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 1934For
      the fiscal year ended December 28,
      2008ORo
              Transition
      Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act
      of 1934For
      the transition period from ______________ to _____________





Commission
file number 1-6081





COMFORCE
Corporation
 (Exact
name of registrant as specified in its charter)





Delaware
            36-2262248(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)415
      Crossways Park Drive,
              P.O.
      Box 9006,
              Woodbury,
      New York
            11797(Address
      of principal executive offices)
            (Zip
      Code)Registrant’s
      telephone number, including area code:   (516)
      437-3300Securities
      registered pursuant to Section 12(b) of the Act:Title
      of Each Class
            Name
      of Each Exchange on Which RegisteredCommon
      stock, $0.01 par value
            NYSE
      Amex


Securities
registered pursuant to Section 12(g) of the Act:  None




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




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




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




Indicate
by check mark 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. o




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





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




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter:  $23,343,588.




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.   At March 18, 2009,
there were 17,387,561 shares of common stock, par value $0.01 per share,
outstanding




Documents
Incorporated by Reference: Portions of the Registrant’s proxy statement to be
filed by April 27, 2009 are incorporated herein by reference in Items 10, 11,
12, 13 and 14.





PART
I




ITEM
1.  BUSINESS




Overview




COMFORCE
Corporation (“COMFORCE”) is a leading provider of outsourced staffing management
services that enable Fortune 1000 companies and other large employers to
consolidate, automate and manage staffing, compliance and oversight processes
for their contingent workforces.  We also provide specialty staffing,
consulting and other outsourcing services to Fortune 1000 companies and other
large employers for their healthcare support, technical and engineering,
information technology, telecommunications and other staffing
needs.  In addition, the Company  provides funding and back
office support services to independent consulting and staffing
companies.  COMFORCE Operating, Inc. (“COI”), a wholly-owned
subsidiary of COMFORCE®, was formed for the purpose of facilitating certain of
the Company’s financing transactions in November 1997.  Unless the
context otherwise requires, the term the “Company” refers to COMFORCE, COI and
all of their direct and indirect subsidiaries, all of which are
wholly-owned.




Through a
national network of 28 offices (20 company-owned and 8 licensed), the Company
provides human capital management and outsourcing services, and recruits and
places highly skilled contingent personnel and financing services for a broad
customer base.  The Company’s labor force consists primarily of
computer programmers, systems consultants, analysts, engineers, technicians,
scientists, researchers, healthcare professionals and skilled office support
personnel.






Services




We
provide outsourcing services, including web-enabled solutions, for the effective
procurement, tracking and engagement of contingent or non-employee labor, as
well as a wide range of staffing, consulting and financial
services.  The extensive proprietary database used by the Company
coupled with its national reach enable it to draw from a wealth of resources to
link highly trained healthcare professionals, computer technicians, engineers
and other professionals, as well as clerical personnel, with businesses that
need highly skilled labor. Management has designed the Company’s services to
give its customers maximum flexibility and maximum choice, including by making
its professionals available for engagement 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 costs.




Results
are reported by the Company through three operating segments -- Human Capital
Management Services, Staff Augmentation and Financial Outsourcing Services. The
Human Capital Management Services segment provides consulting services for
managing the contingent workforce through its PrO UnlimitedSM
subsidiary.  The Staff Augmentation segment provides healthcare
support, including RightSourcing®  Services, technical and
engineering, information technology (IT), telecommunications and other staffing
services.  The Financial Outsourcing Services segment provides funding
and back office support services to independent consulting and staffing
companies.  A description of the types of services provided by each
segment follows.  See note 16 to the Company’s consolidated financial
statements for a presentation of segment results.




Human
Capital Management Services Segment




We
provide Human Capital Management Services through our PrO Unlimited
subsidiary.  PrO is a leading provider of outsourced staffing
management services that enable Fortune 1000 companies and other large employers
to consolidate, automate and manage staffing, compliance and oversight processes
for their contingent workforces, including independent contractors, temporary
workers, consultants, freelancers and, in some cases, returning retirees. PrO’s
vendor-neutral business strategy provides comprehensive services for the
selection, procurement, management and tracking of the contingent workforce,
much of which is provided through its web-enabled proprietary software
system.




Rather
than competing with traditional staffing firms, PrO acts as a vendor-neutral
facilitator, enabling clients to draw on a larger pool of vendors to fill job
orders and allowing them to negotiate with multiple staffing suppliers to
quickly find qualified personnel at favorable price levels.  In
contrast to traditional staffing services providers, which




2


recruit
and recommend candidates for contingent positions, PrO’s focus is on helping
clients manage their diverse relationships with multiple staffing vendors
efficiently and cost-effectively by consolidating billing, monitoring vendor
performance, coordinating staffing programs and generating a broad range of
customized management reports and proprietary Total Quality Management
reviews.  In addition, PrO offers payrolling services and compliance
advisory services.




As many
companies continue to face pressure to contain labor costs and manage headcount
numbers, the use of contingent staffing as an alternative to more costly
long-term employment has expanded substantially. At the same time, large
organizations have increasingly come to rely on outsourced human capital
management services as they seek to improve the efficiency of their staffing
procurement and management processes and enhance the quality and productivity of
their contingent workforces.  Management believes that the number of
companies utilizing contingent labor will continue to grow as companies work to
more effectively manage their cost structures, better position themselves to
weather business downturns, and maintain streamlined “just-in-time” labor
pools.




While PrO
focuses on selling its services primarily to Fortune 1000 companies, management
believes PrO’s contingent workforce management services are designed for a
cross-section of large employers.  In most cases PrO Unlimited
provides services on-site at their client’s premises.  The Company
currently provides these services throughout North America as well as in certain
locations in Europe and Asia.  PrO’s typical client is a Fortune 1000
or other large company that relies upon highly skilled contingent labor to meet
important elements of its staffing needs.  PrO currently provides the
following primary service offerings for its clients:




Vendor Management
Solutions:




·
            Contingent Staffing
      Management:We provide an onsite vendor-neutral service
      for procuring contingent employees. This service allows us, on behalf of
      our clients, to negotiate with multiple independent staffing vendors to
      help identify and hire qualified candidates in a short time frame at
      favorable prices.  PrO offers its clients consolidated
      invoicing, electronic time card functions, staffing supplier reviews,
      headcount and hours tracking, security and background screening and total
      quality management of the clients’ supplier base.  In addition,
      clients receive access to numerous standard reports that enhance
      visibility and overall management of their contingent worker
      population.




·
            PrOBid and STOR:Through PrOBid,we provide a bidding environment for various staffing projects, and
      provide project managers with greater information as to project costs,
      headcount and vendor performance.  In addition, through STOR
      (Standardization & Tracking of Other Resources), a new product
      implemented in 2009, we consolidate project data with other contingent
      staffing data for enterprise-wide reporting and controls, including data
      for project-based consultants and outsourced workers based offshore that
      could otherwise not be consolidated with the rest of a client’s
      non-employee workforce.  The combination of PrOBid and STOR is
      intended to provide our clients with competitive sourcing and
      comprehensive visibility and tracking for their entire contingent
      workforces.






1099
Management Service:




·
            Workers Classification
      Solutions:We assist clients in avoiding potential liabilities
      associated with failing to withhold or pay social security taxes, income
      taxes, unemployment taxes and workers compensation insurance premiums, or
      with excluding workers from participation in their pension, profit
      sharing, health insurance and stock option plans.   Our
      programs include: the evaluation of worker status, ongoing education and
      training, documentation and maintenance, audit support services,
      professional payrolling services and the development of a customized
      YourSourceTM system.




·
            Co-Employment and FLSA
      Compliance Consulting:  We offer on-going consulting on
      co-employment issues.    Co-employment is a legal
      doctrine that applies when two businesses exert a degree of control over
      an employee’s work, so that both businesses may be held liable for
      complying with wage, hour and benefits laws.  In addition, we
      assist our clients with the proper classification of workers for overtime
      purposes (FLSA compliance), which is a critical challenge facing many U.S.
      employers.




3


·
            Consultant Consolidation
      Services:We consolidate and manage invoicing for clients that
      engage the services of multiple consulting firms or independent
      contractors.






Professional
Payrolling Services:




·
            Third Party Payrolling for
      Professional Contractors:We provide an array of
      customized third party payroll services for professional level workers as
      part of our contingent workforce strategy for large companies in North
      America and select international locations.  For these
      companies, PrO employs the workers, pays unemployment taxes and workers
      compensation insurance premiums, and provides other benefits including
      health insurance to its eligible
employees.






Staff
Augmentation Segment




RightSourcing
Services




The
Company’s RightSourcing Services program offers cost savings and process
improvement to its clients by managing all aspects of their supplemental
staffing service program.  RightSourcing, as a human capital
management program, facilitates the management of all staffing vendors, order
process, invoice approval, billing and invoice consolidation.  The
RightSourcing Services program allows the Company to place its billable
employees with the customers it services. Value-added services include
comprehensive data capture and analysis related to staff augmentation spend and
usage including compilation of performance metrics for vendors and contractor
staff.  Clients also rely on RightSourcing to provide robust
logistical management processes to insure compliance with regulatory and
governmental requirements.  RightSourcing can monitor certifications,
manage credentials, and administer the myriad number of logistical details
associated with each contractor assignment.  Whether clients are
challenged with a shortage of skilled personnel or find themselves in a
difficult economic environment, RightSourcing is designed to provide a
significant return on investment.  Client management no longer is
required to spend their valuable time reviewing unqualified or under qualified
candidates.  To the contrary, RightSourcing automatically rates
candidates so that our clients choose from the most qualified and cost effective
resources.  Although we continue to focus on the healthcare field in
pursuing outsourcing opportunities related to our RightSourcing Services
program, the process improvements and overall benefits it provides are not
limited to the healthcare field, or any other particular business
sector.  Accordingly, the Company has broadened its sales efforts to
attract customers who will benefit from RightSourcing, in a wide range of
commercial and business endeavors.




Healthcare
Support Services




The
Company has identified the healthcare support services market as a source of
significant growth potential.  The Company’s
RightSourcing  Services program, described above, has also been
primarily focused in the healthcare sector.   In this sector,
both in conjunction with the RightSourcing program and independent of it, the
Company provides clinical skills including nurses and other allied health
professionals.  In addition, the Company also provides specialty
medical office support personnel including credentialed coders for the
processing of medical reimbursement claims and other personnel in support of
insurance claims processing, billing, medical record keeping and utilization
review/case management.




The
Company’s customers in this area include hospitals, medical offices,
multi-physician practices and other healthcare providers, medical billing
companies and insurance companies.




Information
Technology (IT)




In the IT
field, the Company provides highly skilled software developers, technical
support personnel, systems consultants, business analysts, software engineers,
technical writers and architects and project managers for a wide range of
technical assignments, including client server, mainframe, desktop and help desk
services, and Internet/Intranet projects.  The Company hires the
workers it makes available to its customers, in most cases through its
recruitment process, and performs all of the obligations of an employer,
including processing payrolls, withholding taxes and offering
benefits.  Additionally, the Company provides managed services by
bundling teams of technical personnel for clients as a hybrid answer to IT
project outsources.  Using the managed services approach to staffing,
the Company




4


delivers
the human capital as needed using a just-in-time model while the client
maintains overall IT project direction and responsibility.




The
Company’s IT customers operate in diverse industry sectors which include Fortune
500 companies.






Technical,
Engineering and Governmental Services




The
Company provides technical and engineering services through its Technical
Services division to a diverse client base including both governmental and
commercial accounts.  It provides highly skilled technical and
professional personnel specializing in such areas as public health,
environmental safety, avionics and aerospace, national energy laboratories,
petrochemical, civil engineering, electronics, and many other
fields.  The Company’s government services require the deployment of
both U.S. employees and foreign national employees which has included
approximately 35 countries worldwide.  The Technical Services division
also provides its clients with draft/design services, technical writers and
skilled technicians, in addition to quality control and assurance personnel in
manufacturing environments.




The
Company’s technical and engineering customers include major private sector
commercial and military aerospace companies, federal research facilities and
other federal agencies.






Telecom




The
Company’s Telecom division consists of two business units that provide services
to all segments of the telecommunications industry.  This represents a
traditional supplemental staffing unit and a complete turnkey engineering,
material furnishing, equipment installation, and test/turn (EF&I)
unit.  We prepare site surveys, provide engineering expertise and
furnish material for, and install, test and maintain wireless, wire line, OSP,
power and microwave equipment.  Our clients are major equipment
manufacturers, telecom carriers and wireless companies.  COMFORCE
Telecom is TL 9000 and ISO registered.  Some of the Company’s niche
telecom operations were sold in 2004 (see note 18 to our consolidated financial
statements).






Other
Staffing




In
addition to providing contract consulting and other staffing services in the
areas described above, the Company provides a broad range of staffing services
to its customers, including scientific support to research facilities,
accounting support services, general clerical, data entry and billing support,
call center staffing and telemarketing.  In this respect, the Company
is opportunistic in utilizing its many branch offices, sales networks, customer
relationships, computer databases and other resources to obtain engagements that
are outside of its core businesses.  We also fill our customers’
direct hire requirements, either by conducting searches or by providing them
with an option to hire our personnel that are currently on assignment with
them.






Financial
Outsourcing Services Segment




The
Company provides funding and back office support services to independent
consulting and staffing companies. The Company’s back office services include
payroll processing, billing and funding, preparation of various management
reports and analyses, payment of all payroll-related 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 for which the Company earns a fixed fee.  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 the
firms’ clients. The Company monitors the collection of all receivables related
to its financial outsourcing clients; however, the amount of any accounts
receivable that are not collected within a specified period after billing is
charged back by the Company to its financial outsourcing clients.




Customers




The
Company provides staffing, consulting and outsourcing services to a broad range
of customers, including banks and financial services firms, computer software
and hardware manufacturers, the automotive industry,




5


government
agencies, aerospace and avionics firms, utilities, national laboratories,
biotech companies, insurance companies, pharmaceutical companies, healthcare
facilities, and accounting firms. Services to Fortune 1000 companies represent a
majority of the Company’s revenues.




The
Company generally contracts directly with its Staff Augmentation customers or
through vendor management services agreements to provide that the Company will
have the first opportunity to supply the personnel required by that
customer.




The
Company generally invoices its customers weekly, bi-weekly or
monthly.  The Company typically enters into longer term contracts with
its customers.  These contracts customarily allow either party to
terminate upon a 30-day or other short advance written notice.




During
the fiscal year ended December 28, 2008, one customer accounted for 10% or more
of the Company’s revenues.  The largest four customers of the Company,
in the aggregate, accounted for approximately 26.3% of the Company’s 2008
revenues.






