  Page(s)
<S>                                                                             <C>
Report of Independent Accountants                                                   F-2

Consolidated Financial Statements:

    Consolidated Balance Sheets as of December 31, 1998 and 1997                    F-3

    Consolidated Statements of Operations for the years ended
      December 31, 1998, 1997 and 1996                                              F-4

    Consolidated Statements of Stockholders' Equity for the years ended
      December 31, 1998, 1997 and 1996                                           F-5 - F-7

    Consolidated Statements of Cash Flows for the years ended
      December 31, 1998, 1997 and 1996                                           F-8 - F-9

    Notes to Consolidated Financial Statements                                  F-10 - F-25

Schedule II Valuation and Qualifying Accounts                                      F-26
</TABLE>



                                      F-1
<PAGE>



                        Report of Independent Accountants



To the Shareholders and Board of Directors of COMFORCE Corporation:

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing on page F-1, presents fairly, in all material respects,  the financial
position of COMFORCE Corporation and Subsidiaries at December 31, 1998 and 1997,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1998,  in  conformity  with
generally  accepted  accounting  principles.  In addition,  in our opinion,  the
financial statement schedule listed in the index appearing on page F-1, presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.  These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements and financial  statement  schedule based on our audits. We
conducted our audits of these  statements in accordance with generally  accepted
auditing  standards  which  require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


                                        PricewaterhouseCoopers LLP


New York, New York
February 25, 1999




                                      F-2
<PAGE>



COMFORCE Corporation and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1998 and 1997 (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                        1998         1997
<S>                                                                                  <C>          <C>
                                     ASSETS:
Current assets:
    Cash and cash equivalents                                                        $   4,599    $   6,512
    Restricted cash                                                                                   1,036
    Accounts receivable, less allowance of $790 and $807 in
      1998 and 1997, respectively                                                       47,727       42,262
    Funding and service fees receivable, net                                            33,953       30,603
    Prepaid expenses and other current assets                                            3,342        4,929
    Deferred income taxes                                                                2,306        3,829
                                                                                     ---------    ---------
           Total current assets                                                         91,927       89,171

Property and equipment, net                                                              9,256        4,271
Intangible assets, net                                                                 138,847      135,516
Deferred financing costs                                                                 6,052        6,580
Other assets                                                                                            396
                                                                                     ---------    ---------
           Total assets                                                              $ 246,082    $ 235,934
                                                                                     =========    =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
    Borrowings under revolving line of credit                                        $   4,000    $   5,038
    Accounts payable                                                                     4,296        2,513
    Accrued expenses                                                                    18,068       21,858
                                                                                     ---------    ---------
           Total current liabilities                                                    26,364       29,409
Long-term debt                                                                         174,579      166,000
Deferred income taxes                                                                      224
Other liabilities                                                                          581        1,123
                                                                                     ---------    ---------
           Total liabilities                                                           201,748      196,532
                                                                                     ---------    ---------

Commitments and contingencies

Stockholders' equity:
    Series F convertible  preferred  stock, $.01 par value; 10,000  shares
      authorized, 500 shares issued and outstanding in 1997, liquidation value
      of $1,000 per share ($500) in 1997                                                                  1
    Common stock, $.01 par value; 100,000,000 shares authorized, 16,129,322 shares
      issued and outstanding in 1998 and 15,344,247 shares issued and outstanding
      in 1997                                                                              161          153
    Additional paid-in capital                                                          47,464       43,323
    Accumulated deficit, since January 1, 1996 (Note 1)                                 (3,291)      (4,075)
                                                                                     ---------    ---------
           Total stockholders' equity                                                   44,334       39,402
                                                                                     ---------    ---------
           Total liabilities and stockholders' equity                                $ 246,082    $ 235,934
                                                                                     =========    =========
</TABLE>


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


                                      F-3
<PAGE>


COMFORCE Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                1998         1997        1996
<S>                                                         <C>          <C>          <C>
Revenue:
    Net sales of services                                   $ 459,022    $ 216,521    $  55,867
                                                            ---------    ---------    ---------

Costs and expenses:
    Cost of services                                          372,877      186,455       47,574
    Selling, general and administrative expenses               55,827       19,718        5,266
    Restructuring charge                                         (211)       1,600
    Depreciation and amortization                               5,605        1,883          614
                                                            ---------    ---------    ---------
           Total costs and expenses                           434,098      209,656       53,454
                                                            ---------    ---------    ---------
Operating income                                               24,924        6,865        2,413
                                                            ---------    ---------    ---------

Other income (expense):
    Bridge and financing charges                                            (7,672)
    Interest expense                                          (21,490)      (4,588)        (201)
    Other income (expense), net                                    35          344           40
                                                            ---------    ---------    ---------
                                                              (21,455)     (11,916)        (161)

Income (loss) before income taxes                               3,469       (5,051)       2,252
Provision (credit) for income taxes                             2,664       (1,351)         900
                                                            ---------    ---------    ---------
Net income (loss)                                                 805       (3,700)       1,352
                                                            ---------    ---------    ---------

Dividends on preferred stock                                       21          737          325
Accretive dividend on Series F preferred stock                                              665
                                                            ---------    ---------    ---------
           Income (loss) available to common stockholders   $     784    $  (4,437)   $     362
                                                            =========    =========    =========

Basic income (loss) per common share:
    Net income                                              $    0.05    $   (0.33)   $    0.12
    Accretive dividend on Series F preferred stock                                        (0.09)
                                                            ---------    ---------    ---------
           Basic net income (loss) per common share         $    0.05    $    (.33)   $     .03
                                                            =========    =========    =========

Average common shares outstanding, basic                       15,971       13,493       11,049
                                                            =========    =========    =========

Diluted income (loss) per common share:
    Net income                                              $    0.05    $    (.33)   $    0.10
    Accretive dividend on Series F preferred stock                                         (.07)
                                                            ---------    ---------    ---------
           Diluted net income (loss) per common share       $    0.05    $    (.33)   $    0.03
                                                            =========    =========    =========

Average common shares outstanding, diluted                     16,648       13,493       13,033
                                                            =========    =========    =========
</TABLE>


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


                                      F-4
<PAGE>

COMFORCE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996
 (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                        Series E                Series D
                                                             Common Stock            Preferred Stock         Preferred Stock
                                                         Shares        Amount       Shares      Amount      Shares      Amount
                                                      -----------    ---------    ---------    --------    --------    -------
<S>                                                    <C>           <C>             <C>          <C>         <C>      <C>
Balance at December 31, 1995                            9,309,198    $      92
Quasi-Reorganization as of January 1, 1996
Exercise of stock options                                   4,500            1
Exercise of stock warrants                                449,445            5
Issuance of Series E convertible preferred stock                                      8,871    $      1
Conversion of Series E preferred stock                    887,100            9       (8,871)         (1)
Issuance of Series D senior convertible
    preferred stock                                                                                           7,002    $     1
Issuance of Series F preferred stock
Common stock sold through private placement               810,000            8
SEC registration fees
Common stock issued as consideration for the
    purchase of Force Five                                 27,398            1
Common stock issued as consideration for the
     purchase of AZATAR                                   243,211            2
Common stock issued as consideration for the
    purchase of Continental                                36,800            1
Common stock issued to pay liabilities assumed
    by ARTRA                                              137,500            1
Liabilities assumed by ARTRA
Common stock issued to management for
    anti-dilution provision                               796,782            7          
Net income
Dividends:
    Series E preferred stock
    Series D preferred stock
    Series F preferred stock
    Accretive dividend on Series F preferred stock
                                                       ----------    ---------    ---------    --------    --------    -------
Balance at December 31, 1996                           12,701,934    $     127         --          --         7,002    $     1
                                                       ==========    =========    =========    ========    ========    =======