Sales
and Marketing




As of
December 28, 2008, the Company serviced its customers through a network of 20
company-owned and 8 licensed offices located in 15 states across the United
States and its corporate headquarters located in Woodbury, New York. In
addition, in many instances, the Company’s non-billable (staff) employees work
on-site at its customers’ facilities, including in Europe and
Asia.  The Company’s sales and marketing strategy is focused on
expanding its business with existing customers through cross-selling and by
establishing relationships with new customers. The Company solicits customers
through personal sales presentations, webcasts and webinars, telephone
marketing, direct mail solicitation, referrals from customers, and advertising
in a variety of local and national media including magazines, newspapers, trade
publications and through the Company’s website (www.comforce.com or
prounlimited.com).




In the
case of PrO Unlimited, our marketing efforts are conducted at the national
level.  We utilize a team-oriented approach to the sales
process.  In addition to our dedicated sales force, who focus on
generating leads, PrO’s key operating officers are closely involved in the sales
process, from lead generation through pricing and implementation.  An
important component of PrO’s marketing program is in establishing its profile as
an expert on issues related to the management of the contingent workforce. PrO
regularly conducts seminars on independent contractor compliance, co-employment
and the Fair Labor Standards Act.  Senior management maintains an
active public relations effort to provide added visibility.   We
seek to raise PrO’s profile among potential customers by encouraging its
executives to write articles in trade and other publications. PrO develops
additional sales leads through an ongoing Internet marketing campaign and
through its website. Our strong relationships with our existing customers also
provide a source of referrals to new customers as well as opportunities to
cross-sell additional services to existing customers.




In the
Staff Augmentation segment, our sales and marketing efforts are generally
conducted on a local or regional basis.  Our Sales and Resource
Managers, Client Service Coordinators and Regional Account Managers are
responsible for maintaining contact with existing clients, maximizing the number
of requisitions that we will have the opportunity to fill, and then working with
the recruiting staff to offer the client the candidates that best fit their
specifications.  New account targets are chosen by assessing: (1) the
need for contract labor within the skill sets provided by the Company; (2) the
appropriateness of the Company’s niche products to the client’s needs; (3) the
potential growth and profitability of the account; and (4) the creditworthiness
of the client. While the Company’s corporate office assists in the selection of
target accounts, the majority of account selection and marketing occurs
locally.  Although the Company continues to market to its Fortune 1000
client base, it also places a significant marketing focus on faster-growing
middle-market companies, governmental agencies and large not-for-profit
institutions such as hospitals and research facilities.






Billable
Employees




In the
Human Capital Management Services segment, PrO provides employer-of-record
payrolling services for contingent workers sourced internally by its
clients.  For these companies, PrO employs the workers,
pays




6


unemployment
taxes and workers compensation insurance premiums, and provides other benefits
including health insurance to eligible employees.  These workers may
include former independent contractors, returning retirees or other
mission-critical workers internally sourced for contingent work.  The
Company’s compliance expertise helps clients avoid potential litigation and
other co-employment issues associated with this workforce.




Within
the Staff Augmentation segment, the Company’s success depends significantly on
its ability to effectively and efficiently match skilled personnel with specific
customer assignments. The Company has established an extensive national resume
database of 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, actively
recruits through the Internet and job boards, and otherwise places
advertisements in local newspapers, trade magazines, and its website. 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 individual’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.




The
Company provides assignments with high-profile customers that make use of
advanced technology and offers its employees the opportunity to obtain
additional experience that can enhance their skills and overall marketability.
To attract and retain qualified personnel, the Company also offers flexible
schedules and, depending on the contract or assignment, paid holidays, vacation,
and certain benefit plan opportunities.




Some
customers seek out the Company’s extensive back office and payrolling
capabilities, or elect for strategic reasons to outsource these functions,
without utilizing the Company’s recruitment capabilities.  Although
these contingent workers are sourced internally by the Company’s clients, they
are nonetheless employees of the Company.






Information
Systems




The
Company uses the Pure Internet Architecture of PeopleSoft® 9.0 for its back
office Human Resource Management System, Financial Reporting and Employee Self
Service application software.  Utilizing the web-enabled PeopleSoft
architecture has enabled the Company to consolidate its back office operations,
improve business processes, enhance customer relationships and improve
efficiency and productivity.




The
Company uses WebPAS® front-office staffing software, a web-based software
solution designed specifically for the staffing and recruiting
industry.  WebPAS combines candidate resumes and client management
into one fully relational and centralized database.  This software has
enabled us to automate and streamline the workflow of the sales, recruiting,
staffing and placement process.  The Company also uses the software of
third party vendors in its RightSourcing  Services
program.  Separately, the Company’s PrO Unlimited subsidiary has
internally developed and maintains its proprietary web-based WAND® system, which
provides an end-to-end solution for the engagement, management and tracking of
the contingent workforce.  See “Human Capital Management Services
Segment” in this Item 1.  The Company recently upgraded its WAND
system to incorporate state of the art technology and to enhance the
functionality of the system enabling PrO to continue as a leader in contingent
workforce management.  In addition to enhancing the application
functionality, the WAND infrastructure was also upgraded using a multi-tier
architecture approach.  This approach separates the application into
presentation, middle, service, reporting, integration and data
layers.  In addition to the flexible design approach, the new
application also takes advantage of a variety of industry leading edge
technologies such as Oracle 10g, Oracle RAC, Informatica, Logi XML, Java,
JavaScript, Spring and Hibernate.




Competition




The
contingent staffing and consulting industry is very competitive and fragmented.
There are relatively limited barriers to entry 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 competition
from larger firms possessing substantially greater financial, technical and
marketing resources than the Company and smaller, regional




7


firms
with a strong presence in their respective local markets.  The Company
competes on the basis of price, level of service, quality of candidates and
reputation, and may be in competition with many other staffing companies seeking
to fill orders for job openings, including minority or women-owned firms that
may receive preferential consideration or set asides.




In the
Human Capital Management Services segment, PrO acts as a vendor-neutral
facilitator, utilizing its proprietary WAND system to coordinate a customer’s
multiple staffing relationships, including billing, monitoring vendor
performance and generating management reports.  PrO faces heightened
competition from other solutions companies purporting to offer similar
advantages utilizing widely-available software programs.  Management
believes that to compete in this segment, the Company must not only regularly
upgrade its WAND system but provide experienced personnel to manage the
process.




In the
Staff Augmentation segment, while the unemployment rates may have increased in
2008, the availability of high-quality resources at a competitive rate remains
one of the principal elements of competition.  The Company believes
its ability to compete also depends in part on a number of competitive factors
outside its control, including the economic climate generally and in particular
industries served by the Company, the ability of its competitors to hire, retain
and motivate skilled personnel and the extent of its competitors’ responsiveness
to customer needs.






Employees




The
Company currently employs approximately 590 full-time staff employees in the
United States and approximately 20 in Europe and
Asia.   Non-billable administrative personnel provide management,
sales and marketing, back office and other services in support of the Company’s
services in all of its segments.




In
addition, since the Company is in the business of providing outsourced staffing
management services, specialty staffing, consulting and other outsourcing
services, it has many billable employees throughout the world, the number of
which fluctuates based on operations.  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 (plus any accrued vacation time, if
applicable).  The Company maintains a proprietary database of
prospective employees with expertise in the disciplines served by the
Company.






Licensed
Offices




The
Company has granted six licensees the right to operate a total of eight licensed
offices.  The most recent license for a new office was granted in
July 1992, and the Company does not 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.  However, the Company is involved in the determination of the
terms under which services are to be offered to its customers, and, with the
exception of a single licensee, the Company is the employer of all of the
workers placed through these arrangements.  As the primary obligor,
the Company is fully responsible for the payment of the
employees.  The Company submits all bills directly to the customers
and they are required to remit their payments for services performed directly to
the Company.  The Company has the ability to refuse to perform
services solicited by the licensee that it does not believe are within the
normal scope of its capabilities, or for other reasons if it does not believe
the services to be performed comport with the Company’s
objectives.  The Company and the licensee office bear joint
responsibility for collecting the receivables from the customers and jointly
bear the risk of loss for uncollected receivables.  The licensee earns
a variable percentage of the ultimate gross profit based upon the type of
services rendered.






Regulations




Contingent
staffing and consulting services firms are generally subject to one or more of
the following types of government regulations: (1) regulation of the
employer/employees; (2) licensing, record keeping and recording
requirements; and (3) substantive limitations on operations.  We
are governed by laws regulating the employer/employee relationship, such as tax
withholding and reporting, social security or retirement, anti-discrimination
and workers compensation in the United States and in the foreign countries in
which we have employment activities, and, in the case of our government
contracts, we are further subject to Federal Acquisition




8


Regulations
(FAR).  In some instances, the Company’s licensees are deemed to be
franchisees, and the arrangements the Company enters into with them are subject
to regulation, both by the Federal Trade Commission and a number of
states.   In addition, in the healthcare support sector, the
Company is subject to extensive federal and state laws and regulations, as well
as the regulations of various public and private healthcare organizations and
authorities.






ITEM
1A.  RISK FACTORS




Any
investment in our securities involves a high degree of risk.  You should
consider carefully the following information about these risks, together with
the other information contained in this report, before you decide to buy our
securities.  The risks and uncertainties described below are not the only
ones we face.  Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our operations.  If
any of the following risks actually occur, our business would likely suffer and
our results could differ materially from those expressed in any forward-looking
statements contained in this report including those contained in the
section captioned “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” under Item 7.






Global
economic conditions have created turmoil in the credit and labor markets that
could have a significant adverse impact on our operations.




Current
United States and worldwide economic conditions have resulted in an
extraordinary tightening of credit markets coupled with higher interest rates,
particularly since the bankruptcy of a major investment banking firm in the
third quarter of 2008.  These economic conditions have been
characterized in news reports as a global economic crisis that has been marked
by dramatic and rapid shifts in market conditions and government responses, and
they have resulted in unprecedented intervention in financial institutions and
markets by governments throughout the world.  Although many economists
originally characterized this crisis as limited to the subprime mortgage
markets, the current adverse conditions have quickly spread to broader
financial, manufacturing and labor markets.




Our
results of operations are affected directly by the level of business activity of
our clients, which in turn is affected by the level of economic activity in the
industries and markets that they serve. Global and national economic
uncertainties, as well as unfavorable local and regional economic conditions in
the United States and abroad, may cause our clients or prospective clients to
defer hiring contingent workers or reduce spending on the Human Capital
Management Services and staffing services that we provide.




The
weakened  economy  has resulted in decreased demand for
contingent staff.  When economic activity slows down, customers often
reduce their use of contingent staff before undertaking layoffs of their regular
employees resulting in decreased demand for
contingent  workers.  Some of our clients have
announced  reduction in
workforce  including  contingent  labor.  In
addition, since employees are also reluctant to risk
changing  employers, there are fewer openings  available and
therefore  reduced activity in permanent placements as
well.  Furthermore,  the  current  recession
(or depression)  may cause  some of the vendors we manage as
part of our Human Capital Management Services and
RightSourcing  Services programs to reduce
or  discontinue  operations,  which
may  adversely  affect our ability to manage these
programs.  In addition, reduced demand for our services could increase
price competition.  If, as a result of adverse economic conditions,
one or more of our clients enter bankruptcy or liquidate their operations, our
revenues and accounts receivable could be adversely affected.  If the
current economic conditions persist or deteriorate, they could also have a
significant adverse impact on our operations by:




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




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




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




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




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







9




Competition
in our industry could reduce our sales or profitability.




We face
significant competition in the markets we serve and there are few barriers to
entry for new competitors.  The competition among staffing services
companies is intense.  We compete for potential clients with providers of
outsourcing services, vendor managed services, systems integrators, computer
systems consultants, temporary personnel agencies, search companies and other
providers of staffing services.




Some of
our competitors may have greater marketing, financial, technology and personnel
resources than we do and could offer increased competition.  Some of
our competitors may offer better pricing or superior features in their products
and services.  In addition, competitors offering different products
and services could merge or form partnerships in order to provide a broader
range of offerings.  Our clients’ own human resources departments may
be competitors to the extent they begin to handle, in house, the operations we
perform.  In addition, the growth in demand for vendor managed
services has put heightened pressure on the margins of staffing services
providers, including us.






Some
of our contracts are awarded on the basis of competitive proposals which can be
periodically re-bid by the client.




There can
be no assurance that existing contracts, including with governmental agencies,
will be renewed on satisfactory terms or that additional or replacement
contracts will be those awarded to us.  In the current economic
climate, we expect our competitors to bid more aggressively, which could result
in our loss of contracts or a reduction in margins in cases in which we seek to
retain contracts by lowering our bids.  We may not be able to retain
clients or market share in the future, and, in light of competitive pressures,
we may not be able to remain profitable.






Potential
increase in costs related to being a public company.




The
Company may incur substantial additional costs related to compliance with the
provisions of the Sarbanes-Oxley Act.  These additional costs relate to
higher documentary and administrative costs and consulting, audit and legal fees
we will incur, as well as for the cost of the audit of our internal control over
financial reporting that will be required as presently proposed by the SEC for
our 2009 fiscal year.






Significant
increases in payroll-related costs could adversely affect our
business.




We are
required to pay a number of federal, state, local and foreign payroll and
related costs, including unemployment taxes, workers compensation benefits,
healthcare benefits, FICA, and Medicare, among others, for our employees and
personnel.  Significant increases in the effective rates of any
payroll-related costs likely would have a material adverse effect upon us.
 In the current economic climate, and given the many state and federal
legislative proposals circulating to stimulate economic activity, extend
unemployment benefits and provide health care reform, costs could also increase
as a result of reforms.




We
generally seek to increase fees charged to our clients to cover increases in
healthcare, unemployment and other direct costs of services, but our ability to
pass these costs to our clients has diminished in recent years. There can be no
assurance that we will be able to increase the fees charged to our clients in a
timely manner and in a sufficient amount if these expenses continue to
rise.  Our inability to increase our fees or adapt to future
regulatory changes could have a material adverse effect on our business,
operating results and financial condition.






The
profitability of our engagements with clients may not meet our
expectations.




Unexpected
costs or delays in client purchases of our services could make our client
engagements less profitable than anticipated.  When making proposals
for engagements, we estimate the costs and potential revenue associated with
those engagements when determining the pricing.  Any increased or
unexpected costs or unanticipated delays in connection with the performance of
these engagements, including delays caused by factors outside our control, could
reduce our profit margin. For example, our clients may not fully cooperate with
us so as to enable us to implement our services in a cost-effective manner, or
the nature of future engagements may require that we incur significant
costs




10


in
preparation of the engagement before we generate revenues under the terms of the
engagement.  Our agreements with our clients, as well as competition
in our target markets, may prevent us from passing these increased costs on to
our clients.






We
face significant employment liability risk.




We employ
and place people in the workplaces of other businesses.  An inherent risk
of such activity includes possible claims of errors and omissions, misuse of
client proprietary information, misappropriation of funds, discrimination and
harassment, employment of illegal aliens, theft of client property, other
criminal activity, torts or other claims.  Our contracts with our clients
often require that we indemnify them against these kinds of
losses.  We have policies and guidelines in place to reduce our
exposure to risks for these potential losses.  However, failure of any
employee or personnel to follow these policies and guidelines may result in:
negative publicity; injunctive relief; the payment by us of monetary damages or
fines; or other material adverse effects upon our business.  Moreover, we
could be held responsible for the actions at a workplace of persons not under
our immediate control.  For example, our contracts with vendor management
services customers frequently require that we confirm that the suppliers of
personnel or like service providers maintain insurance coverage as required by
the customer, and our failure to require these providers to maintain the
required insurance could result in liability to us for any losses our customers
incur as a result of this failure.




To reduce
our exposure, we maintain general liability insurance, property insurance,
automobile insurance, fidelity insurance, errors and omissions insurance,
professional/medical malpractice insurance, fiduciary insurance, cyber insurance
and directors’ and officers’ liability insurance for domestic and foreign
operations as management deems appropriate and prudent.  However, due
to the nature of our assignments, in particular, access to client information
systems and confidential information, and the potential liability with respect
thereto, we may not be able to obtain insurance coverage in amounts adequate to
cover any such liability on acceptable terms.  Our healthcare staffing
services exposes us to potential malpractice claims, a growing area of
litigation.  Furthermore, we are generally self-insured with respect
to workers compensation claims, but maintain excess workers compensation
coverage to limit our exposure for amounts over $4.5 million.  We
maintain reserves for uninsured risks and other potential liabilities, but we
may be unable to accurately estimate our exposure.  In addition, we
face various other employment-related risks not covered by insurance, such as
wage and hour laws and employment tax responsibility.  Any of these
liabilities could have a material adverse effect on our business, operating
results and financial condition.






We
operate in a complex regulatory environment and failure to comply with
applicable laws and regulations could adversely affect our
business.




The
services we provide are subject to a number of laws and regulations, including
those applicable to payroll practices, benefits administration, state
unemployment and workers compensation regulations, employment practices and data
privacy both in the United States and abroad.  In particular, we could
also be impacted by changes in reimbursement regulations by states or the
federal government which make it difficult for our healthcare clients to pay us
or require us to lower our rates.




Because
our services are provided throughout the United States and in foreign countries,
we must perform our services in compliance with the complex legal and regulatory
requirements of multiple jurisdictions.  Some of these laws and
regulations may be difficult to ascertain or interpret and may change over time.
The addition of new services may subject us to additional laws and regulations
from time to time.  Violation of laws and regulations could subject us
to fines and penalties or to legal liability, constitute a breach of our client
contracts and impair our ability to do business in various jurisdictions or
according to our established processes.  If our reputation suffers as
a result of any failure to comply with applicable laws, our ability to maintain
our clients and increase our client base will be weakened.






We
may be subject to lawsuits and claims, which could have a material adverse
effect on our financial condition and results of operations.




Litigation
involving employment practices and workplace conditions is prevalent in the
United States, including class actions against employers for allegedly failing
to comply with the many federal and state laws and regulations designed to
protect the health and safety of workers or to properly classify workers for
purposes of their entitlement to overtime or benefits.  We are
currently subject to claims and lawsuits, and we expect to be subject to
additional claims




11


and
lawsuits in the future.  Litigation is often costly, unpredictable and
time consuming to resolve, and unfavorable results in any lawsuit could
potentially have a material adverse effect on our financial condition and
results of operations.






We
may not be able to recruit and retain qualified personnel.




We depend
upon the abilities of our staff to attract and retain personnel, particularly
technical and professional personnel, who possess the skills and experience
necessary to meet the staffing requirements of our clients. We must continually
evaluate and upgrade our base of available qualified personnel to keep pace with
changing client needs and emerging technologies. We expect continued competition
for individuals with proven technical or professional skills for the foreseeable
future. If qualified personnel are not available to us in sufficient numbers and
upon economic terms acceptable to us, it could have a material adverse affect on
our business.






If
we cannot obtain new clients or increase sales to our existing clients, our
business will not expand and our revenues will not increase.




Our
future success not only depends on our ability to maintain our current
relationships with existing clients, but also to acquire new client
relationships and increase sales to our existing clients.  Our
strategies to reach new clients and to expand the range of services purchased by
our existing clients may not succeed.




In
the event of bankruptcy
of any of our clients, we may be unable to collect our fees, including the
recovery of the amount of any wages we have paid to employees for work
performed for these clients.




Because
the amount of business we do with large clients each month can be substantial,
these clients owe us a significant portion of our total receivables at any one
time.  In the event one of those clients would enter bankruptcy or
becomes unable to pay its obligations, we may be unable to collect from that
client, and our bad debt expense and revenues could be adversely
affected.  In addition, with respect to our professional payrolling
and staffing services, we pay for the services rendered by those personnel prior
to collecting those amounts from our clients.  Therefore, we are at
risk for the entire amount of those wages in addition to our fees.






If
we fail to develop new services, or enhance our existing services, to meet the
needs of our existing and future clients, our sales may decline.




To
satisfy increasingly sophisticated client requirements and achieve market
acceptance, we must enhance and improve our existing services, and we must also
continue to introduce new services.  Any new services that we offer
may not be introduced in a timely manner, and they may not achieve sufficient
market acceptance necessary to generate significant revenue.  If we
are unable to successfully develop new services, or enhance our existing
services, our sales may decline, and our profitability will
decrease.






Our
business will be negatively affected if we are not able to keep pace with rapid
changes in technology or if growth in the use of technology in business is not
as rapid as in the past.




Our
future success depends, in part, on our ability to develop and implement
technology services that anticipate and keep pace with rapid and continuing
changes in technology, industry standards and client preferences.  We
have developed and must continually improve our proprietary web-enabled WAND
system, which provides an end-to-end solution for the engagement, management and
tracking of the contingent workforce. We are reliant on third party vendors in
updating and improving other technologies on which our business is dependent,
particularly in our RightSourcing  Services program.  We may
not be successful in anticipating or responding to the continuing developments
in technology, industry standards and client preferences on a timely and
cost-effective basis, and our ideas, or those of our software vendors, may not
be accepted in the marketplace.  In addition, technologies developed
by our competitors may make our service offerings noncompetitive or
obsolete.  Any one of these circumstances could significantly reduce
our ability to obtain new client engagements or to retain existing client
engagements.




Our
business is also dependent, in part, upon continued growth in the use of
technology in business by our clients and prospective clients and their
employees, and our ability to deliver the efficiencies and convenience
afforded




12


by
technology.  If growth in the use of technology does not continue,
demand for our services may decrease.  Use of new technology for
commerce generally requires understanding and acceptance of a new way of
conducting business and exchanging information.  Companies that have
already invested substantial resources in traditional means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new approach that would not utilize their existing personnel and
infrastructure.




The
effort to gain technological expertise and develop new technologies in our
business requires us to incur significant expenses.  If we cannot
offer new technologies as quickly as our competitors, we could lose market
share.  We also could lose market share if our competitors develop
more cost-effective technologies than we offer or develop.






If
our clients or third parties are not satisfied with our services, we may face
damage to our professional reputation or legal liability.




We depend
to a large extent on our relationships with our clients and our reputation for
high-quality services.  As a result, if a client is not satisfied with
our services, it may be more damaging in our business than in other
businesses.  Our services may contain defects or errors, which could
hurt our reputation, result in significant costs to us and impair our ability to
sell our services in the future.  The costs incurred in correcting any
defects or errors may be substantial, and would reduce our
profitability.  Moreover, if we fail to meet our contractual
obligations, we could be subject to legal liability or loss of client
relationships.  If the reputation of our services declines, our
ability to maintain our clients and increase our client base will be
weakened.




Clients
are increasingly filing legal claims against professional service providers,
including those in the human resources outsourcing and consulting
industries.  Clients and third parties who are dissatisfied with our
consulting services or who claim to suffer damages caused by our services may
bring lawsuits against us.




Defending
lawsuits arising out of any of our services could require substantial amounts of
management attention, which could adversely affect our financial
performance.  In addition to client liability, governmental
authorities may impose penalties with respect to our errors or omissions and may
preclude us from doing business in some jurisdictions.  In addition to
the risks of liability exposure and increased costs of defense and insurance
premiums, claims arising from our professional services may produce publicity
that could hurt our reputation and business.






Our
financial results could be harmed if we are required to expend significant
financial and other resources to protect our intellectual property from
infringement by third parties.




Our
proprietary technology is an important part of our success, particularly in the
Human Capital Management Services segment.  We rely on a combination
of copyrights, trademarks and trade secrets, confidentiality provisions and
contractual and licensing provisions to establish and protect our proprietary
rights.  We have registered trademarks for some of our products and
services and will continue to evaluate the registration of additional trademarks
as appropriate.  We also enter into confidentiality and proprietary
rights agreements with our employees, consultants and other third parties and
control access to software, documentation, client data and other proprietary
information.




Despite
these efforts, it may be possible for unauthorized third parties to copy
portions of our products or to reverse engineer or otherwise obtain and use our
proprietary information.  We do not have any patents or patent pending
with respect to any of our products or services, including our WAND
technology.  Existing copyright laws afford only limited
protection.  In addition, others may design around our technology or
develop substantially equivalent or superior proprietary technology, or
equivalent products may be marketed in competition with our products, which
would substantially reduce the value of our proprietary
rights.  Furthermore, confidentiality agreements between us and our
employees or any license agreements with our clients may not provide meaningful
protection of our proprietary information in the event of any unauthorized use
or disclosure of it.  Accordingly, the steps we have taken to protect
our intellectual property rights may not be adequate and we may not be able to
protect our proprietary software in the United States or abroad against
unauthorized third party copying or use, which could significantly harm our
business.  If we fail to successfully enforce our intellectual
property rights, our competitive position could suffer, which could reduce our
revenues.




13




Any
significant failure or disruption in our computing, software and communications
infrastructure could harm our reputation, result in a loss of clients, and
disrupt our business.




Our
computing, software and communications infrastructure is a critical part of our
business operations.  Many of our clients, particularly those in the
Human Capital Management Services segment, typically access our services through
a standard web browser.   Our clients depend on us for fast and
reliable access to our applications.  We rely on the expertise of our
software development teams for the continued performance of our
applications.  We may experience serious disruptions in our computing,
software and communications infrastructure.  Factors that may cause
these types of disruptions include:




·
            human
      error;




·
            physical
      or electronic security breaches;




·
            telecommunications
      outages from third-party providers;




·
            computer
      viruses;




·
            acts
      of terrorism or sabotage;




·
            fire,
      earthquake, flood and other natural disasters;
  and




·
            power
      loss.




Although
we back up data stored on our systems at least daily, our infrastructure does
not currently include mirroring of data storage and production capacity in more
than one geographically distinct location.  As a result, in the event
of a physical disaster, or a significant failure of our computing
infrastructure, client data from recent transactions may be permanently lost. If
our clients experience service interruptions or the loss or theft of client
data, we may be subject to financial penalties, financial liability or client
losses.  Our insurance policies may not adequately compensate us for
any losses that may occur due to any failures or interruptions in our
systems.






Security
breaches that result in the release of proprietary data of clients could impair
our reputation and our revenue.




Our
business involves the use, storage and transmission of clients’ proprietary
information.  Any security breaches could expose us to a risk of loss
of this information, litigation and possible liability. If our security measures
are breached as a result of third-party action, employee error, malfeasance or
otherwise, and as a result, someone obtains unauthorized access to client data,
our reputation will be damaged, our business may suffer and we could incur
significant liability.  Techniques used to obtain unauthorized access
or to sabotage systems change frequently and generally are not recognized until
launched against a target. As a result, we may be unable to anticipate these
techniques or to implement adequate preventative measures. If an actual or
perceived breach of our security occurs, the market perception of our security
measures could be harmed and we could lose sales and clients.






Restrictions
and covenants under our bank credit facility and other financing agreements
limit our ability to take actions and impose consequences in the event of a
compliance failure.




Our
$110.0 million Revolving Credit and Security Agreement (the “PNC Credit
Facility”) with PNC Bank, National Association, as a lender and administrative
agent (“PNC”), imposes various restrictions on our activities without the
consent of the lenders, including:




·
            prohibiting
      us from incurring indebtedness or granting security interests in our
      assets except in accordance with the covenants and conditions in the PNC
      Credit Facility;




·
            prohibiting
      us from selling or disposing of our assets except in accordance with the
      covenants and conditions in the PNC Credit
  Facility;




14


·
            prohibiting
      fundamental changes such as consolidations, mergers and sales and transfer
      of assets, and limiting our ability or any of our direct or indirect
      subsidiaries to grant liens upon our property or
    assets;




·
            requiring
      us to meet certain net worth, debt service coverage and other financial
      requirements; and




·
            entering
      into transactions with affiliates other than in accordance with the
      indenture.




These
covenants and conditions affect our operating flexibility by, among other
things, substantially restricting our ability to incur expenses and
indebtedness, or make acquisitions, that could be used to grow our
business.  Our ability to issue shares of our capital stock is also
limited.




The PNC
Credit Facility includes events of default and provides that, upon the
occurrence of certain events of default, payment of all amounts payable under
the PNC Credit Facility, including the principal amount of, and accrued interest
on, the PNC Credit Facility may be accelerated.  See “--Liquidity and
Capital Resources” in Item 7.






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




The PNC
Credit Facility, under which we had $78.6 million in borrowings outstanding at
March 8, 2009, matures on July 24, 2010.  The Company has had
preliminary discussions with PNC to extend the PNC Credit Facility beyond its
current maturity date.  No assurance can be given that the Company
will resolve such discussions on a satisfactory basis.  If we are
unable to satisfactorily resolve such discussions with PNC or otherwise find a
source of capital to repay or refinance this obligation, we will be unable to
repay the PNC Credit Facility at maturity, which would have a material adverse
effect on our financial condition.  The credit markets have tightened
significantly since the second quarter of 2008.  We cannot predict
whether capital will be available to us with interest rates and on terms
acceptable to us, if at all, when the PNC Credit Facility matures.