<CAPTION>
                                                              Series F           Additional                             Total
                                                          Preferred Stock          Paid-in   Accumulated   Retained  Stockholders'
                                                         Shares        Amount      Capital     Deficit     Earnings     Equity
                                                      -----------    ---------   ----------  -----------   --------  ------------
<S>                                                    <C>           <C>          <C>         <C>          <C>        <C>
Balance at December 31, 1995                                                      $  95,993   $ (93,847)              $  2,238
Quasi-Reorganization as of January 1, 1996                                          (93,847)     93,847
Exercise of stock options                                                                22                                 23
Exercise of stock warrants                                                            2,041                              2,046
Issuance of Series E convertible preferred stock                                      4,635                              4,636
Conversion of Series E preferred stock                                                   (8)
Issuance of Series D senior convertible
    preferred stock                                                                   6,415                              6,416
Issuance of Series F preferred stock                        3,250    $       1        2,957                              2,958
Common stock sold through private placement                                           6,362                              6,370
SEC registration fees                                                                  (300)                              (300)
Common stock issued as consideration for the
    purchase of Force Five                                                              499                                500
Common stock issued as consideration for the
     purchase of AZATAR                                                               4,118                              4,120
Common stock issued as consideration for the
    purchase of Continental                                                             574                                575
Common stock issued to pay liabilities assumed
    by ARTRA                                                                            275                                276
Liabilities assumed by ARTRA                                                          3,318                              3,318
Common stock issued to management for               
    anti-dilution provision                                                             534                                541
Net income                                                                                                 $  1,352      1,352
Dividends:
    Series E preferred stock                                                                                    (18)       (18)
    Series D preferred stock                                                                                   (280)      (280)
    Series F preferred stock                                                                                    (27)       (27)
    Accretive dividend on Series F preferred stock                                      665                    (665)
                                                       ----------    ---------    ---------    --------    --------    -------
Balance at December 31, 1996                                3,250    $       1    $  34,253        --      $    362   $ 34,744
                                                       ==========    =========    =========    ========    ========    =======
</TABLE>

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

                                      F-5
<PAGE>


COMFORCE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)


<TABLE>
<CAPTION>

                                                                                                    Series D
                                                                     Common Stock                Preferred Stock
                                                                 Shares        Amount         Shares         Amount
                                                              -----------   -----------    -----------    -----------
<S>                                                           <C>           <C>                  <C>      <C>
Balance at December 31, 1996                                  12,701,934    $       127          7,002    $         1
Exercise of stock options                                        124,000              1
Exercise of stock warrants                                        80,000              1
Redemption of Series F preferred stock
Conversion of Series D preferred stock                           583,500              6         (7,002)            (1)
Issuance of common stock as inducement to
    effect Series D conversion                                    87,750              1
SEC registration fees
Issuance of warrants in connection with debt placement
Issuance of common stock in connection with
    payment right                                                385,591              4
Issuance of common stock as consideration for interest
    owed on debt                                                 118,145              1
Issuance of common shares in connection with the
    acquisition of Uniforce Services, Inc.                     1,585,208             16
Issuance of warrants in connection with the acquisition
    of Uniforce Services, Inc.
Redemption of common stock                                      (321,881)            (4)
Net loss
Dividends:
    Series D preferred stock
    Series F preferred stock
                                                              -----------   -----------    -----------    -----------
Balance at December 31, 1997                                  15,344,247    $       153           --             --
                                                              ===========   ===========    ===========    ===========

<CAPTION>
                                                                                                          Retained
                                                                       Series F            Additional      Earnings       Total
                                                                   Preferred Stock           Paid-in      Accumulated  Stockholders'
                                                                Shares         Amount        Capital       (Deficit)      Equity
                                                             -----------    -----------    -----------    -----------  -------------
<S>                                                               <C>       <C>            <C>            <C>          <C>
Balance at December 31, 1996                                       3,250    $         1    $    34,253    $       362  $    34,744
Exercise of stock options                                                                          141                         142
Exercise of stock warrants                                                                         214                         215
Redemption of Series F preferred stock                            (2,750)                       (3,162)                     (3,162)
Conversion of Series D preferred stock                                                              (5)
Issuance of common stock as inducement to
    effect Series D conversion                                                                     492           (493)
SEC registration fees                                                                             (625)                       (625)
Issuance of warrants in connection with debt placement                                           1,511                       1,511
Issuance of common stock in connection with
    payment right                                                                                   (4)
Issuance of common stock as consideration for interest
    owed on debt                                                                                   632                         633
Issuance of common shares in connection with the
    acquisition of Uniforce Services, Inc.                                                      12,143                      12,159
Issuance of warrants in connection with the acquisition
    of Uniforce Services, Inc.                                                                     150                         150
Redemption of common stock                                                                      (2,417)                     (2,421)
Net loss
Dividends:                                                                                                     (3,700)      (3,700)
    Series D preferred stock                                                                                     (195)        (195)
    Series F preferred stock                                                                                      (49)         (49)
                                                             -----------    -----------    -----------    -----------  -----------
Balance at December 31, 1997                                         500    $         1    $    43,323    $    (4,075) $    39,402
                                                             ===========    ===========    ===========    ===========  ===========
</TABLE>


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


                                      F-6
<PAGE>




COMFORCE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                   Series F
                                                                        Common Stock            Preferred Stock
                                                                    Shares        Amount       Shares      Amount
                                                                  ----------     --------     -------     --------
<S>                                                               <C>            <C>              <C>     <C>
Balance at December 31, 1997                                      15,344,247     $    153         500     $      1
Exercise of stock options                                             80,500            1
Exercise of stock warrants                                           108,132            1
Conversion of Series F preferred stock                                57,143            1        (500)          (1)
SEC registration fees
Issuance of common stock in connection with the
    acquisition of Camelot                                           203,307            2
Issuance of common stock in connection with acqisitions              335,993            3
Tax benefit from exercise of stock options
Net income
Dividends:
    Series F preferred stock
                                                                  ----------     --------     -------     --------
Balance at December 31, 1998                                      16,129,322     $    161        --           --
                                                                  ==========     ========     =======     ========

<CAPTION>
                                                                                  Retained
                                                                  Additional      Earnings       Total
                                                                    Paid-in     Accumulated   Stockholders'
                                                                    Capital      (Deficit)       Equity
                                                                   --------      ---------      --------
<S>                                                                <C>           <C>            <C>
Balance at December 31, 1997                                       $ 43,323      $ (4,075)      $ 39,402
Exercise of stock options                                               137                          138
Exercise of stock warrants                                              459                          460
Conversion of Series F preferred stock                                 (298)                        (298)
SEC registration fees                                                   (46)                         (46)
Issuance of common stock in connection with the
    acquisition of Camelot                                            1,498                        1,500
Issuance of common stock in connection with acqisitions               2,005                        2,008
Tax benefit from exercise of stock options                              386                          386
Net income                                                                            805            805
Dividends:
    Series F preferred stock                                                          (21)           (21)
                                                                   --------      --------       --------
Balance at December 31, 1998                                       $ 47,464      $ (3,291)      $ 44,334
                                                                   ========      ========       ========
</TABLE>


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


                                      F-7
<PAGE>

COMFORCE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                      1998         1997         1996
<S>                                                                                <C>          <C>          <C>
Cash flows from operating activities:
Net income (loss)                                                                  $     805    $  (3,700)   $   1,352
Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operations:
      Depreciation                                                                     1,255          482          139
      Amortization of intangible assets                                                4,326        1,401          475
      Amortization of deferred financing costs                                           836
      Allowance for doubtful accounts                                                    (17)         106          212
      Deferred income taxes                                                            1,747         (578)        (189)
      Issuance of notes in lieu of interest                                            3,162
    Changes in assets and  liabilities,  net of the effects of  acquisitions  of
      businesses:
        Accounts receivable                                                           (3,848)      (1,177)     (10,500)
        Prepaid expenses and other current assets                                       (746)         714          341
        Income taxes receivable                                                        2,896       (1,218)
        Other noncurrent assets                                                                     2,021       (1,183)
        Accounts payable and accrued expenses                                         (5,966)      (8,162)       3,637
        Other liabilities                                                                          (1,322)         (60)
                                                                                   ---------    ---------    ---------
             Net cash provided by (used in) operating activities                       4,450      (11,433)      (5,776)
                                                                                   ---------    ---------    ---------

Cash flows from investing activities:
Acquisitions, net of cash acquired                                                    (3,574)     (97,006)     (15,834)
Purchase of property and equipment                                                    (6,182)        (832)        (329)
Increase in receivable from officers                                                                              (373)
Payments of contingent consideration                                                  (1,912)
Decrease in restricted cash                                                            1,036       (1,036)
Other                                                                                                (636)
                                                                                   ---------    ---------    ---------
           Net cash used in investing activities                                     (10,632)     (99,510)     (16,536)
                                                                                   ---------    ---------    ---------

Cash flows from financing activities:
Payment of note payable                                                                                           (500)
Net decrease in short-term debt                                                                    (7,302)
Net borrowings (repayments) under line of credit agreements                            4,170       (4,790)       3,850
Proceeds from issuance of equity securities                                              639          983       22,149
Dividends paid                                                                           (21)        (244)        (228)
Proceeds from long-term borrowings                                                                130,000
Debt financing costs                                                                    (309)      (4,800)
Reduction of capital lease obligations                                                  (210)
                                                                                   ---------    ---------    ---------
           Net cash provided by financing activities                                   4,269      113,847       25,271
                                                                                   ---------    ---------    ---------

(Decrease) increase in cash and cash equivalents                                      (1,913)       2,904        2,959
Cash and cash equivalents, beginning of year                                           6,512        3,608          649
                                                                                   ---------    ---------    ---------
           Cash and cash equivalents, end of year                                  $   4,599    $   6,512    $   3,608
                                                                                   =========    =========    =========
</TABLE>
Continued


                                      F-8
<PAGE>


COMFORCE Corporation and Subsidiaries
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1998, 1997 and 1996
(in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                      1998         1997        1996
<S>                                                                                <C>          <C>          <C>
Supplemental cash flow information:
  Cash paid during the year for:
      Interest                                                                     $  17,068    $   2,575    $     157
      Income taxes                                                                     1,585          347          934

    Details of acquisition (Note 3):
      Fair value of assets acquired                                                    9,071      185,175       21,029
      Liabilities assumed                                                             (3,855)     (70,700)
      Less stock issued                                                               (1,500)     (12,157)      (5,195)
                                                                                   ---------    ---------    ---------
        Cash paid                                                                      3,716      102,318       15,834
      Less cash acquired                                                                 142        5,312         --
                                                                                   ---------    ---------    ---------
        Net cash paid                                                              $   3,574    $  97,006    $  15,834
                                                                                   ---------    ---------    ---------

Supplemental schedule of significant noncash investing
  and financing activities:
      Quasi-reorganization                                                                                   $ (93,848)
      Common stock issued in connection with acquisitions                          $   3,508    $  12,159        5,195
      Tax benefit from exercise of stock options                                         386
      Accretive dividend on preferred stock                                                                        665
      Common stock issued to restructure and settle liabilities                                       636          550
      Amounts assumed by ARTRA                                                                                   3,594
      Issuance of short-term debt to redeem Series F
        Preferred Stock                                                                             3,162
      Dividends paid through issuance of common stock                                                 493
      Warrants issued in connection with debt and acquisitions                                      1,931
      Forgiveness of officer loans                                                                    352
</TABLE>


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




                                      F-9
<PAGE>



COMFORCE Corporation and Subsidiaries
Notes to Consolidated Financial Statements


1.   Basis of Presentation:

     COMFORCE  Corporation  ("COMFORCE"),  is a leading  provider  of  staffing,
     outsourcing and consulting  solutions primarily to Fortune 500 companies in
     the growing information technology ("IT"),  telecommunications,  technical,
     professional  and  financial  market  sectors.   COMFORCE  Operating,  Inc.
     ("COI"),  a wholly owned  subsidiary  of COMFORCE,  was  incorporated  as a
     Delaware  corporation  in  October  1997 for the  purpose  of  facilitating
     certain of the Company's financing  transactions in November 1997 (see Note
     9). Unless the context  otherwise  requires,  the term "Company"  refers to
     COMFORCE, COI and all of their direct and indirect subsidiaries.

     Effective  January 1, 1996,  the  Company  effected a  quasi-reorganization
     through  the  application  of  $93,847,000  of its  $95,993,000  additional
     paid-in capital account to eliminate its accumulated deficit. The Company's
     Board  decided  to effect a  quasi-reorganization  given  that the  Company
     achieved  profitability  following  its entry into the  technical  staffing
     business and discontinuation of its unprofitable jewelry business.

2.   Summary of Significant Accounting Policies:

     Principles of Consolidation

     The consolidated financial statements include the accounts of COMFORCE, COI
     and  their  subsidiaries.   All  significant   intercompany   accounts  and
     transactions have been eliminated in consolidation.

     Revenue Recognition

     Revenue for  providing  staffing  services is  recognized  at the time such
     services are rendered.

     A portion of the Company's revenue is attributable to franchise operations.
     The Company  included  such  revenues  and related  direct costs in its net
     sales of services and cost of services,  respectively. The net distribution
     to the franchisee is based on a percentage of gross profit generated and is
     included in operating  expenses.  The licensee share in operating  expenses
     for fiscal 1998 was approximately $6,950,000.

     Cash and Cash Equivalents

     The Company  considers all highly  liquid  short-term  investments  with an
     original  maturity of three months or less to be cash and cash equivalents.
     Cash equivalents consists primarily of money market funds.

     Restricted Cash

     At December 31, 1997, the Company had  $1,036,000 of restricted  cash which
     was  utilized to  collateralize  a  performance  bond with the State of New
     York, which was redeemed during 1998.


                                      F-10
<PAGE>

Notes to Consolidated Financial Statements, Continued

     Property and Equipment

     Property  and  equipment  are  carried at cost.  Depreciation  is  provided
     primarily on a straight-line  basis over the estimated  useful lives of the
     related assets.  Leasehold  improvements  are amortized over the shorter of
     the life of the lease or of the  improvement.  Maintenance  and repairs are
     charged to expense as incurred and improvements that extend the useful life
     are  capitalized.  Upon  retirement  or  sale,  the  cost  and  accumulated
     depreciation  are removed  from the  respective  accounts,  and the gain or
     loss, if any, is reflected in earnings.

     If events or changes in circumstances  indicate that the carrying amount of
     a long-lived asset may not be recoverable, the Company estimates the future
     cash flows  expected to result  from the use of the asset and its  eventual
     disposition. If the sum of the expected future cash flows (undiscounted and
     without  interest  charges)  is  less  than  the  carrying  amount  of  the
     long-lived asset, an impairment loss is recognized.  To date, no impairment
     losses have been recognized.

     Intangible Assets

     The net assets of a purchased  business are recorded at their fair value at
     the date of acquisition.  Goodwill  represents the excess of purchase price
     over the fair  value of  identifiable  net  assets of  companies  acquired.
     Goodwill is  amortized  on a  straight-line  basis over periods of 20 to 40
     years. (See Note 6.)

     The  Company  assesses  the  recoverability  of this  asset by  determining
     whether the  amortization  of the goodwill  balance over its remaining life
     can be  recovered  through  forecasted  future  operations.  Impairment  is
     evaluated by comparing future cash flows (undiscounted and without interest
     charges)  expected  to  result  from the use or sale of the  asset  and its
     eventual disposition, to the carrying amount of the asset.

     Income Taxes

     The Company recognizes deferred tax liabilities and assets for the expected
     future tax consequences of differences  between the tax basis of assets and
     liabilities and their financial reporting amounts at each year-end based on
     enacted tax laws and statutory tax rates applicable to the periods in which
     the differences are expected to affect taxable income. Valuation allowances
     are established  when necessary to reduce deferred tax assets to the amount
     expected to be realized. Income tax expense consists of the tax payable for
     the  period and the change  during  the period in  deferred  tax assets and
     liabilities.

     Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during the reporting period.  The most significant  estimates relate to the
     realizability of accounts  receivable,  long-lived  assets and deferred tax
     assets. Actual results could differ from those estimates.


                                      F-11
<PAGE>

Notes to Consolidated Financial Statements, Continued

     Fair Values of Financial Instruments

     Cash and cash  equivalents and fixed rate debt obligations are reflected in
     the  accompanying  consolidated  balance  sheets at amounts  considered  by
     management to reasonably approximate fair value.

     Management is not aware of any factors that would significantly  affect the
     value of these amounts.