Shares
eligible for future sale may cause the market price for our common stock to
decline even if our business is doing well.




Sales of
substantial amounts of our common stock in the public market, or the perception
that these sales may occur, could cause the market price of our common stock to
decline.  A substantial number of shares of our common stock are held
by persons other than “affiliates.”  In addition, as of December 28,
2008, approximately 16.0 million shares of common stock or equivalent non-voting
preferred shares are issuable to a trust in which John C. Fanning, our chairman
and chief executive officer, holds the principal economic
interest.  Subject to some limitations on the holder’s rights,
the  8.0% Subordinated Convertible Note due December 2, 2009 (the
“Convertible Note”) (which continues to accrue pay-in-kind interest), the
Company’s Series 2003A Preferred Stock, the Series 2003B Preferred Stock and the
Series 2004A Preferred Stock (which continue to cumulate dividends) are
convertible into these common or non-voting shares at conversion prices ranging
from $0.54 to $1.70, which could have a potentially depressing effect on the
market price of the Company’s common stock.






We
could be required to write-off goodwill in future periods if our future
operating results suffer.




In
accordance with generally accepted accounting principles, we are required to
review our goodwill for impairment at least annually.  Our goodwill
was $32.1 million at December 28, 2008.  Significant assumptions used
in this analysis include expected future revenue growth rates, operating
margins, working capital levels and tax rates, which are based on management’s
expectation of future results.  An unfavorable evaluation could cause
us to write-off goodwill in future periods.  The current economic
climate heightens the risk of future write-offs.  We had write-offs of
goodwill of $96.1 million, excluding $5.9 million relating to discontinued
operations, in 2002 and 2003.   Any future write-offs could have
a material adverse impact on our financial condition and results of
operations.




15




Adverse
results of tax audits could result in significant cash expenditures or exposure
to unforeseen liabilities.




We are
subject to periodic federal, state, local and foreign income tax audits for
various tax years.  Although we attempt to comply with all taxing authority
regulations, adverse findings or assessments made by the taxing authorities as
the result of an audit could have a material adverse affect on us.






Significant
foreign currency fluctuations could affect our operating results.




We
conduct our operations in a number of foreign countries and the results of our
local operations are reported in the applicable foreign currencies and then
translated into U.S. dollars at the applicable foreign currency exchange rates
for inclusion in our consolidated financial statements.  We are
subject to exposure for devaluations and fluctuations in currency exchange
rates, which, if we are successful in further growing and developing our foreign
operations or these devaluations or fluctuations are significant, could
potentially affect our investment in these foreign countries as well as on our
cash flow and results of operations.  These risks are heightened in
the current volatile economic environment, including the recent volatility in
the value of the U.S. dollar and other currencies worldwide and instability in
the credit markets.




Severe
weather, natural disasters, acts of war or terrorism and other external events
could significantly impact our business




Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on our ability to conduct
business.  For example, during 2005, hurricanes Katrina and Rita
caused extensive flooding and destruction along the coastal areas of the Gulf of
Mexico. While we were not significantly and adversely affected by the impact of
these specific disasters, other severe weather or natural disasters, acts of war
or terrorism or other adverse external events may occur in the future that could
have an effect on our business.






We
depend on key personnel, and the loss of the services of one or more of our
senior management or a significant portion of our local management personnel
could weaken our management team and our ability to deliver quality services and
could adversely affect our business.




Our
operations historically have been, and continue to be, dependent on the efforts
of our executive officers and senior management, including John C. Fanning, our
chairman and chief executive officer. In addition, we are dependent on the
performance and productivity of our respective regional operations executives,
local managing directors and field personnel. The loss of one or more of these
employees could have an adverse effect on our operations, including our ability
to maintain existing client relationships and attract new clients in the context
of changing economic or competitive conditions.  Our ability to
attract and retain business is significantly affected by local relationships and
the quality of service rendered by branch managerial personnel. If we are unable
to attract and retain key employees to perform these services, our business,
financial condition and results of operations could be materially adversely
affected.






The
Company’s stock price may be volatile and investors may not be able to resell
shares they purchase at their purchase price.




The
stock  market  has  experienced  and may
in the  future  experience  extreme
volatility  that
has  often  been  unrelated  to
the  operating  performance  of
particular  companies.  Broad market fluctuations may
adversely affect the market price of the Company's common stock.  The
Company's stock price has in the past, and could in the future, fluctuate as a
result of a variety of factors,  including factors beyond
the  Company's  control, including:




·
            the
      relatively low float of the Company's common stock caused, among other
      reasons, by the holdings of the
      Company's  principal  shareholders;




·
            adverse
      general economic conditions, such as those currently being experienced,
      including withdrawals of investments in the stock markets generally and a
      tightening of credit available to potential acquirers of business, that
      result in a lower average prices being paid for public company shares and
      lower valuations being placed on
businesses;




·
            other
      domestic
      and  international  macroeconomic  factors
      unrelated to the Company's
performance;




·
            the  Company's  failure  to
      meet the  expectations  of the  investment
      community;




16


·
            industry
      trends and the business success of the Company's
  customers;




·
            loss
      of key customers;




·
            fluctuations
      in the Company's results of operations;
and




·
            litigation.








ITEM
1B.  UNRESOLVED STAFF COMMENTS




None.






ITEM
2.  PROPERTIES




The
Company leases all of its office space.  Excluding the Company’s
headquarters, these leases are for office space ranging in size from small
shared 1,000-square foot executive suites to facilities exceeding 10,000 square
feet in size.  The remaining terms under the Company’s leases range
from less than six months to four years.  The Company’s headquarters
in Woodbury, New York occupies approximately 38,000 square feet of space in two
facilities under separate leases that expire in 2010. In some instances our
full-time staff employees work at the client’s site for which we do not incur
any rental costs.  The Company owns no real estate.




The
Company believes that its facilities are adequate for its present and reasonably
anticipated future business requirements.  The Company does not
anticipate difficulty locating additional facilities, if needed.






ITEM
3.  LEGAL PROCEEDINGS




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




The
Illinois EPA took control of the site and began to construct a cap on the
site.  In 2008, the Company received a demand from the U.S. EPA for
more than $2.0 million in past costs and a demand from the Illinois
Environmental Protection Agency (“IEPA”) for over $14.0 million in IEPA's past
costs for its partial work on the cap.  The agencies are also
demanding that the parties complete construction of the cap and investigate
whether a groundwater remedy is required.  Cost estimates for that
work have not yet been made and a final allocation of costs among the
potentially responsible parties have not yet been made and a group has not yet,
but will likely form to address these demands.  The Company's share is
expected to be less than 1% of the total liability for these costs assuming that
the level of participation remains at least as high as it has been in the
past.  The group believes that it has some defenses and challenges to
the government's past cost claims and will likely try to negotiate a reduction
in the amount of the claims.  Furthermore, the Company has made
inquiries of the insurance carriers for Apeco to determine if it has coverage
under old insurance policies.  No assurance can be given that the
costs to the Company to resolve this claim will be within management’s
estimates.




In July
2005, the Company’s subsidiary, COMFORCE Technical Services, Inc. (“CTS”) was
served with an amended complaint in the suit titled Reyes V. East Bay Municipal Utility
District, et al, filed in the Superior Court of California, Alameda
County, in connection with a gas pipeline explosion in November 2004 that killed
five workers and injured four others.  As part of a construction
project to lay a water transmission line, a backhoe operator employed by
a




17


construction
contractor unaffiliated with CTS allegedly struck and breached a gas pipeline
and an explosion occurred when leaking gas ignited.  The complaint
names various persons involved in the construction project as defendants,
including CTS.  The complaint alleges, among other things, that CTS
was negligent in failing to properly mark the location of the
pipeline.  The complaint did not specify specific monetary
damages.




CTS was
subsequently named as a defendant in 15 other lawsuits concerning this accident
in the Superior Court of California which have been consolidated with the Reyes case in a single
coordinated action styled as the Gas Pipeline Explosion Cases
in the Superior Court of California, Contra Costa County.  Two
co-defendants brought cross-claims against CTS.  In addition, a
company that provided insurance coverage to a private home and property damaged
by the explosion brought a subrogation action against CTS.  CTS denies
any culpability for this accident.  Following an investigation of the
accident, Cal-OSHA issued citations to four unrelated contractors on the
project, but declined to issue any citations against CTS.  Although
Cal-OSHA did not issue a citation against CTS, it will not be determinative in
the pending civil cases.




CTS
requested that its insurance carriers defend it in these actions, and the
carrier under the primary policy appointed counsel and has defended CTS in these
actions.  As of June 2007, CTS settled with 17 of the 19 plaintiffs,
in each case within the limits of its primary policy, except as described
below.  With the settlements, the limits under the primary policy have
been reached.  The umbrella insurance carrier for CTS had previously
denied the claims of CTS for coverage, claiming that the matter was within
the policy exclusions.  This carrier also initiated a declaratory
action in Contra Costa County, California in which it asked the court to
determine whether the claims against CTS were within the policy
exclusions.  In March 2007, CTS and this carrier reached a tentative
settlement under which the carrier agreed to dismiss CTS from the declaratory
action and defend and insure CTS in the remaining cases when the primary
coverage limits have been reached, subject to an agreed upon contribution by CTS
and the carrier's reservation of rights to seek recovery against CTS for the
claims of Mountain Cascade, Inc., a co-defendant not related to CTS
that served as a contractor for East Bay Municipal Utility
District.  Management of CTS (and the Company) believes that any
losses in respect of Mountain Cascade should be covered under the umbrella
policy.  However, the carrier has declined to release
its reservation of rights as to this unresolved Mountain Cascade claim, and
the amount that CTS will be required to contribute to any settlement of or
judgment on the remaining plaintiffs’ cases is not determinable.  As
of February 2009 one of the two remaining matters was settled as the unresolved
portion of a settlement was finalized as an appeal that was being taken from a
prior ruling on the settlement was not pursued timely and dismissed by the court
at the same time we were advised the party was discontinuing its pursuit and
would accept its allocated portion of a prior settlement.  This leaves
only the claim by Mountain Cascade, Inc. unresolved.  Accordingly,
management of CTS (and the Company) cannot estimate the amount of losses that
CTS may ultimately incur in connection with these cases, if any, other than to
estimate that any losses will be less than $1.5 million. No assurance can be
given that the costs to CTS to resolve all remaining claims will be within
management’s estimates.




The
Company is also a party to contract and employment-related litigation matters,
and audits of state and local tax returns arising in the ordinary course of its
business.  In the opinion of Management, the aggregate liability, if
any, with respect to any such legal proceedings that arise in the ordinary
course of business will not materially adversely affect our financial position,
results of operations, or cash flows.  The Company expenses legal
costs associated with contingencies when incurred.  The Company
maintains general liability insurance, property insurance, automobile insurance,
fidelity insurance, errors and omissions insurance, professional/medical
malpractice insurance, fiduciary insurance, cyber insurance and directors’ and
officers’ liability insurance for domestic and foreign operations as management
deems appropriate and prudent. The Company is generally self-insured with
respect to workers compensation, but maintains excess workers compensation
coverage to limit its maximum exposure to such claims.






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




None
during the fourth quarter of fiscal 2008.




18


PART
II




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




Market
Price and Dividends




The
Company’s Common Stock is traded on the NYSE Amex (formerly, NYSE Alternext U.S.
and, prior thereto, the American Stock Exchange) (NYSE Amex:CFS). The high and
low sales prices for the Common Stock, as reported in the business news media,
for the periods indicated, were as follows:




Fiscal
      Year
                                                Quarter
                                                High
      ($)
                                                Low
      ($)2008
                                                First
      Quarter
                                                2.65
                                                1.20Second
      Quarter
                                                2.19
                                                1.60Third
      Quarter
                                                2.05
                                                0.70Fourth
      Quarter
                                                1.65
                                                0.522007
                                                First
      Quarter
                                                2.60
                                                2.11Second
      Quarter
                                                2.98
                                                2.22Third
      Quarter
                                                2.69
                                                1.90Fourth
      Quarter
                                                2.32
                                                1.25







The
closing price of the Common Stock of the Company on March  18, 2009
was $1.45.   As of such date, there were approximately 3,800
stockholders of record and 11,971,077 shares of Common Stock held by
non-affiliates.  The aggregate market value of the voting stock held
by non-affiliates of the registrant on March  18 , 2009 was
$17,358,062 .




No
dividends were declared or paid on the Common Stock during 2008. The terms of
the Company’s debt obligations effectively prohibit its payment of
dividends.  In addition, until undeclared, cumulated dividends on its
Series 2003A, 2003B and 2004A Preferred Stock (approximately $5.0 million in the
aggregate at December 28, 2008) are fully paid, no dividends are permitted to be
paid on Common Stock.  Accordingly, the Company does not anticipate
that it will pay cash dividends on its Common Stock for the foreseeable
future.




Equity
Compensation Plan Information




The
following table describes options and warrants issued as part of the Company’s
equity compensation plans at the end of fiscal 2008.




Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in first
      column).Equity
      compensation plans approved by security holders (1)
            
            2,355,000
            
            $           2.57
            
            990,000Equity
      compensation plans not approved by security holders (2)
            
            169,000
            
            7.55
            
            -Total
            
            2,524,000
            
            $           2.90
            
            990,000





19





(1)
            At
      December 28, 2008, the Company had two equity compensation plans that had
      been approved by stockholders, the Long-Term Stock Investment Plan (the
      “1993 Plan”) and the 2002 Stock Option Plan (the “2002
      Plan”).  Securities shown as being issuable pursuant to
      outstanding options, warrants and rights in the first column represent
      option grants made under the 1993 Plan and the 2002 Plan.  No
      options or other rights have been issuable under the 1993 Plan since
      December 31, 2002.  Accordingly, the number of securities shown
      in the third column as being available for future issuance includes only
      the shares of common stock remaining available for issuance under the 2002
      Plan upon exercise of options or other rights that may be granted
      thereunder in future periods.  At the Company’s 2006 annual
      meeting of stockholders, the stockholders approved the increase in the
      number of shares issuable under the 2002 Plan from 1,000,000 to
      2,000,000.(2)
            Warrants
      issued as additional compensation to debtholders for extending credit to
      the Company.