     Deferred Licensee Acquisition Costs

     In  connection  with the  Uniforce  acquisition  (see Note 3), the  Company
     acquired  executed  contracts for affiliations  with existing  supplemental
     staffing  service  companies.   Such  contracts  required  the  payment  of
     affiliation  fees which are being amortized on a straight-line  method over
     the minimum terms of the  affiliation  agreements  which range from five to
     ten years.  Amortization  of deferred  licensee  acquisition  costs was not
     significant in fiscal 1998 and 1997.

     Deferred Financing Costs

     Deferred  financing costs consist of costs  associated with the issuance of
     the Company's  long-term debt (see Note 9). Such costs are being  amortized
     on a  straight-line  basis over the life of each  financing  source,  which
     ranges from 5 to 12 years.

     Newly Issued Accounting Standards

     In June 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
     Financial Accounting  Standards No. 131,  "Disclosures about Segments of an
     Enterprise and Related Information" ("SFAS No. 131"), which changes the way
     public  companies  report  information  about  segments.  This statement is
     effective for 1998 and is included in footnote 17.

     Effective  January 1, 1998, the Company adopted AICPA Statement of Position
     ("SOP") No. 98-1,  "Accounting for the Costs of Computer Software Developed
     or Obtained  for  Internal  Use." SOP No. 98-1  requires  certain  costs in
     connection  with  developing  or obtaining  internally  used software to be
     capitalized  that  previously  would have been  expensed as  incurred.  The
     adoption  of SOP 98-1  did not  have a  material  impact  on the  Company's
     results of operations, financial position, or cash flows.

     In June 1998, the FASB issued statement of Financial  Accounting  Standards
     No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities,"
     effective for all fiscal  quarters of all fiscal years beginning after June
     15, 1999.  The Company does not expect the  statement to have a significant
     effect on its current financial reporting and disclosure requirements.

     Reclassification

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

                                      F-12
<PAGE>

Notes to Consolidated Financial Statements, Continued

3.   Acquisitions:

     During January 1998, COMFORCE Telecom,  Inc., a wholly-owned  subsidiary of
     the Company,  purchased all of the issued and outstanding  stock of Camelot
     Consulting Group Inc., Camelot  Communications  Group Inc., Camelot Control
     Group Inc.  and Camelot  Group Inc.  (collectively,  "Camelot,")  for total
     consideration of  approximately  $3.7 million in cash and 203,307 shares of
     the Company's  common stock.  In addition,  the Company  issued  contingent
     payment  certificates  under  which it could be required to pay up to $3.25
     million  in  cash  over a  three-year  period.  The  acquisition  has  been
     accounted for under the purchase  method and,  accordingly,  the results of
     operations  are  included  in the  financial  statements  from  the date of
     acquisition.   Camelot  is  in  the  business  of  selling  and  installing
     telecommunications equipment and of providing staffing services.

     On November 26, 1997,  the Company  completed the  acquisition  of Uniforce
     Services,  Inc.  and  subsidiaries  ("Uniforce").   The  Company  purchased
     Uniforce for  $93,600,000 in cash and 1,585,208 of its common shares with a
     value of approximately $12,200,000.  The acquisition has been accounted for
     under the purchase method and,  accordingly,  the results of operations are
     included in the financial statements from the date of acquisition. The cash
     portion  of the  purchase  price  paid at closing  was  principally  funded
     through the Company's  offering of 12% Senior Notes (see Note 9).  Uniforce
     is a  leading  provider  of  staffing  and  consulting  solutions  for  the
     information technology, professional and office support markets.

     On  February  28,  1997,  the  Company  purchased  all of the  stock of RHO
     Company, Inc. ("Rhotech") for $14,800,000 in cash, plus a contingent payout
     to be paid over  three  years  based on future  earnings  of  Rhotech,  and
     payable  in stock in an  aggregate  amount  not to exceed  $3,300,000.  The
     maximum number of shares  issuable  under the contingent  payout is 386,249
     shares.  Rhotech provides  specialists  primarily in the technical services
     and information technology sectors.

     In the year ended December 31, 1996, the Company completed the acquisitions
     of the  following  businesses  which  have  been  accounted  for  under the
     purchase  method  of  accounting:  Williams  Communication  Services,  Inc.
     ("Williams"),  Project  Staffing Support Team, Inc., RRA, Inc. and Datatech
     Technical Services,  Inc.  (collectively  "RRA"),  Force Five, Inc. ("Force
     Five"),  Azatar Computer Systems,  Inc.  ("Azatar"),  and Continental Field
     Services  Corporation  and its affiliate,  and  Progressive  Telecom,  Inc.
     (collectively   "Continental").   The  aggregate   purchase  price  of  the
     acquisitions  in  the  year  ended  December  31,  1996  was  approximately
     $21,029,000,  comprised of $15,834,000 in cash and approximately $5,195,000
     in common stock of the Company.  In addition,  certain of the  acquisitions
     contain  contingent  payout provisions based on the attainment of specified
     earnings.  At December 31, 1998, maximum contingent  payments in connection
     with all  acquisitions  approximate  $5,300,000  in cash and  approximately
     248,000 shares of the Company's common stock.

     The following unaudited pro forma summary presents the consolidated results
     of  operations as if the  acquisitions  had occurred on January 1, 1997 and
     does not purport to be an  indication  of what would have  occurred had the
     acquisitions been made as of that date. In addition,  they are not intended
     to be  projections  of future results and do not reflect any synergies that
     might be  achieved  from  combined  operations.  No pro forma  results  are
     presented  for  1998 as the  Camelot  acquisition  was  consummated  at the
     beginning of the fiscal year.



                                      F-13
<PAGE>

Notes to Consolidated Financial Statements, Continued


                                                                        1997
                                                                    (Unaudited)

     Revenue                                                         $ 409,893
     Net loss                                                          (17,145)
                                                                     ---------
     Net loss per share (diluted)                                    $   (1.07)
                                                                     ---------

     The above pro forma data assume the  issuance of Series F preferred  stock,
     the borrowing under the revolving line of credit and the offering of Senior
     Notes to finance  these  transactions  (see Note 9). Pro forma  adjustments
     include an  interest  cost  increase  of  $11,408,000  in 1997,  additional
     goodwill  amortization  of $2,050,000 in 1997,  and the related  income tax
     effect.

4.   Restructuring Charges:

     The  Company  recorded a $1.6  million  restructuring  charge in the fourth
     quarter of 1997 related to merger and  integration  charges  resulting from
     the  acquisition  of  Uniforce.  Most of the actions  under these plans are
     completed and have resulted in lower costs than originally estimated.  As a
     result of these developments, the Company recognized a restructuring credit
     of $211,000.  As of December 31, 1998, the remaining  restructuring charges
     liabilities  are $635,000.  The Company  expects to have its  restructuring
     program completed in 1999.

5.   Fixed Assets:

     Fixed assets consist of (in thousands):

<TABLE>
<CAPTION>
                                                        Estimated
                                                       Useful Lives
                                                         in Years        1998        1997
<S>                                                         <C>       <C>         <C>
Office equipment                                            3-8       $  9,193    $  3,446
Furniture, fixtures and vehicles                            3-7          1,633       1,324
Leasehold improvements                                      3-7            346         162
                                                                      --------    --------
                                                                        11,172       4,932
      Less, accumulated depreciation and amortization                   (1,916)       (661)
                                                                      --------    --------
                                                                      $  9,256    $  4,271
                                                                      --------    --------
</TABLE>

     Depreciation  expense was  $1,255,000,  $482,000 and $139,000 for the years
     ended December 31, 1998, 1997 and 1996, respectively.


                                      F-14
<PAGE>

Notes to Consolidated Financial Statements, Continued

6.   Intangibles:

     Intangibles as of December 31, 1998 and 1997 consisted of (in thousands):


<TABLE>
<CAPTION>

                                                         Estimated
                                                       Useful Lives
                                                         in Years        1998        1997
<S>                                                        <C>       <C>         <C>
Goodwill                                                   20-40     $ 143,245   $ 135,828
Non-compete covenants                                        5             737         737
Other                                                        5           1,130         890
                                                                     ---------   ---------
                                                                       145,112     137,455
      Less, accumulated amortization                                    (6,265)     (1,939)
                                                                     ---------   ---------
                                                                     $ 138,847   $ 135,516
                                                                     ---------   ---------
</TABLE>

     Amortization  expense was $4,326,000,  $1,401,000 and $475,000 in the years
     ended December 31, 1998, 1997 and 1996, respectively.