Convertible
Instruments




Fanning
CPD Assets, LP (the “Fanning Partnership”), a limited partnership in which John
C. Fanning, the Company’s chairman and chief executive officer, holds the
principal economic interest is the holder of $1.8 million principal amount of
the Company’s 8% Convertible Subordinated Note (the “Convertible Note”). Under
the terms of the Convertible Note, the Company is permitted to pay interest in
cash or kind, at its election.  As permitted, on the two semi-annual
interest payment dates of June 1, 2008 and December 1, 2008, the Company elected
to pay the interest in-kind.  Accordingly, on June 1, 2008 and
December 1, 2008, $66,000 and $68,000, respectively, were added to the principal
of the Convertible Note.  As of the date of this report, the Company
had sufficient excess availability under the PNC Credit Facility to fully repay
the Convertible Note.




The
Convertible Note is convertible at the election of the Fanning Partnership into
common stock (or, in certain circumstances, into a participating preferred stock
which in turn will be convertible into common stock at the same effective rate)
at a conversion price of $1.70 per share.   The Company’s
payments of interest in-kind were made in reliance upon the exemptions from
registration afforded by section 4(2) of the Securities Act of 1933 and the
regulations thereunder.  Unless the Company registers the shares
issuable upon conversion of the Convertible Note for resale under the Securities
Act of 1933, any resale of those shares by the Fanning Partnership, as an
affiliate of the Company, will be conducted in compliance with the volume
limitations and other conditions of Rule 144 of the Securities Act of
1933.




In
addition, for fiscal 2008, dividends have cumulated in the amount of $461,000 on
the Company’s Series 2003A Preferred Stock, $38,000 on the Series 2003B
Preferred Stock and $506,000 on the Series 2004A Preferred
Stock.  Although these cumulated dividends have not been declared by
the Company’s board of directors and are not payable, the Fanning Partnership
can elect to convert all or any portion of these shares of Series Preferred
Stock, including the cumulated dividends, into common stock (or, in certain
circumstances, into a participating preferred stock which in turn will be
convertible into common stock at the same effective rate) at a conversion price
of $1.05 per share for the Series 2003A Preferred Stock, $0.54 per share for the
Series 2003B Preferred Stock and $1.70 per share for the Series 2004A Preferred
Stock.  See notes 8, 10 and 17 to our consolidated financial
statements.




20


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 fiscal years in the period ended December 28, 2008.
The Company derived the statement of income and balance sheet data as of and for
each of the five fiscal years in the period ended December 28, 2008 from its
audited historical consolidated financial statements (in thousands, except per
share data).




2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005
                                            
                                            
                                            2004Statement
      of Income Data:Net
      sales of services
                                            
                                            $
                                            606,636
                                            
                                            
                                            $
                                            586,685
                                            
                                            
                                            $
                                            567,821
                                            
                                            
                                            $
                                            539,841
                                            
                                            
                                            $
                                            480,887Costs
      and expenses:Cost
      of services
                                            
                                            
                                            510,188
                                            
                                            
                                            
                                            494,104
                                            
                                            
                                            
                                            478,927
                                            
                                            
                                            
                                            460,581
                                            
                                            
                                            
                                            408,850Selling,
      general and administrative expenses
                                            
                                            
                                            77,129
                                            
                                            
                                            
                                            74,012
                                            
                                            
                                            
                                            68,821
                                            
                                            
                                            
                                            59,919
                                            
                                            
                                            
                                            53,755Depreciation
      and amortization
                                            
                                            
                                            3,156
                                            
                                            
                                            
                                            2,803
                                            
                                            
                                            
                                            3,095
                                            
                                            
                                            
                                            3,700
                                            
                                            
                                            
                                            4,219Total
      costs and expenses
                                            
                                            
                                            590,473
                                            
                                            
                                            
                                            570,919
                                            
                                            
                                            
                                            550,843
                                            
                                            
                                            
                                            524,200
                                            
                                            
                                            
                                            466,824Operating
      income
                                            
                                            
                                            16,163
                                            
                                            
                                            
                                            15,766
                                            
                                            
                                            
                                            16,978
                                            
                                            
                                            
                                            15,641
                                            
                                            
                                            
                                            14,063Other
      (expense) income:Interest
      expense
                                            
                                            
                                            (4,400
                                            )
                                            
                                            
                                            (7,669
                                            )
                                            
                                            
                                            (9,369
                                            )
                                            
                                            
                                            (10,744
                                            )
                                            
                                            
                                            (12,338
                                            )(Loss)
      gain on debt extinguishment (1)
                                            
                                            
                                            (278
                                            )
                                            
                                            
                                            (443
                                            )
                                            
                                            
                                            (169
                                            )
                                            
                                            
                                            (336
                                            )
                                            
                                            
                                            1,999Other
      (expense) income, net
                                            
                                            
                                            (1,064
                                            )
                                            
                                            
                                            644
                                            
                                            
                                            
                                            11
                                            
                                            
                                            
                                            186
                                            
                                            
                                            
                                            110(5,742
                                            )
                                            
                                            
                                            (7,468
                                            )
                                            
                                            
                                            (9,527
                                            )
                                            
                                            
                                            (10,894
                                            )
                                            
                                            
                                            (10,229
                                            )Income
      from continuing operations before income taxes
                                            
                                            
                                            10,421
                                            
                                            
                                            
                                            8,298
                                            
                                            
                                            
                                            7,451
                                            
                                            
                                            
                                            4,747
                                            
                                            
                                            
                                            3,834Provision
      (benefit) for income taxes
                                            
                                            
                                            4,535
                                            
                                            
                                            
                                            3,309
                                            
                                            
                                            
                                            3,373
                                            
                                            
                                            
                                            (1,455
                                            )
                                            
                                            
                                            2,058Income
      from continuing operations
                                            
                                            
                                            5,886
                                            
                                            
                                            
                                            4,989
                                            
                                            
                                            
                                            4,078
                                            
                                            
                                            
                                            6,202
                                            
                                            
                                            
                                            1,776Income
      (loss) from discontinued operations, net of income taxes
    (2)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            70
                                            
                                            
                                            
                                            (20
                                            )Net
      income
                                            
                                            $
                                            5,886
                                            
                                            
                                            $
                                            5,989
                                            
                                            
                                            $
                                            4,078
                                            
                                            
                                            $
                                            6,272
                                            
                                            
                                            $
                                            1,756Dividends
      on preferred stock
                                            
                                            
                                            1,005
                                            
                                            
                                            
                                            1,005
                                            
                                            
                                            
                                            1,005
                                            
                                            
                                            
                                            1,005
                                            
                                            
                                            
                                            530Net
      income available to common stockholders
                                            
                                            $
                                            4,881
                                            
                                            
                                            $
                                            4,984
                                            
                                            
                                            $
                                            3,073
                                            
                                            
                                            $
                                            5,267
                                            
                                            
                                            $
                                            1,226Diluted
      income per share:Income
      from continuing operations
                                            
                                            $
                                            0.18
                                            
                                            
                                            $
                                            0.16
                                            
                                            
                                            $
                                            0.13
                                            
                                            
                                            $
                                            0.21
                                            
                                            
                                            $
                                            0.07Income
      from discontinued operations
                                            
                                            
                                            -
                                            
                                            
                                            
                                            0.03
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Net
      income available to common stockholders
                                            
                                            $
                                            0.18
                                            
                                            
                                            $
                                            0.19
                                            
                                            
                                            $
                                            0.13
                                            
                                            
                                            $
                                            0.21
                                            
                                            
                                            $
                                            0.07Balance
      Sheet data:Working
      capital
                                            
                                            $
                                            23,314
                                            
                                            
                                            $
                                            34,513
                                            
                                            
                                            $
                                            32,345
                                            
                                            
                                            $
                                            43,163
                                            
                                            
                                            $
                                            46,018Trade
      receivables, net
                                            
                                            
                                            149,704
                                            
                                            
                                            
                                            131,264
                                            
                                            
                                            
                                            127,249
                                            
                                            
                                            
                                            118,916
                                            
                                            
                                            
                                            92,144Goodwill
                                            
                                            
                                            32,073
                                            
                                            
                                            
                                            32,073
                                            
                                            
                                            
                                            32,073
                                            
                                            
                                            
                                            32,073
                                            
                                            
                                            
                                            32,073Total
      assets
                                            
                                            
                                            201,736
                                            
                                            
                                            
                                            183,384
                                            
                                            
                                            
                                            175,138
                                            
                                            
                                            
                                            173,978
                                            
                                            
                                            
                                            154,649Total
      debt, including current maturities
                                            
                                            
                                            69,978
                                            
                                            
                                            
                                            83,858
                                            
                                            
                                            
                                            89,770
                                            
                                            
                                            
                                            105,792
                                            
                                            
                                            
                                            117,227Stockholders’
      deficit (3)
                                            
                                            
                                            (3,833
                                            )
                                            
                                            
                                            (9,503
                                            )
                                            
                                            
                                            (18,715
                                            )
                                            
                                            
                                            (23,031
                                            )
                                            
                                            
                                            (29,835
                                            )





(1)
            During
      2004, the Company repurchased Senior Notes, and, as a result of these
      repurchases, the Company recognized a gain on debt extinguishment of $2.0
      million, net of $280,000 of deferred financing costs.  During
      2005, the Company repurchased Senior Notes, and, as a result of these
      repurchases, the Company recognized a loss on debt extinguishment of
      $336,000, net of $178,000 of deferred financing costs. During 2006, the
      Company repurchased and redeemed Senior Notes, and, as a result of these
      repurchases and redemptions, the Company recognized a loss on debt
      extinguishment of $169,000, net of $128,000 of deferred financing costs.
      During 2007, the Company redeemed and repurchased Senior Notes, and, as a
      result of the redemption and repurchase, the Company recognized a loss on
      debt extinguishment of $443,000, net of $137,000 of deferred financing
      costs.  During 2008, the Company redeemed and repurchased Senior
      Notes, and, as a result of the redemption and repurchase, the Company
      recognized a loss on debt extinguishment of $278,000, net of $108,000 of
      deferred financing costs.  See “Financial Condition, Liquidity
      and Capital Resources” in Item
7.


21


(2)
            Effective
      March 1, 2004, the Company sold its interest in two telecom subsidiaries
      in the Staff Augmentation segment.  In accordance with Financial
      Accounting Standards Board ("FASB") Statement No. 144, Accounting for the Impairment or Disposal of
      Long-Lived Assets ("SFAS 144") the results of operations from the
      sale of this telecom operation have been reclassified as discontinued
      operations.  The Company initiated a lawsuit against the
      purchaser of this telecom operation and, following mediation and extended
      negotiations, the parties reached a settlement in September 2007 under
      which $1.0 million was received by the Company in the fourth quarter of
      2007.


(3)
              In
      June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes – an Interpretation of FASB Statement No. 109 “Accounting for
      Income Taxes” (“FIN 48”).  Under FIN 48, the Company may
      recognize the tax benefit from an uncertain tax position only if it is
      more-likely-than-not that the tax position will be sustained on
      examination by the taxing authorities, based on the technical merits of
      the tax position.  The tax benefits recognized in the financial
      statements from such tax position should be measured based on the largest
      benefit that has a greater than fifty percent likelihood of being realized
      upon ultimate settlement.  The Company adopted the provisions of
      FIN 48 effective January 1, 2007.  The impact upon adoption was
      to decrease accumulated deficit by approximately $3.4 million and to
      decrease accruals for uncertain tax positions and related penalties and
      interest by a corresponding
amount.







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 audited
consolidated financial statements and related notes of COMFORCE Corporation
(“COMFORCE”) and its wholly-owned subsidiaries, including COMFORCE Operating,
Inc. (“COI”) (collectively, the “Company”).






Overview




Staffing
personnel placed by the Company are employees of the Company. The Company is
responsible for employment related expenses for its employees, including workers
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and general payroll expenses.  The Company offers health,
dental, 401(k), disability and life insurance to its eligible employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
customers, resulting in significant outstanding receivables.  To the
extent the Company grows, these receivables will increase and there will be
greater need for borrowing availability under the PNC Credit
Facility.  At March 8, 2009, the Company had outstanding $78.6 million
principal amount under the PNC Credit Facility with remaining availability of up
to $18.7 million, based upon the borrowing base as defined in the loan
agreement, to fund operations.  The Company has had
preliminary discussions with PNC to extend the PNC Credit Facility beyond
its current maturity date of July 24, 2010.  No assurance can be given
that the Company will resolve such discussions on a satisfactory
basis.




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




The
Company’s fiscal year consists of the 52 or 53 weeks ending on the last Sunday
in December.  The Company’s most recently completed fiscal year ended
on December 28, 2008.  Fiscal years 2008 and 2007 each contained 52
weeks and fiscal year 2006 contained 53 weeks.






Recent
Developments




Current
United States and worldwide economic conditions have resulted in an
extraordinary tightening of credit markets.  These economic conditions
have been characterized in news reports as a global economic crisis that
has




22


been
marked by dramatic and rapid shifts in market conditions and government
responses, and they have resulted in unprecedented intervention in financial
institutions and markets by governments throughout the
world.  Although many economists originally characterized this crisis
as limited to the subprime mortgage markets, the current adverse conditions have
quickly spread to broader financial, manufacturing and labor
markets.   As reported by the Bureau of Labor Statistics (U.S.
Department of Labor) in a report released March 6, 2009, nonfarm payroll
employment fell by approximately 650,000 in February 2009 and the unemployment
rate rose to 8.1%.




In
October 2008, the Emergency Economic Stabilization Act of 2008 was enacted.
Under this act, up to $700 billion has been made available to stabilize U.S.
banks and enable the government to purchase devalued financial instruments held
by banks and other financial institutions.  The Federal Reserve
continues to take other measures to stabilize the U.S. financial system and
encourage lending.  In February 2009, the American Recovery and
Reinvestment Act of 2009 was signed into law, which provides up to $787 billion
in broad based relief to stimulate economic activity, including $288 billion in
tax relief, $148 billion for health care, $91 billion for education, $83 billion
for worker benefits, job training and unemployment relief, and $81 billion in
infrastructure development.




Management
has been closely monitoring the economic conditions and government
responses.  The Company has also implemented new procedures to contain
or reduce its expenses.  The impact of the tight credit markets on our
interest expense in the second half of 2008 was limited, but we expect our
interest expense in future periods to increase unless the credit markets improve
significantly.  In addition, we have observed a weakening in the labor
markets that has resulted in declines in revenues in our Staff Augmentation
segment during the second half of 2008 as compared to the comparable 2007
period.  Furthermore, some of our clients have
announced  reductions in workforce,  including
contingent  labor, which may cause  some of the vendors we
manage as part of our Human Capital Management Services and
RightSourcing  Services programs to reduce
or  discontinue  operations,  which would further
impact our management of these programs.  While the current economic
conditions have not had a significant negative impact on our operations through
the end of 2008, if these conditions persist or deteriorate, they could
potentially have a significant adverse impact on our operations in future
periods.