7.   Accrued Expenses and Other Current Liabilities:

     Accrued expenses and other current liabilities consist of the following (in
     thousands):

                                                           1998             1997

     Payroll and payroll taxes                          $ 9,023          $ 9,228
     Pension plan                                           546              306
     Vacation                                               836            1,471
     Professional fees                                      234              510
     Medical insurance                                      563              219
     Interest                                             1,733            1,902
     Restructuring                                          635            1,600
     Other                                                4,498            6,622
                                                        -------          -------
                                                        $18,068          $21,858
                                                        -------          -------


                                      F-15
<PAGE>

Notes to Consolidated Financial Statements, Continued

8.   Income Taxes:

     The provision  (benefit) for income taxes as of December 31, 1998, 1997 and
     1996 consists of (in thousands):

                                        1998             1997             1996
     Current:
       Federal                        $   621          $  (695)         $   867
       State                              296              (78)             222
     Deferred                           1,747             (578)            (189)
                                      -------          -------          -------
                                      $ 2,664          $(1,351)         $   900
                                      -------          -------          -------

     The  difference  between  the  statutory  Federal  income  tax rate and the
     effective income tax rate is reconciled as follows:

                                                         1998      1997    1996
                                                          %         %       %
     Statutory Federal tax rate provision (benefit)      34.0     (34.0)   34.0
     State and local taxes, net of Federal benefit        3.8     (3.8)     5.0
     Change in deferred tax rates                                  2.3
     Effect of non-deductible items                      38.9      4.6      0.9
     Alternative minimum tax                                       0.9
     Other, individually less than 5%                              3.3
                                                         ----     ----     ----
                                                         76.7     (26.7)   39.9
                                                         ----     ----     ----

     The  components  of deferred  tax assets and deferred  tax  liabilities  at
     December 31, 1998 and 1997 (in thousands) are as follows:

                                                             1998          1997
     Deferred tax assets:
       Reserves and allowances                              $1,277        $1,417
       Accrued liabilities and other                         1,823           672
       Accrued severance                                       111           283
       Net operating loss                                                  1,474
       Fixed assets                                                          327
                                                            ------        ------
            Total deferred tax assets                        3,211         4,173
                                                            ------        ------
     Deferred tax liability:
       Intangibles                                             677           344
       Excess depreciation                                     452
                                                            ------        ------
            Total deferred tax liabilities                   1,129           344
                                                            ------        ------
            Net deferred tax asset                          $2,082        $3,829
                                                            ------        ------



                                      F-16
<PAGE>

Notes to Consolidated Financial Statements, Continued

     The net  deferred  income  tax  assets are  reflected  in the  accompanying
     balance sheets as follows (in thousands):

                                                               1998        1997

     Net deferred income tax assets - current                 $2,306      $1,710
     Net deferred income tax assets - noncurrent                           2,119
                                                              ------      ------
            Total deferred tax assets                          2,306       3,829
                                                              ------      ------

     Net deferred income tax liability - noncurrent              224
                                                              ------      ------
                                                              $2,082      $3,829
                                                              ------      ------

     Management has determined  that,  based on the history of taxable  earnings
     and its expectations  for the future,  taxable income will more likely than
     not be sufficient to fully  realize  deferred tax assets and,  accordingly,
     has not reduced deferred tax assets by a valuation allowance.

     9. Debt:

     Notes  payable  and  long-term  debt at  December  31,  1998  and  1997 (in
     thousands) consisted of the following:

                                                               1998       1997

12% Senior Notes, due 2007 (a)                               $110,000   $110,000
15% Senior Secured PIK Debentures, due 2009 (b)                23,162     20,000
Revolving  line of credit,  due November 26, 2002, with
  interest payable monthly at LIBOR plus up to 2.25%
  At December 31, 1998, the rate was 7.53% (c)                 45,417     41,038
                                                             --------   --------
                                                              178,579    171,038
    Less, current portion                                       4,000      5,038
                                                             --------   --------
       Total long-term debt                                  $174,579   $166,000
                                                             ========   ========


     (a)  The  12%  Senior  Notes  (the  "Notes")  are  senior  uncollateralized
          obligations  of COI and  rank  equal  in  right  of  payment  with all
          existing and future senior  indebtedness of COI and senior in right of
          payment to all existing and future  subordinated  indebtedness of COI.
          The Notes  provide for the payment of  interest  semi-annually  at the
          rate of 12% per annum and mature on December 1, 2007.

          COI may redeem the Notes, in whole or in part, at any time on or after
          December  1,  2002 at a  redemption  price of 106%  for the 12  months
          commencing December 1, 2002, declining annually to 100% at any time on
          or after December 1, 2005,  together with accrued and unpaid  interest
          to the date of redemption.  In addition, at any time prior to December
          1, 2000, COI may, subject to certain requirements, redeem up to 35% of
          the  aggregate  principal  amount of the Notes with the cash  proceeds
          received from one or more equity offerings at a redemption price equal
          to 112% of the principal amount to be redeemed,  together with accrued
          and unpaid interest to the date of redemption,  provided that at least
          65% of the aggregate principal amount


                                      F-17
<PAGE>

Notes to Consolidated Financial Statements, Continued

          of the Notes issued through the date of redemption remains outstanding
          immediately after each such redemption.

          Upon the occurrence of certain  specified events deemed to result in a
          change of control, COI will be required to make an offer to repurchase
          the Notes at a price equal to 101% of the  principal  amount  thereof,
          together with accrued and unpaid interest to the date of repurchase.

          Subject  to  certain   qualifications  and  exceptions  the  indenture
          governing   the  Notes  limits  (i)  the   incurrence   of  additional
          indebtedness  by  COI  and  its  subsidiaries,  (ii)  the  payment  of
          dividends  on,  and  redemption  of,  capital  stock  of COI  and  the
          redemption  of  certain   subordinated   obligations   of  COI,  (iii)
          investments,   (iv)  sales  of  assets  and  subsidiary   stock,   (v)
          transactions  with  affiliates,   (vi)  consolidations,   mergers  and
          transfers  of all or  substantially  all the assets of COI,  and (vii)
          distributions from subsidiaries.

     (b)  The 15% Senior Debentures (the "Senior Debentures")  constitute direct
          and   unconditional   senior   obligations  of  the  Company  and  are
          collateralized  by a pledge by the  Company  of all of the  issued and
          outstanding  common  stock  of COI.  The  payment  obligations  of the
          Company  under the Senior  Debentures  must at all times rank at least
          equal in priority of payment with all existing and future indebtedness
          of the Company. The Senior Debentures are structurally subordinated to
          all indebtedness of the Company's direct and indirect subsidiaries.

          The  Senior  Debentures  bear  interest  at the rate of 15% per annum,
          subject to increases in certain circumstances,  payable semi-annually,
          and mature on December 1, 2009. Prior to December 1, 2002, interest is
          payable in cash or in additional  Senior Debentures paid in kind (PIK)
          on  each  interest  payment  date,  at  the  option  of  the  Company.
          Thereafter, interest is payable only in cash. During 1998, the Company
          issued $3,162,000 of additional Senior Debentures in lieu of interest.

          Subject to certain  requirements,  the  Company may at any time redeem
          any or all of the Senior Debentures at the price of 107.5%.

          Upon the occurrence of certain  specified events deemed to result in a
          change of control, COI will be required to make an offer to repurchase
          the Senior Debentures at a price equal to 101% of the principal amount
          thereof,  together  with accrued and unpaid  interest,  if any, to the
          date of repurchase.