See “Risk
Factors--Global economic conditions have created turmoil in credit and labor
markets that could have a significant adverse impact on our operations” in Item
1A of this report.






Results
of Operations




Fiscal
Year Ended December 28, 2008 compared to December 30, 2007




Net sales
of services for the year ended December 28, 2008 were $606.6 million, which
represents a 3.4% increase from the $586.7 million in net sales of services
recorded for the year ended December 30, 2007.  Net sales of services
in the Human Capital Management Services segment increased by $25.8 million, or
7.1%, due primarily to an increase in services provided to new
clients.  While management believes that such an increase is
reflective of a trend over the past decade for companies to rely increasingly on
providers of human capital management services, such as those provided by the
Company’s PrO Unlimited subsidiary, the current economic environment (see
“Overview and Recent Developments” in this Item 7) has impacted this
trend.  Management has observed that, since the second quarter of
2008, PrO’s customers generally have not sought to expand the scope of services
they engage PrO to perform.   In the Staff Augmentation segment,
net sales of services decreased $5.6 million, or 2.5%, which decrease was
principally attributable to the decrease of services provided to technical
services customers, partially offset by an increase in services provided to
healthcare support services and information technology customers.




Cost of
services for the year ended December 28, 2008 was 84.1% of net sales of services
as compared to cost of services of 84.2% of net sales of services for the year
ended December 30, 2007.  Cost of services as a percentage of net
sales of services in the Human Capital Management Services segment for fiscal
2008 was 86.7% as compared to 86.8% for fiscal 2007.  In the Staff
Augmentation segment, cost of services as a percentage of net sales of services
for fiscal 2008 was 80.6% as compared to 81.3% in this segment for fiscal 2007,
principally due to higher gross margins associated with the healthcare support
services described above.




Selling,
general and administrative expenses as a percentage of net sales of services
were 12.7% for the year ended December 28, 2008, compared to 12.6% for the year
ended December 30, 2007.  The $3.1 million increase in selling,
general and administrative expenses is primarily due to higher personnel costs
incurred to support the increase




23


in
consultant consolidation services provided in the Human Capital Management
Services segment discussed above.




Operating
income for the year ended December 28, 2008 was $16.2 million, or 2.7% of net
sales, as compared to operating income of $15.8 million, or 2.7% of net sales,
for the year ended December 30, 2007.  The Company’s operating income
for fiscal 2008 is slightly higher than for fiscal 2007 principally due to an
increase in net sales of services and related gross margins in Human Capital
Management Services and healthcare support services, partially offset by an
increase in selling, general, and administrative expenses discussed
above.




The
Company’s interest expense for the year ended December 28, 2008 was principally
attributable to interest recorded on the PNC Credit Facility, the Convertible
Note and, prior to their redemption, the Senior Notes. Interest expense of $4.4
million for fiscal 2008 was lower as compared to the interest expense of $7.7
million for fiscal 2007.  This decrease in interest expense was
principally due to the repurchases and redemptions of $22.9 million of Senior
Notes since the beginning of 2007, including the redemption of the remaining
$5.2 million principal amount of Senior Notes in August 2008, and to lower
interest rates under the PNC Credit Facility.




As a
result of its repurchase of $6.5 million principal amount of Senior Notes in
April 2008 and its final redemption of $5.2 million principal amount of Senior
Notes in August 2008, the Company recognized a loss on debt extinguishment of
$278,000 in the year ended December 28, 2008, including the write-off of
$108,000 of deferred financing costs.  As a result of its redemption
of $10.0 million principal amount of Senior Notes in June 2007 and its
repurchase of $1.2 million of Senior Notes in December 2007, the Company
recognized a loss on debt extinguishment of $443,000 in the year ended December
30, 2007, including the write-off of $137,000 of deferred financing
costs.  See also the discussion in note 8 under “Revolving Line of
Credit” in our consolidated financial statements.




Other
expense, net, for the year ended December 28, 2008 of $1.1 million, principally
consists of losses on foreign currency exchanges as compared to other income,
net, for the year ended December 30, 2007 of $644,000, principally consisting of
gains on foreign currency exchanges.




The
income tax provision for the year ended December 28, 2008 was $4.5 million (a
rate of 43.5%) on income from continuing operations before income taxes of $10.4
million.  Included in the income tax provision for the year ended
December 28, 2008 are discrete items related to an income tax benefit for
certain return-to-provision items based on the filing of the Company’s 2007 tax
return, partially offset by the accrual of interest pursuant to FIN
48.  The income tax provision for the year ended December 30, 2007 was
$3.3 million (a rate of 39.9%) on income from continuing operations before
income taxes of $8.3 million.  Included in the income tax provision
for fiscal 2007 is an income tax benefit related to certain tax deductions
realized upon the dissolution of a subsidiary that operated one branch office
that has been closed.




The
Company’s total unrecognized tax benefit as of December 28, 2008 was
approximately $818,000, which, if recognized, would affect the Company’s
effective tax rate.  As of December 28, 2008, the Company had
approximately $24,000 of accrued interest and penalties reflected in the tax
provision.




In
accordance with SFAS 144, the results of operations from the sale of the
Company’s niche telecom operations (as described in note 18 to our consolidated
financial statements) have been recorded as discontinued
operations.   The net income from discontinued operations was
$1.0 million for the year ended December 30, 2007, which represented the
settlement received in November 2007.  As a result of a capital loss
relating to this settlement, no provision for income taxes was
recorded.






Fiscal
Year Ended December 30, 2007 compared to Fiscal Year Ended December 31,
2006




Net sales
of services for the fiscal year ended December 30, 2007 were $586.7 million,
which represents a 3.3% increase from the $567.8 million in net sales of
services recorded for the year ended December 31, 2006.  Net sales of
services in the Human Capital Management Services segment increased by $26.0
million, or 7.7%, due to an increase in services provided to new and existing
clients.  Management believes such increase is reflective of a trend
for companies to rely increasingly on providers of human capital management
services, such as those provided by the Company’s PrO Unlimited
subsidiary.  In the Staff Augmentation segment, the decrease of $6.8
million, or 3.0%, is principally attributable to the decrease of services
provided to telecom, other staffing and technical services
customers,




24


partially
offset by an increase in services provided to information technology and
healthcare support customers.  Our revenues were impacted by a
reduction of business days in 2007 as compared to 2006.  In addition,
the reduction in net sales of services in the telecom sector was due to a
reduction in demand from our largest telecom client.




Cost of
services for the year ended December 30, 2007 was 84.2% of net sales of services
as compared to cost of services of 84.3% of net sales of services for the year
ended December 31, 2006.  The cost of services as a percentage of net
sales for the year ended December 30, 2007 decreased slightly from the prior
year principally due to higher gross margins as a result of increased consultant
consolidation services provided by the Human Capital Management Services segment
and lower state unemployment rates, partially offset by less favorable workers
compensation claims experience during 2007.




Selling,
general and administrative expenses as a percentage of net sales of services
were 12.6% for the year ended December 30, 2007, compared to 12.1% for the year
ended December 31, 2006.  The $5.2 million increase in selling,
general and administrative expenses is primarily due to higher personnel and
professional costs incurred to support the increase in consultant consolidation
services provided in the Human Capital Management Services segment discussed
above and additional professional fees and personnel costs associated with
Sarbanes-Oxley compliance.




Operating
income for the year ended December 30, 2007 was $15.8 million, or 2.7% of net
sales, as compared to operating income of $17.0 million, or 3.0% of net sales,
for the year ended December 31, 2006.  The Company’s operating income
for 2007 is slightly lower than 2006 principally due to an increase in selling,
general, and administrative expenses and less favorable workers compensation
experience discussed above partially offset by an increase in net sales of
services and higher gross margins in Human Capital Management
Services.




The
Company’s interest expense for the year ended December 30, 2007 was principally
attributable to interest recorded on the PNC Credit Facility, the Convertible
Note and the Senior Notes. The interest expense of $7.7 million for 2007 was
lower as compared to the interest expense of $9.4 million for
2006.  This reduction was principally due to the repurchase and
redemption of $11.2 million of Senior Notes during 2007 and $23.4 million during
2006.  These decreases were partially offset by increased interest
expense on the Company’s revolving line of credit due to higher borrowings in
2007 as compared to 2006.




As a
result of the redemption and repurchase, the Company recognized a loss on debt
extinguishment of $443,000, including a reduction of $137,000 of deferred
financing costs in 2007.  The Company’s repurchase and redemption of
Senior Notes during 2006 resulted in a loss of $169,000 net of $128,000 of
deferred financing costs.




The
income tax provision for the year ended December 30, 2007 was $3.3 million (a
rate of 39.9%) on income from continuing operations before income taxes of $8.3
million.   The income tax provision for the year ended December
31, 2006 was $3.4 million (a rate of 45.3%) on income from continuing operations
before income taxes of $7.5 million.  The difference between income
taxes at the federal statutory income tax rate and the Company’s tax provision
for the respective periods relates primarily to state income taxes, as well as a
disallowance for non-deductible expenses and adjustments to tax contingencies
during 2006.  In addition, the Company included a tax deduction of
approximately $1.3 million (a tax benefit of $476,000) when determining its
expected annual effective tax rate for the year ended December 30, 2007 due to
tax benefits expected to be realized upon the dissolution of a subsidiary that
represented one closed branch office.




In
accordance with SFAS 144, the results of operations from the sale of the
Company’s niche telecom operations (as described in note 18 to our consolidated
financial statements) have been recorded as discontinued
operations.   The net income from discontinued operations was
$1.0 million for the year ended December 30, 2007, which represented the
settlement received in November 2007.  As a result of a capital loss
relating to this settlement, no provision for income taxes was
recorded.






Financial
Condition, Liquidity and Capital Resources




As
described in “Overview and Recent Developments” in this Item 7, management has
observed weakening of the labor markets and a tightening of the
credit markets coupled with an increase in interest rates.  These
conditions, which are interrelated, could affect our liquidity in future periods
in a number of ways, including by:




25


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




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




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




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




Staffing
personnel placed by the Company are employees of the Company. The Company is
responsible for employment related expenses for its employees, including workers
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and general payroll expenses.  The Company offers health,
dental, 401(k), disability and life insurance to its eligible employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
customers, resulting in significant outstanding receivables.  To the
extent the Company grows, these receivables will increase and there will be
greater need for borrowing availability under the PNC Credit
Facility.  At March 8, 2009, the Company had outstanding $78.6 million
principal amount under the PNC Credit Facility with remaining availability of up
to $18.7 million based upon the borrowing base, as defined under the PNC Credit
Facility agreement, to fund operations.




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




Payments
      due by fiscal year (in thousands)2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      ThereafterOperating
      Leases
                      $
                      2,933
                      
                      
                      $
                      1,837
                      
                      
                      $
                      1,182
                      
                      
                      $
                      700
                      
                      
                      $
                      23Employment
      Agreements
                      
                      1,040
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -PNC
      Credit Facility(1)-
      principal repayments
                      
                      -
                      
                      
                      
                      68,200
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Convertible
      Note(1)
      - principal repayments
                      
                      1,778
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      $
                      5,751
                      
                      
                      $
                      70,037
                      
                      
                      $
                      1,182
                      
                      
                      $
                      700
                      
                      
                      $
                      23





(1)
            See
      note 8 to our consolidated financial
statements.







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




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




The
Company also had standby letters of credit outstanding under the PNC Credit
Facility at December 28, 2008 in the aggregate amount of $4.2 million,
principally as security for the Company’s obligations under its workers
compensation insurance policies.




26


As
reported in the accompanying cash flow statement, during 2008, the Company’s
primary sources of funds were $19.7 million provided by its operating activities
due significantly to the continued profitability of the Company.  The
Company also used cash of $5.5 million in investing activities due to the
purchases of property and equipment.  In addition, the cash used in
financing activities of $14.4 million is primarily a result of the repurchase
and redemption of $11.9 million aggregate principal amount of Senior
Notes.




At
December 28, 2008, the Company had outstanding $68.2 million principal amount
under the PNC Credit Facility bearing interest at a weighted average rate of
3.35% per annum.  At such date, the Company had remaining availability
of up to $23.6 million based upon the borrowing base, as defined in the
agreement, under the PNC Credit Facility.




At
December 28, 2008, the Company also had outstanding $1.8 million principal
amount of Convertible Notes bearing interest at 8% per annum.




The
Company has made significant progress in improving its capital structure and
reducing interest expense through the elimination of long-term debt through the
repurchase, redemption or exchange of Senior Notes, Convertible Notes and other
instruments.  Since June 2000 and through the date of this Report, the
Company has eliminated $138.8 million of public debt and reduced its total
long-term debt from $195.3 million to $68.2 million.  The Company has
reduced its annualized interest expense principally by borrowing at the lower
rates available under the PNC Credit Facility to effectuate the repurchase and
redemption of long-term debt and by exchanging preferred stock and lower
interest rate Convertible Notes for public debt.




Substantially
all of the consolidated net assets of the Company are assets of COI and all of
the net income that had been generated by the Company was attributable to the
operations of COI.  Prior to the redemption of the remaining Senior
Notes in August 2008 (as described under “Results of Operations --Fiscal Year
Ended December 28, 2008 compared to December 30, 2007” in this Item 7), these
assets and any cumulated net income were restricted as to their use by
COMFORCE.  The Indenture imposed restrictions on COI making specified
payments, which were referred to as “restricted payments,” including making
distributions or paying dividends (referred to as upstreaming funds) to
COMFORCE.  Upon the completion of the redemption of the Senior Notes,
these restrictions were eliminated.  However, the PNC Credit Facility
includes significant restrictions and covenants that continue to be binding on
the Company, including many that are comparable to or more restrictive than
those that were applicable under the Indenture (see note 8 to our consolidated
financial statements).




The
Company’s Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of
7.5% per annum and, at December 28, 2008 there were cumulated, unpaid and
undeclared dividends of $2.7 million on the Series 2003A Preferred Stock,
$202,000 on the Series 2003B Preferred Stock and $2.1 million on the Series
2004A Preferred Stock.  If such dividends and underlying instruments
were converted to voting or non-voting common stock, the aggregate amount would
equal 14.9 million shares at December 28, 2008 (as compared to 14.1 million
shares at December 30, 2007).




Management
of the Company believes that cash flow from operations and funds anticipated to
be available under the PNC Credit Facility will be sufficient to service the
Company’s indebtedness and to meet currently anticipated working capital
requirements for the next 12 months.  The Company was in compliance
with all covenants under the PNC Credit Facility at December 28, 2008 and
expects to remain in compliance for the next 12 months.  The Company
has had preliminary discussions with PNC to extend the PNC Credit Facility
beyond its current maturity date of July 24, 2010. No assurance can be given
that the Company will resolve such discussions on a satisfactory
basis.