          Subject  to  certain  qualifications  and  exceptions,  the  indenture
          governing  the  Senior   Debentures   limits  (i)  the  incurrence  of
          additional indebtedness by the Company and its subsidiaries,  (ii) the
          payment of  dividends  on, and  redemption  of,  capital  stock of the
          Company and the redemption of certain subordinated  obligations of the
          Company, (iii) investments, (iv) sales of assets and subsidiary stock,
          (v) transactions  with affiliates,  (vi)  consolidations,  mergers and
          transfers  of all or  substantially  all the assets of the Company and
          (vii) distributions from subsidiaries.

     (c)  The  Company  maintains  a  revolving  credit  facility  (the  "Credit
          Facility")  providing  for  borrowings of up to $75 million based on a
          specified  percentage of the Company's  eligible accounts  receivable.
          The Company has pledged  substantially all of its assets as collateral
          for the Credit Facility.

          Borrowings  under the credit facility bear interest,  at the Company's
          option, at a rate based on a


                                      F-18
<PAGE>

Notes to Consolidated Financial Statements, Continued

          margin over either prime rate or LIBOR.

          The  agreements   evidencing  the  Credit  Facility   contain  various
          financial  and other  covenants  and  conditions,  including,  but not
          limited to,  limitations  on paying  dividends,  engaging in affiliate
          transactions,    making   acquisitions   and   incurring    additional
          indebtedness.  The scheduled  maturity date of the Credit  Facility is
          November 26, 2002.

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

          2002                                                          $ 45,417
          Thereafter                                                     129,162
                                                                        --------
                                                                        $174,579
                                                                        --------

10.  Earnings Per Share:

     Basic earnings (loss) per common share is computed by dividing net earnings
     (losses)  available for common  shareholders by the weighted average number
     of shares of common stock outstanding during each period.  Diluted earnings
     (loss) per share is computed  assuming  the  conversion  of stock  options,
     warrants  and  contingent  shares  with a  market  value  greater  than the
     exercise price.

     The  following   represents  a   reconciliation   of  the   numerators  and
     denominators   of  the  basic  and  diluted   earnings   (loss)  per  share
     computations (in thousands):

<TABLE>
<CAPTION>
                                                          1998       1997       1996
<S>                                                    <C>        <C>        <C>
Numerator:
  Net income (loss)                                    $   805    $(3,700)   $ 1,352
  Preferred stock dividends                                (21)      (737)      (325)
  Accretive dividend on Series F preferred stock            --         --       (665)
                                                       -------    -------    -------

     Numerator for basic and diluted earnings (loss)
       per share - income (loss) available to common
       stockholders                                    $   784    $(4,437)   $   362
                                                       -------    -------    -------
</TABLE>


                                      F-19
<PAGE>

Notes to Consolidated Financial Statements, Continued


<TABLE>
<CAPTION>
                                                            1998     1997    1996
<S>                                                        <C>      <C>      <C>
Denominator:
   Denominator for basic earnings (loss) per share -
     weighted-average shares                               15,971   13,493   11,049
                                                           ------   ------   ------
   Effect of dilutive securities:
     Employee stock options                                   280             1,180
     Contingent stock - acquisition                                              78
     Warrants                                                 397               726
                                                           ------   ------   ------
                                                              677       --    1,984
                                                           ------   ------   ------
   Dilutive potential common shares
     Denominator for diluted earnings (loss) per share -
       adjusted weighted-average shares and assumed
       conversions                                         16,648   13,493   13,033
                                                           ------   ------   ------
</TABLE>

     Options and warrants to purchase 2,043,370, 4,826,818 and 583,477 shares of
     common  stock were  outstanding  for the years ended  1998,  1997 and 1996,
     respectively,  but were not included in the computation of diluted earnings
     (loss) per share because their effect would be anti-dilutive.

11.  Stock Options and Warrants:

     Long-Term Stock Investment Plan

          Effective December 16, 1993, the Company's Board of Directors approved
          the Long-Term Stock Investment Plan (the "1993 Plan"),  which provided
          for the granting of options for the purchase of the  Company's  common
          stock to executives,  key employees and  non-employee  consultants and
          agents of the Company and its  subsidiaries.  The 1993 Plan authorizes
          the awarding of Stock Options, Incentive Stock Options and Alternative
          Appreciation  Rights.  The 1993 Plan reserved  1,500,000 shares of the
          Company's  common stock for grant on or before  December 31, 2002. All
          options  have  generally  been  granted at a price equal to or greater
          than the fair market value of the  Company's  common stock at the date
          of grant.  Generally,  options are granted with a vesting period of up
          to 4 years and  expire 10 years  from the date of  grant.  In  October
          1996,  the Stock  Option Plan was amended to allow for the issuance of
          an  additional  2,500,000  options  under  the  plan  for a  total  of
          4,000,000 shares.

     A summary of stock  option  transactions  for the years ended  December 31,
     1998, 1997 and 1996 is as follows:



                                      F-20
<PAGE>


Notes to Consolidated Financial Statements, Continued


<TABLE>
<CAPTION>
                                             December 31, 1998               December 31, 1997               December 31, 1996
                                       -----------------------------   -----------------------------   -----------------------------
                                                         Weighted                        Weighted                        Weighted
                                                          Average                         Average                         Average
                                                         Exercise                        Exercise                        Exercise
                                          Shares          Price           Shares           Price          Shares           Price

<S>                                    <C>           <C>               <C>           <C>               <C>            <C>
Outstanding, beginning of year          2,135,775    $1.125 to 18.50    2,091,525    $1.125 to 22.75    1,541,378     $1.125 to 6.75
    Granted                               580,700      5.50 to 12.90      184,750      5.88 to 10.00    1,120,275      6.75 to 27.00
    Exercised                             (95,500)    1.125 to 6.00      (124,000)        1.125           (4,500)           5.00
    Forfeited/expired                     (55,350)     6.00 to 18.50      (16,500)    7.625 to 9.00     (565,628)          1.125
                                       ----------    ---------------   ----------    ---------------   ----------    ---------------
Options outstanding, end of year        2,565,625    $1.125 to 18.50    2,135,775    $1.125 to 18.50    2,091,525    $1.125 to 22.75
                                       ----------    ---------------   ----------    ---------------   ----------    ---------------

Options exercisable, end of year        1,964,475                       1,896,293                       1,537,500
                                       ----------                      ----------                      ----------
Options available, for grant
    end of year                         1,051,859                       1,577,209                       1,745,559
                                       ----------                      ----------                      ----------

Weighted average fair value of
    options granted during the year    $     9.35                      $     4.13                      $     4.37
                                       ----------                      ----------                      ----------
</TABLE>


     The weighted  average  fair value of each option has been  estimated on the
     date of grant  using  the  Black-Scholes  options  pricing  model  with the
     following  weighted  average  assumptions used for grants in 1998, 1997 and
     1996,  respectively:   no  dividend  yield;  expected  volatility  of  46%;
     risk-free interest rate (ranging from 4.18% - 5.63%); and expected lives of
     approximately  3 years.  Weighted  averages  are used  because  of  varying
     assumed exercise dates.

     The  Company  applies  APB  Opinion  25  and  related   interpretations  in
     accounting for stock options;  accordingly,  no compensation  cost has been
     recognized. Had compensation cost been determined based upon the fair value
     of the stock  options  at grant  date  consistent  with the  method in SFAS
     Statement  123, the  Company's net income and earnings per share would have
     been reduced to the pro forma amounts indicated below:

                                                  1998       1997        1996
                                                     (in thousands, except
                                                      per share amounts)

Net income (loss) attributable to common
  shareholders as reported                      $    784   $ (4,437)   $    362
                                                --------   --------    --------
Pro forma income (loss)                              538     (5,053)     (1,898)
                                                --------   --------    --------
Basic earnings (loss) per share as reported          .05       (.33)        .03
                                                --------   --------    --------
Pro forma basic earnings (loss) per share            .03       (.37)       (.17)
                                                --------   --------    --------
Diluted earnings (loss) per share as reported        .05       (.33)        .03
                                                --------   --------    --------
Pro forma diluted earnings per share                 .03       (.37)       (.17)
                                                --------   --------    --------


                                      F-21
<PAGE>


Notes to Consolidated Financial Statements, Continued


     The following table summarizes  information about stock options outstanding
     at December 31, 1998:

<TABLE>
<CAPTION>
                                   Weighted
                                   Average      Weighted                   Weighted
                                   Remaining    Average                     Average
Range of             Shares       Contractual   Exercise       Shares     Exercisable
Exercise Prices    Outstanding       Life        Price       Exercisable     Price
                                    (Years)
<S>                 <C>                <C>         <C>      <C>               <C>
$1                    156,000            4         1.12       156,000         1.12
$5 - $7             1,731,500            7         6.77     1,604,500         6.77
$8 - $13              590,710            9         9.87       157,768         9.15
$14 - $17              20,815            8        15.18        10,408        15.18
$18 - $19              63,600            8        18.39        34,300        18.39
$22 - $27               3,000            8        27.00         1,500        27.00
                    ---------      -------       ------     ---------      -------
$1 - $27            2,565,625          7.3         7.52     1,964,476         6.77
                    ---------      -------       ------     ---------      -------
</TABLE>

     Warrants

     At December  31, 1998 and 1997,  the  Company had  outstanding  warrants to
     purchase a total of  2,034,662  and  2,127,794  of common  shares at prices
     ranging from $2.00 to $24.00 per share.  These  warrants  expire at various
     dates through 2009.

13.  Litigation:

     In  January  1997,  Austin A.  Iodice,  who served as the  Company's  Chief
     Executive  Officer,  President  and Vice  Chairman  while the  Company  was
     engaged in the jewelry  business,  and Anthony  Giglio,  who  performed the
     functions of the Company's  Chief  Operating  Officer while the Company was
     engaged in the jewelry  business,  filed separate suits against the Company
     in the  Connecticut  Superior  Court alleging that the Company had breached
     the terms of  management  agreements  entered  into with them by failing to
     honor options to purchase  common stock awarded to them in connection  with
     the management of the Jewelry  business under the terms of such  management
     agreements and the Company's  long-term  stock  investment  plan. The suits
     allege  that the  plaintiffs  are  entitled  to an  unspecified  amount  of
     damages.  The Company  believes that the option to purchase  370,419 shares
     granted to Mr. Iodice (through Nitsua, Ltd., a corporation  wholly-owned by
     him) and the option to purchase 185,210 shares granted to Mr. Giglio,  each
     having an exercise price of $1.125 per share, expired in 1996, three months
     after  Messrs.  Giglio and Iodice  ceased to be  employed  by the  Company.
     Messrs.  Giglio and Iodice maintain that they were agents and not employees
     of the Company and that the options continue to be exercisable.  In October
     1998, Messrs. Giglio and Iodice filed motions for partial summary judgment,
     which motions were denied by the court.  The parties continue to be engaged
     in the discovery stage of the case.

     In a case filed in U.S.  District  Court,  Central  District of California,
     against Rhotech and Technical Staff  Associates,  Inc.  ("TSA"),  which was
     acquired by Rhotech in 1992,  TSA's  former  insurance


                                      F-22
<PAGE>


Notes to Consolidated Financial Statements, Continued

     carrier has  alleged  that TSA and  Rhotech  are  obligated  to repay to it
     approximately  $1,600,000 that it was required to pay in connection with an
     injury and death that occurred in November 1992 to a temporary  employee of
     TSA.  Rhotech has been granted summary  judgment with respect to all claims
     made in the action, which was subsequently upheld on appeal.

     The  Company  is  a  party  to  routine  contract  and   employment-related
     litigation matters in the ordinary course of its business.  No such pending
     matters,  individually or in the aggregate,  if adversely  determined,  are
     believed  by  management  to  be  material  to  the  business,  results  of
     operations or financial condition of the Company.

14.  Savings Incentive and Profit Sharing Plan:

     The Company  participates  in a savings  incentive and profit  sharing plan
     (the "Plan").  All eligible employees may make contributions to the Plan on
     a pre-tax  salary  reduction  basis in  accordance  with the  provisions of
     Section 401(k) of the Internal Revenue Code. No material contributions were
     made by the Company in 1998 and 1997.

     Certain  employees  who work for  governmental  agencies are required to be
     covered under a separate  pension plan.  During 1998 and 1997,  the Company
     recorded approximately $1,649,000 and $1,332,000,  respectively, of expense
     related to these benefits.

15.  Lease Commitments:

     The  Company   leases   certain   office   space  and   equipment   in  its
     telecommunications and computer staffing service business. Rent expense for
     all  operating  leases  in 1998,  1997 and  1996  approximated  $2,286,000,
     $969,000 and $200,000, respectively.

     As of December 31, 1998,  future  minimum rent payments due under the terms
     of  noncancelable  operating  leases excluding any amount that will be paid
     for operating costs are:



     Year ending                                                      Total
      December                                                    (in thousands)

     1999                                                            $ 2,621
     2000                                                              2,043
     2001                                                              1,714
     2002                                                              1,311
     2003                                                              1,164
     Thereafter                                                        1,517
                                                                     -------
                                                                     $10,370
                                                                     -------


                                      F-23
<PAGE>

Notes to Consolidated Financial Statements, Continued

16.  Concentration of Credit Risk:

     Financial  instruments which potentially subject the Company to credit risk
     consist primarily of cash and cash equivalents and trade receivables.

     The  Company  maintains  cash in bank  accounts  which at times may  exceed
     federally  insured  limits.  The Company has not  experienced any losses in
     such accounts and believes it is not exposed to any significant credit risk
     on its cash  balances.  The  Company  believes  it  mitigates  such risk by
     investing its cash through major financial institutions.

     At December 31, 1998 and 1997,  the Company had one customer  with accounts
     receivable  balances that  aggregated  5.4% and 7% of the  Company's  total
     accounts  receivable,  respectively.  Percentages  of total  revenues  from
     significant  customers for the years ended December 31, 1998,  December 31,
     1997 and December 31, 1996 are summarized as follows:


                                 December 31,      December 31,     December 31,
                                     1998              1997             1996

     Customer 1                      10.1%             14.5%           19.0%
     Customer 2                          *             11.6%               *

     *Less than 10%.

17.  Industry Segment Information:

     COMFORCE has determined that its reportable  segments can be  distinguished
     principally by the types of services offered to the Company's clients.

     Revenues  and profits in the Staff  Augmentation  segment are  generated by
     providing   temporary   employees  to  client  companies   generally  on  a
     time-and-materials  basis. Staff Augmentation  services are offered through
     several divisions.  Telecom provides  telecommunications workers, primarily
     to   telecommunications   companies;   Information   Technologies  provides
     programmers,  systems consultants,  software engineers and other IT workers
     to a broad  range  of  companies  which  outsource  portions  of  their  IT
     requirements;  and Staffing Services provides primarily  technical workers,
     including  engineers,  scientists and laboratory  workers,  to a variety of
     corporations and laboratories.

     Revenues  and  profits in the  Financial  Services  segment  are  generated
     through outsourcing and consulting services for client companies. Financial
     Services is composed of two distinct activities: the Pro Unlimited division
     provides  confidential   consulting  and  conversion  services  related  to
     clients'  employment of  independent  contractors,  and typically  involves
     providing non-recruited payrolling services to those clients. The Financial
     Services  segment  also  includes   outsourcing   services  to  independent
     consulting  and staffing  companies,  in which  COMFORCE  provides  payroll
     funding services and back office support to those clients.



                                      F-24
<PAGE>

Notes to Consolidated Financial Statements, Continued

     The accounting  policies of the segments are the same as those described in
     the "Summary of Significant  Accounting  Policies."  COMFORCE evaluates the
     performance  of its  segments  and  allocates  resources  to them  based on
     operating contribution, which represents segment revenues less direct costs
     of  operations,   excluding  the   allocation  of  corporate   general  and
     administrative  expenses.  Identifiable  assets of the  operating  segments
     reflect   primarily  net  accounts   receivable   associated  with  segment
     activities; all other identifiable assets are included as Corporate assets.
     The Company does not track  expenditures for long-lived assets on a segment
     basis.

     The  table  below  presents  information  on  the  revenues  and  operating
     contribution  for each segment for the three years ended December 31, 1998,
     and items which  reconcile  segment  operating  contribution  to COMFORCE's
     reported pre-tax income.