The
Company is currently undergoing audits for certain state and local tax
returns.  The results of these audits are not expected to have a
material effect upon the results of operations.




In 2006,
COMFORCE Technical Services, Inc. (“CTS”) entered into a contract with a United
States government agency (the “Agency”) to provide technical, operational and
professional services in foreign countries throughout the world for humanitarian
purposes.  Persons employed by CTS in the host countries include U.S.
nationals, nationals of the host countries (local nationals) and nationals of
other countries (third country nationals). The contract provides, generally,
that the U.S. government will reimburse the Company for all direct labor
properly chargeable to the contract plus fringe benefits, in some cases at
specified rates and profit.  Although not anticipated,
the




27


amount of
foreign payroll taxes and other taxes related to these employees could
potentially exceed the amount available to us from our own resources or under
the PNC Credit Facility.  (See note 12 to our  consolidated
financial statements.)






Critical
Accounting Policies and Estimates




Management’s
discussion in this Item 7 addresses the Company’s consolidated financial
statements which have been prepared in conformity with accounting principles
generally accepted in the United States.  The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses reported in
those financial statements.  These judgments can be subjective and
complex, and consequently actual results could differ from those estimates. A
discussion of the more significant estimates follows.  Management has
discussed the development, selection and disclosure of these estimates and
assumptions with the Audit Committee of the Board of Directors.






Revenue
Recognition




Staff Augmentation and Human Capital
Management Services:  The Company provides supplemental staff
to its customers under arrangements that typically require supervision by the
customers’ management for a period of time.  In these arrangements,
the Company is solely responsible for employees engaged to provide services to a
customer.  The Company is the sole employer of record, pays the
employees’ wages, pays unemployment taxes and workers compensation insurance
premiums, provides health insurance and other benefits to eligible employees,
and is responsible for paying all related taxes.  The Company enters
into service agreements with its customers, negotiates the terms of the
services, including pricing, and bears the credit risk relative to customer
payments.  The Company bills its customers for these services with
payment generally due upon receipt of the invoice.  Revenue under
these arrangements is recognized upon the performance of the service by the
Company’s employees.  The associated payroll costs are recorded as
cost of sales.  There is no right of cancellation or refund provisions
in these arrangements and the Company has no further obligations once the
services are rendered by the employee.




The
Company’s contingent staffing management services enable customers to manage the
selection, procurement and supervision of contingent staffing suppliers through
its web-enabled proprietary and third party software, and include providing
Company operating and support personnel to assist customers.  The
Company does not sell its software to customers, but rather utilizes it in
connection with providing services.  Consultant consolidation
services, provided as a component of contingent staffing management services,
comprise the management of invoicing for a customer’s multiple services
providers that results in the consolidation of invoices for all of a customer’s
individual staffing vendors.  The Company recognizes revenue for the
amount of its fees for these services, which are determined as a percentage of
the gross billings to customers from the contingent staffing suppliers, as the
services are performed.  The Company invoices its customers for its
fees together with the billings from the contingent staffing suppliers, which
are reflected in accounts receivable as there is no right of offset with the
liabilities for amounts due to the contingent staffing
suppliers.  Amounts invoiced related to contingent staffing supplier
billings are included in accrued expenses and are settled after our collection
of the related receivables.




We rely
on our billable employees, staffing suppliers and clients to timely submit their
work and expense reports.  It is our policy to record all activity
(net sales of services and cost of services) performed during each reporting
period for which we receive and process the submissions of our billable
employees, staffing suppliers and clients within two weeks after the end of each
of our first three quarters and within five weeks after the end of our fiscal
year.




In
accordance with Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of
Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,
reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue.




The
Company follows Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, in the presentation of revenues and
expenses.  This guidance requires that the Company assess whether it
acts as a principal in the transaction or as an agent acting on behalf of
others.  In situations where the Company is the principal in the
transaction and has the risks and rewards of ownership, the transactions are
recorded gross in our consolidated statements of income.




28


Staff
Augmentation:A portion of the Company’s revenue is
attributable to license agreements.  Under the terms of such license
agreements, the Company is fully responsible for the payment of the
employees.  The Company submits all invoices for services performed to
the customers and they are required to remit their payments for services
performed directly to the Company.  The Company includes these
revenues and related direct costs in its net sales of services and cost of
services on a gross basis.  The net distribution to the licensee is
based on a percentage of gross profit generated.




Financial Outsourcing Services:The Company provides back office support to unaffiliated independently
owned staffing companies.  These arrangements typically require the
Company to process the payrolls and invoicing for these unaffiliated staffing
companies through the use of the Company’s information technology
system.  In return, these unaffiliated staffing companies (the
Company’s customers) pay the Company a fixed percentage of the weekly billings
it processed for them.  Payment of the Company’s fees is due upon the
completion of the processing of weekly payrolls and
invoicing.  Revenue is recognized over the period as the Company
performs these services for the amount of the fixed fee the Company receives as
stipulated in the applicable contract.  There is no right of
cancellation or refund provisions in these arrangements and the Company has no
further obligations once the services are rendered.




The
Company also provides funding services to unaffiliated independently owned
staffing companies.   These arrangements typically require the
Company to advance funds to these unaffiliated staffing companies (the Company’s
customers) in exchange for the receivables related to invoices remitted to their
clients for services performed during the prior week.  The advances
are repaid through the remittance of payments of receivables by their clients
directly to the Company.  The Company withholds from these advances an
administrative fee and other charges as well as the amount of receivables
relating to prior advances that remain unpaid after a specified number of
days.  These administrative fees and other charges are recognized as
revenue when earned.  There is no right of cancellation or refund
provisions in these arrangements and the Company has no further obligations once
the services are rendered.






Accounts
Receivable




The
Company’s accounts receivable balances are comprised of trade and unbilled
receivables.  The Company maintains an allowance for doubtful accounts
recorded as an estimate of the accounts receivable balance that may not be
collected.  This allowance is calculated on the trade receivables with
consideration for the Company’s historical write-off experience, the current
aging of receivables, general economic climate and the financial condition of
customers.  After giving due consideration to these factors, the
Company establishes specific allowances for uncollectible
accounts.  The allowance for the funding and service fee receivables
is calculated with consideration for the ability of the Company’s clients to
absorb chargebacks due to the uncollectibility of the funded receivables. Bad
debt expense, which increases the allowance for doubtful accounts, is recorded
as an operating expense in our consolidated statements of
income.  Factors that would cause this provision to increase primarily
relate to increased bankruptcies by customers, the inability of the Company’s
funding services clients to absorb chargebacks and other difficulties collecting
amounts billed.  On the other hand, an improved write-off experience
and aging of receivables would result in a decrease to the
provision.






Accrued
Workers Compensation Liability




The
Company records its estimate of the ultimate cost of, and liabilities for,
workers compensation based on actuarial computations using the Company's loss
history as well as industry statistics.  Furthermore, in determining
its liabilities, the Company includes amounts for estimated claims incurred but
not reported.  The ultimate cost of workers compensation will depend
on actual costs incurred to settle the claims and may differ from the
liabilities recorded for those claims.




Accruals
for workers compensation claims are included in accrued expenses in our
consolidated balance sheets.  A significant increase in claims or
changes in laws may require the Company to record additional expenses related to
workers compensation.  On the other hand, significantly improved claim
experience may result in lower annual expense levels.




29




Income
Taxes




Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and net
operating loss and tax credit carryforwards.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  The Company records a valuation allowance
against deferred tax assets for which realization of the asset is not considered
more-likely-than-not.




Management’s
judgment is required in determining the realizability of the deferred tax assets
and liabilities, and any valuation allowances recorded.  The net
deferred tax assets may need to be adjusted in the event that tax rates are
modified, or management’s estimates of future taxable income change, such that
deferred tax assets or liabilities are expected to be recovered or settled at a
different tax rate than currently estimated. In addition, valuation allowances
may need to be adjusted in the event that management’s estimate of future
taxable income changes from the amounts currently estimated.




The
Company provides for income taxes on a quarterly basis based upon an estimated
annual effective tax rate.  In determining this rate, management
estimates taxable income for each of the jurisdictions where the Company
operates, as well as the tax rate that will be in effect for each state and
foreign country.  To the extent these estimates change during the
year, or that actual results differ from these estimates, the estimated annual
tax rate may change between quarterly periods and may differ from the actual
effective tax rate for the year.






Goodwill
Impairment




The
Company is required to test goodwill for impairment in accordance with the
provisions of FASB Statement No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), as of the end of each fiscal year or earlier during
each fiscal year as circumstances require.  In connection with these
goodwill tests, the Company engages an independent valuation firm to assist
management in the determination of the fair values of its reporting units (as
defined by SFAS 142).  In its determination of the fair values, the
firm engaged by the Company primarily utilizes a discounted cash flow analysis
as well as various other valuation approaches, including (i) capitalization
multiples of companies with investment characteristics resembling those of the
reporting units, (ii) the enterprise value of the Company, and (iii) asset and
liability structure.




Significant
assumptions used in this analysis include (i) expected future revenue growth
rates, operating unit profit margins, and working capital levels, (ii) a
discount rate, and (iii) a terminal value multiple.  The revenue
growth rates, working capital levels and operating unit profit margins are based
on management’s expectation of future results.  If management’s
expectations of future operating results change, or if there are changes to
other assumptions, the estimate of the fair value of the Company’s reporting
units could change significantly.  Such a change could result in
additional goodwill impairment charges in future periods, which could have a
significant impact on the Company’s consolidated financial
statements.






Share-based
Payment




With our
adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment(“SFAS No. 123(R)”), effective December 26,
2005, we are required to record the fair value of share-based payment awards as
an expense.  In order to determine the fair value of stock options on
the date of grant, the Company utilizes the Black-Scholes option-pricing
model.  Inherent in this model are assumptions related to expected
stock price volatility, option life, risk-free interest rate and dividend
yield.  Expected volatilities are based on historical volatility of
our shares using daily price observations over a period consistent with the
expected life.  For options granted in fiscal 2006 and later, we use
the safe harbor guidance in SAB 107 to estimate the expected life of
options.  The risk-free rate is based on the U.S. Treasury yield curve
in effect at the time of grant for periods similar to the expected
life.  While the risk-free interest rate and dividend yield are less
subjective assumptions that, typically, are based on factual data derived from
public sources, the expected stock price volatility and option life assumptions
require a greater level of judgment which makes them critical accounting
estimates.


30




New
Accounting Pronouncements




In
December 2007, the FASB issued SFAS 141-R, Business Combinations (“SFAS
141-R”).  This statement is effective for us on December 29, 2008, and
applies prospectively to business combinations for which the acquisition date is
on or after December 29, 2008.  SFAS 141-R significantly changes the
accounting for acquisitions. Some of the major provisions are that acquisition
related costs will generally be expensed as incurred, contingent consideration
will be recorded at fair value on the acquisition date, with adjustments to
certain forms of contingent liabilities impacting the results of operations. The
impact that SFAS 141-R will have on our consolidated financial statements after
adoption will depend on the nature, terms, and size of the acquisitions, if any,
we consummate after adoption.




In
December 2007, the FASB issued FAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“FAS 160”). FAS 160 re-characterizes
minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity.
Under FAS 160, a change in control will be measured at fair value, with any gain
or loss recognized in earnings. The effective date for FAS 160 is for annual
periods beginning on or after December 15, 2008. Early adoption and
retroactive application of FAS 160 to fiscal years preceding the effective date
are not permitted. We currently do not have minority interests in our
consolidated subsidiaries.






Seasonality




In the
Human Capital Management Services segment, PrO Unlimited does not observe
significant seasonal variations in its business.  In the Staff
Augmentation segment, demand for services has historically been lower during the
second half of the fourth quarter through the following second quarter, and,
generally shows gradual improvement until the second half of the fourth
quarter.  The Company’s quarterly operating results are, however,
affected by the number of billing days in the quarter.  Management has
noted that the observance of seasonal trends has been limited in the current
economic climate.






Forward
Looking Statements




We have
made statements under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under this Item 7, as well as in
other sections of this report that are forward-looking statements.  In
some cases, you can identify these statements by forward-looking words such as
“may,” “might,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “forecasts,” “projects,” “predicts,” “intends,”
“potential,” “continue,” the negative of these terms and other comparable
terminology.  These forward-looking statements, which are subject to
risks, uncertainties and assumptions about us, may include projections of our
future financial performance, our anticipated growth strategies and anticipated
trends in our business and industry. These statements are only predictions based
on our current expectations and projections about future events.




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




Factors
which may cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements include the following:




·
            unfavorable
      global, national or local economic conditions that cause our customers to
      defer hiring contingent workers or reduce spending on the human capital
      management services and staffing that we
  provide;




·
            the
      current banking crisis has created a tightening of the credit markets
      coupled with increasing interest rates, which, if these conditions persist
      or deteriorate, could significantly increase our interest expense and make
      it more difficult and costly for us to refinance or extend the PNC Credit
      Facility at its maturity on July 24,
2010;




31


·
            significant
      increases in the effective rates of any payroll-related costs that we are
      unable to pass on to our customers;




·
            increases
      in the costs of complying with the complex federal, state and foreign laws
      and regulations in which we operate, or our inability to comply with these
      laws and regulations;




·
            our
      inability to collect fees due to the bankruptcy of our customers,
      including the amount of any wages we have paid to our employees for work
      performed for these customers;




·
            our
      inability to keep pace with rapid changes in technology in our
      industry;




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




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




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




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




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




·
            any
      of the other factors described under “Risk Factors” in Item 1A of this
      Report.






ITEM
7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




At
December 28, 2008, we had $68.2 million outstanding under the PNC Credit
Facility bearing variable rate interest at the weighted average rate of 3.35%
per annum as compared to $70.5 million outstanding at December 30, 2007 at a
weighted average rate of 6.9% per annum.  Despite the turmoil in the
U.S. and global credit markets, we have experienced a reduced weighted average
rate for borrowings under the PNC Credit Facility due to a reduction in
LIBOR.  Assuming an immediate 25% increase in the weighted average
interest rate of 3.35% on variable rate obligations of $68.2 million, the impact
to the Company in annualized interest expense would be approximately
$571,000.




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




A portion
of the Company’s borrowings are fixed rate obligations, including $1.8 million
principal amount of Convertible Notes bearing interest at a fixed rate of 8% per
annum.  The estimated fair value of these debt obligations at December
28, 2008 was $1.7 million for the Convertible Notes.  Management of
the Company does not believe that a 25% increase in interest rates would have a
material impact on the fair value of these fixed rate obligations.