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                             -----------------------------------
                                               1998         1997         1996
                                                       (in thousands)
<S>                                          <C>          <C>          <C>
Net sales of services:
   Financial Services                        $  91,026    $   6,497
   Staff Augmentation                          367,996      210,024    $  55,867
                                             ---------    ---------    ---------
                                             $ 459,022    $ 216,521    $  55,867
                                             ---------    ---------    ---------

Operating contribution:
   Financial Services                        $  12,393    $     754
   Staff Augmentation                           32,374       14,319    $   4,255
                                             ---------    ---------    ---------
                                             $  44,767    $  15,073    $   4,255
                                             ---------    ---------    ---------

Consolidated expenses:
   Interest                                  $  21,455    $   4,244    $     161
   Bridge and financing charges                               7,672
   Restructuring charge                           (211)       1,600
   Depreciation and amortization                 5,605        1,883          614
   Corporate general and administrative         14,449        4,725        1,228
                                             ---------    ---------    ---------
                                             $  41,298    $  20,124    $   2,003
                                             ---------    ---------    ---------

   Income (loss) before income taxes         $   3,469    $  (5,051)   $   2,252
                                             ---------    ---------    ---------

Identifiable assets:
   Financial Services                        $  39,967    $  36,113
   Staff Augmentation                           41,714       36,752
   Corporate                                    19,502       20,973
                                             ---------    ---------
                                             $ 101,183    $  93,838
                                             ---------    ---------
</TABLE>


                                      F-25
<PAGE>


COMFORCE Corporation and Subsidiaries
Schedule II Valuation and Qualifying Accounts
for the years ended December 31, 1998, 1997 and 1996 (in thousands)


<TABLE>
<CAPTION>
                                                                   (1)          (2)
                                                  Balance at    Charged to    Charged to                  Balance at
                                                  Beginning     Costs and       Other       Deductions      End of
 DESCRIPTION                                      of Period     Expenses      Accounts      (Describe)      Period
                                                  ----------    ----------    ----------    ----------    ----------
<S>                                               <C>           <C>           <C>           <C>           <C>
For the year ended December 31, 1998
  Deducted from assets to which they apply:
      Allowance for doubtful accounts             $    807      $    (17)     $     --      $     --      $     790
                                                  ---------     ---------     ---------     ---------     ---------
                                                  $    807      $    (17)     $     --      $     --      $     790
                                                  ---------     ---------     ---------     ---------     ---------
For the year ended December 31, 1997
  Deducted from assets to which they apply:
      Allowance for doubtful accounts             $    213      $     79      $     515     $     --      $     807
                                                  ---------     ---------     ---------     ---------     ---------
                                                  $    213      $     79      $     515     $     --      $     807
                                                  ---------     ---------     ---------     ---------     ---------
For the year ended December 31, 1996
  Deducted from assets to which they apply:4
      Allowance for doubtful accounts             $     --      $    213      $     --      $     --      $     213
                                                  --------      --------      ---------     ---------     ---------
                                                  $     --      $    213      $     --      $     --      $     213
                                                  --------      --------      ---------     ---------     ---------
</TABLE>


                                      F-26
<PAGE>





                                  EXHIBIT INDEX


2.1      Agreement and Plan of Merger, dated as of August 13, 1997, by and among
         COMFORCE  Corporation,  COMFORCE Columbus,  Inc. and Uniforce Services,
         Inc.  (included as an exhibit to the Company's  Current  Report on Form
         8-K dated August 20, 1997 and incorporated herein by reference).

2.2      Stockholders  Agreement,  dated as of  August  13,  1997,  by and among
         COMFORCE Corporation, COMFORCE Columbus, Inc., John Fanning and Fanning
         Limited  Partnership,  L.P.  (included  as an exhibit to the  Company's
         Current  Report  on Form 8-K dated  August  20,  1997 and  incorporated
         herein by reference).

2.3      Registration  Rights Agreement dated as of August 13, 1997 by and among
         the Company,  John Fanning and Fanning Asset Partners,  L.P., a Georgia
         limited  partnership  (included as an exhibit to Amendment No. 2 to the
         Registration  Statement  on Form  S-4 of the  Company  filed  with  the
         Commission on October 24, 1997 and incorporated herein by reference).

3.1      Restated  Certificate of  Incorporation  of the Company,  as amended by
         Certificates of Amendment filed with the Delaware Secretary of State on
         June 14,  1987  and  February  12,  1991  (included  as an  exhibit  to
         Amendment  No.  1 to the  Registration  Statement  on  Form  S-1 of the
         Company  filed with the  Commission  on May 10,  1996 and  incorporated
         herein by reference).

3.2      Certificate  of  Ownership  (Merger) of COMFORCE  Corporation  into the
         Company  (included as an exhibit to the Company's Annual Report on Form
         10-K for the year ended  December 31, 1995 and  incorporated  herein by
         reference).

3.3      Bylaws of the Company, as amended and restated effective as of February
         26, 1997 (included as an exhibit to the Company's Annual Report on Form
         10-K for the year ended  December 31, 1996 and  incorporated  herein by
         reference).

3.4      Certificate of Ownership  (Merger) of AZATAR into the Company (included
         as an  exhibit  to the  Company's  Current  Report  on Form  8-K  dated
         November 8, 1996 and incorporated herein by reference).

4.1      Indenture  dated as of  November  26,  1997 with  respect to 12% Senior
         Notes  due 2007  between  COMFORCE  Operating,  Inc.,  as  issuer,  and
         Wilmington  Trust  Company,  as trustee  (included as an exhibit to the
         Company's  Current  Report  on Form  8-K  dated  December  9,  1997 and
         incorporated herein by reference).

4.2      Indenture  dated as of  November  26,  1997 with  respect to 15% Senior
         Secured  PIK  Debentures  due 2009  between  COMFORCE  Corporation,  as
         issuer, and The Bank of New York, as trustee (included as an exhibit to
         the  Company's  Current  Report on Form 8-K dated  December 9, 1997 and
         incorporated herein by reference).

10.1     Loan  and  Security  Agreement  dated as of  November  26,  1997  among
         COMFORCE  Corporation  and  specified  subsidiaries  thereof and Heller
         Financial,  Inc., as lender and agent for other lenders (included as an
         exhibit to the Company's  Current  Report on Form 8-K dated December 9,
         1997 and incorporated herein by reference).

10.2     Purchase  Agreement,  dated as of  November  19,  1997,  by and between
         COMFORCE  Operating,  Inc.  and NatWest  Capital  Markets  Limited,  as
         Initial Purchaser (included as an exhibit to the Registration Statement
         on Form S-4 of the Company  filed with the  Commission  on December 24,
         1997 and incorporated herein by reference).

10.3     Purchase Agreement, dated as of November 19, 1997, by and between dated
         as of November 26, 1997, by and between the Company and NatWest Capital
         Markets Limited,  as Initial  Purchaser  (included as an exhibit to the
         Registration  Statement  on Form  S-4 of the  Company  filed  with  the
         Commission on December 24, 1997 and incorporated herein by reference).


                                       E-1

<PAGE>

10.4     Warrant  Agreement  dated  November 26, 1997 by and between the Company
         and The Bank of New York, as Warrant  Agent  (included as an exhibit to
         the  Registration  Statement on Form S-4 of the Company  filed with the
         Commission on December 24, 1997 and incorporated herein by reference).

10.5     Pledge Agreement dated November 26, 1997 by and between the Company and
         The Bank of New York,  as Collateral  Agent  (included as an exhibit to
         the  Registration  Statement on Form S-4 of the Company  filed with the
         Commission on December 24, 1997 and incorporated herein by reference).

10.6*    Employment  Agreement  dated as of January 1, 1999 between the Company,
         COMFORCE Operating, Inc.  and John C. Fanning.

10.7*    Employment Agreement dated as of January 1, 1999  between the  Company,
         COMFORCE Operating, Inc. and Harry Maccarrone.

21.1*    List of Subsidiaries.

23.1*    Consent of PricewaterhouseCoopers LLP
 
27.1*    Financial Data Schedule of COMFORCE Corporation.

27.2*    Financial Data Schedule of COMFORCE Operating, Inc.

--------------------------
* Filed herewith.


                                       E-2