32




ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




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






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




None.






ITEM
9A(T).  CONTROLS AND PROCDURES




Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934.  The Company’s
internal control over financial reporting includes policies and procedures
pertaining to the Company’s ability to record, process, and report reliable
information.  The Company’s internal control system is designed to
provide reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of the Company’s published
financial statements.




The
Company’s management assessed the effectiveness of internal control over
financial reporting as of December 28, 2008.  In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated
Framework.  Based on this assessment, the Company’s management
identified no material weaknesses in its internal control over financial
reporting and has concluded that, as of December 28, 2008, the Company’s
internal control over financial reporting is effective based on those
criteria.




This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.




During
the Company’s fiscal quarter ended December 28, 2008, there were no changes
in the Company’s internal controls over financial reporting that have materially
and adversely affected, or are reasonably likely to materially affect the
Company’s internal control over financial reporting.




Management
of the Company has also evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as of December 28,
2008.  Based upon this evaluation, our management has concluded that,
as of December 28, 2008, our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act.  Our disclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.






ITEM
9B.  OTHER INFORMATION




None.




33


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 27, 2009 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 27, 2009 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 27, 2009 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 27, 2009 and is incorporated by reference herein.






ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES




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 27, 2009 and is incorporated by reference herein.




PART
IV




ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES







(a)  
Financial Statements





1.
            Financial
      Statements as listed on page F-1.2.
            Financial
      Statement Schedule listed on page F-1.3.
            Exhibits
      as listed on the Exhibit
Index.





(b)  
Exhibits





The
exhibits filed herewith are listed on the Exhibit Index.







(c)  
Other Financial Statement Schedules





None







A
copy of this annual report on Form 10-K will accompany the Company’s proxy
statement and be posted on the Company’s website:
www.comforce.com.   In addition, the Company will provide to
stockholders upon request, without charge, copies of the exhibits to the annual
report.  Requests should be submitted to Linda Annicelli, Vice
President, Administration, at COMFORCE Corporation, 415 Crossways Park Drive,
P.O. Box 9006, Woodbury, New York 11797.







34





SIGNATURES









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




COMFORCE
Corporation







By:
            /s/
      John C. FanningJohn
      C. FanningChairman
      and Chief Executive Officer





Date:  March
24, 2009







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




SIGNATURE
              
              TITLE
              
              DATE/s/
      John C. FanningJohn
      C. Fanning
              
              Chairman,
      Chief Executive Officer and Director (Principal Executive
      Officer)
              
              March
      24, 2009/s/
      Harry V. MaccarroneHarry
      V. Maccarrone
              
              Executive
      Vice President and Director (Principal Financial and Accounting
      Officer)
              
              March
      24, 2009/s/
      Rosemary ManiscalcoRosemary
      Maniscalco
              
              Vice
      Chairman and Director
              
              March
      24, 2009/s/
      Daniel RaynorDaniel
      Raynor
              
              Director
              
              March
      24, 2009/s/
      Gordon RobinettGordon
      Robinett
              
              Director
              
              March
      24, 2009/s/
      Kenneth J. DaleyKenneth
      J. Daley
              
              Director
              
              March
      24, 2009/s/
      Pierce J. FlynnPierce
      J. Flynn
              
              Director
              
              March
      24, 2009


35


COMFORCE
CORPORATION AND SUBSIDIARIES




Table
of Contents









Report
      of Independent Registered Public Accounting Firm
                          
                          F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of December 28, 2008 and December 30,
    2007
                          
                          F-3Consolidated
      Statements of Income for the fiscal years ended December 28, 2008,
      December 30, 2007 and December 31, 2006
                          
                          F-4Consolidated
      Statements of Stockholders’ Deficit and Comprehensive Income for the
      fiscal years ended December 28, 2008, December 30, 2007 and December 31,
      2006
                          
                          F-5Consolidated
      Statements of Cash Flows for the fiscal years ended December 28, 2008,
      December 30, 2007 and December 31, 2006
                          
                          F-6Notes
      to Consolidated Financial Statements
                          
                          F-7Schedule:Schedule
      II -- Valuation and Qualifying Accounts
                          
                          F-27







F-1







Report of Independent
Registered Public Accounting Firm




The Board
of Directors and Stockholders


COMFORCE
Corporation:




We have
audited the accompanying consolidated balance sheets of COMFORCE Corporation and
subsidiaries, as of December 28, 2008 and December 30, 2007, and the related
consolidated statements of income, stockholders’ deficit and comprehensive
income, and cash flows for each of the fiscal years in the three-year period
ended December 28, 2008, and the related financial statement schedule listed in
Item 15 (a)(2).  These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards 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.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of COMFORCE Corporation and
subsidiaries as of December 28, 2008 and December 30, 2007, and the results of
their operations and their cash flows for each of the fiscal years in the
three-year period ended December 28, 2008 in conformity with U.S. generally
accepted accounting principles.  Also, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.




As
discussed in Note 2 to the accompanying consolidated financial statements, the
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes- an
Interpretation of FASB Statement No. 109, “Accounting for Income Taxes,”
effective January 1, 2007.












/s/ KPMG
LLP


Melville,
New York


March 24,
2009














F-2


COMFORCE
CORPORATION AND SUBSIDIARIES




Consolidated
Balance Sheets


December
28, 2008 and December 30, 2007


(in
thousands, except share and per share amounts)




Assets
                                                                                                  
                                                                                                  December
      28, 2008
                                                                                                  
                                                                                                  
                                                                                                  December
      30, 2007Current
      assets:Cash
      and cash equivalents
                                                                                                  
                                                                                                  $
                                                                                                  6,137
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6,654Accounts
      receivable, less allowance of
                                                                                                    $92
      in 2008 and $129 in 2007
                                                                                                  
                                                                                                  
                                                                                                  140,763
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  118,163Funding
      and service fees receivable, less allowance of
                                                                                                    $20
      in 2008 and $44 in 2007
                                                                                                  
                                                                                                  
                                                                                                  8,941
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  13,101Prepaid
      expenses and other current assets
                                                                                                  
                                                                                                  
                                                                                                  3,014
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  4,408Deferred
      income taxes, net
                                                                                                  
                                                                                                  
                                                                                                  353
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  388Total
      current assets
                                                                                                  
                                                                                                  
                                                                                                  159,208
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  142,714Deferred
      income taxes, net
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  164Property
      and equipment, net
                                                                                                  
                                                                                                  
                                                                                                  10,057
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  7,723Deferred
      financing costs, net
                                                                                                  
                                                                                                  
                                                                                                  213
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  480Goodwill
                                                                                                  
                                                                                                  
                                                                                                  32,073
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  32,073Other
      assets, net
                                                                                                  
                                                                                                  
                                                                                                  185
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  230Total
      assets
                                                                                                  
                                                                                                  $
                                                                                                  201,736
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  183,384Liabilities
      and Stockholders’ DeficitCurrent
      liabilities:Accounts
      payable
                                                                                                  
                                                                                                  $
                                                                                                  2,675
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,376Short-term
      debt (related party)
                                                                                                  
                                                                                                  
                                                                                                  1,778
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  –Accrued
      expenses
                                                                                                  
                                                                                                  
                                                                                                  131,441
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  105,825Total
      current liabilities
                                                                                                  
                                                                                                  
                                                                                                  135,894
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  108,201Long-term
      debt (including related party debt of $1,644 in 2007)
                                                                                                  
                                                                                                  
                                                                                                  68,200
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  83,858Deferred
      taxes, net
                                                                                                  
                                                                                                  
                                                                                                  1,074
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Other
      liabilities
                                                                                                  
                                                                                                  
                                                                                                  401
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  828Total
      liabilities
                                                                                                  
                                                                                                  
                                                                                                  205,569
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  192,887Commitments
      and contingencies (note 12)Stockholders’
      deficit:Common
      stock, $.01 par value; 100,000,000 shares authorized,
                                                                                                    17,387,560
      and 17,387,553 shares issued and
                                                                                                    outstanding
      in 2008 and 2007, respectively
                                                                                                  
                                                                                                  
                                                                                                  174
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  174Convertible
      preferred stock, $.01 par value:4,304
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  4,304Series
      2003A, 6,500 shares authorized, 6,148 shares issued and
                                                                                                    outstanding
      at December 28, 2008 and December 30, 2007,
                                                                                                    with
      an aggregate liquidation preference of $8,850 at
                                                                                                    December
      28, 2008 and $8,389 at December 30, 2007Series
      2003B, 3,500 shares authorized, 513 shares issued and
                                                                                                    outstanding
      at December 28, 2008 and December 30, 2007,
                                                                                                    with
      an aggregate liquidation preference of $714 at
                                                                                                    December
      28, 2008 and $676 at December 30, 2007
                                                                                                  
                                                                                                  
                                                                                                  513
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  513Series
      2004A, 15,000 shares authorized, 6,737 shares issued and
                                                                                                    outstanding
      at December 28, 2008 and December 30, 2007, with
                                                                                                    an
      aggregate liquidation preference of $8,790 at December 28, 2008
                                                                                                    and
      $8,284 at December 30, 2007
                                                                                                  
                                                                                                  
                                                                                                  10,264
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  10,264Additional
      paid-in capital
                                                                                                  
                                                                                                  
                                                                                                  48,406
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  48,356Accumulated
      other comprehensive loss
                                                                                                  
                                                                                                  
                                                                                                  (522
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (256
                                                                                                  )Accumulated
      deficit
                                                                                                  
                                                                                                  
                                                                                                  (66,972
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (72,858
                                                                                                  )Total
      stockholders’ deficit
                                                                                                  
                                                                                                  
                                                                                                  (3,833
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (9,503
                                                                                                  )Total
      liabilities and stockholders’ deficit
                                                                                                  
                                                                                                  $
                                                                                                  201,736
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  183,384The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-3


COMFORCE
CORPORATION AND SUBSIDIARIES





Consolidated
Statements of Income


For the
fiscal years ended December 28, 2008, December 30, 2007 and December 31,
2006


(in
thousands, except per share amounts)




December
      28, 2008
              
              
              December
      30, 2007
              
              
              December
      31, 2006Net
      sales of services
              
              $
              606,636
              
              
              
              586,685
              
              
              
              567,821Costs
      and expenses:Cost
      of services
              
              
              510,188
              
              
              
              494,104
              
              
              
              478,927Selling,
      general and administrative expenses
              
              
              77,129
              
              
              
              74,012
              
              
              
              68,821Depreciation
      and amortization
              
              
              3,156
              
              
              
              2,803
              
              
              
              3,095Total
      costs and expenses
              
              
              590,473
              
              
              
              570,919
              
              
              
              550,843Operating
      income
              
              
              16,163
              
              
              
              15,766
              
              
              
              16,978Other
      (expense) income:Interest
      expense
              
              
              (4,400
              )
              
              
              (7,669
              )
              
              
              (9,369
              )Loss
      on debt extinguishment
              
              
              (278
              )
              
              
              (443
              )
              
              
              (169
              )Other
      (expense) income, net
              
              
              (1,064
              )
              
              
              644
              
              
              
              11(5,742
              )
              
              
              (7,468
              )
              
              
              (9,527
              )Income
      from continuing operations before income taxes
              
              
              10,421
              
              
              
              8,298
              
              
              
              7,451Provision
      for income taxes
              
              
              4,535
              
              
              
              3,309
              
              
              
              3,373Income
      from continuing operations
              
              
              5,886
              
              
              
              4,989
              
              
              
              4,078Income
      from discontinued operations, net of tax benefits of $0 in
      2007
              
              
              -
              
              
              
              1,000
              
              
              
              -Net
      income
              
              $
              5,886
              
              
              
              5,989
              
              
              
              4,078Dividends
      on preferred stock
              
              
              1,005
              
              
              
              1,005
              
              
              
              1,005Net
      income available to common stockholders
              
              $
              4,881
              
              
              
              4,984
              
              
              
              3,073Basic
      income per common share:Income
      from continuing operations
              
              $
              0.28
              
              
              
              0.23
              
              
              
              0.18Income
      from discontinued operations
              
              
              -
              
              
              
              0.06
              
              
              
              -Net
      income
              
              $
              0.28
              
              
              
              0.29
              
              
              
              0.18Diluted
      income per common share:Income
      from continuing operations
              
              $
              0.18
              
              
              
              0.16
              
              
              
              0.13Income
      from discontinued operations
              
              
              -
              
              
              
              0.03
              
              
              
              -Net
      income
              
              $
              0.18
              
              
              
              0.19
              
              
              
              0.13Weighted
      average common shares outstanding, basic
              
              
              17,388
              
              
              
              17,385
              
              
              
              17,317Weighted
      average common shares outstanding, diluted
              
              
              32,580
              
              
              
              31,870
              
              
              
              31,012




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


F-4


COMFORCE
CORPORATION AND SUBSIDIARIES




Consolidated
Statements of Stockholders’ Deficit and Comprehensive Income


Fiscal
years ended December 28, 2008, December 30, 2007 and December 31,
2006


(in
thousands, except share amounts)





Common
      stock
              
              
              Preferred
      stock
              
              
              Additional
                paid-in
              
              
              Accumulated
                Other
      Comprehensive
              
              
              Accumulated
              
              
              Total
                stock-holders’Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Income
      (Loss)
              
              
              Deficit
              
              
              deficitAdjusted
      balance at December 26, 2005
              
              
              17,079,532
              
              
              $
              171
              
              
              
              13,398
              
              
              $
              15,081
              
              
              $
              47,727
              
              
              $
              147
              
              
              $
              (86,293
              )
              
              $
              (23,167
              )Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,078
              
              
              
              4,078Foreign
      currency translation adjustment, net of tax of $35
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (92
              )
              
              
              -
              
              
              
              (92
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,986Exercise
      of stock options
              
              
              290,628
              
              
              
              3
              
              
              
              -
              
              
              
              -
              
              
              
              341
              
              
              
              -
              
              
              
              -
              
              
              
              344Issuance
      of common stock
              
              
              391
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Share-based
      payment compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              98
              
              
              
              -
              
              
              
              -
              
              
              
              98Beneficial
      conversion feature attributable to 8% Notes, net of tax of
    $36
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              24
              
              
              
              -
              
              
              
              -
              
              
              
              24Balance
      at December 31, 2006
              
              
              17,370,551
              
              
              
              174
              
              
              
              13,398
              
              
              
              15,081
              
              
              
              48,190
              
              
              
              55
              
              
              
              (82,215
              )
              
              
              (18,715
              )Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,989
              
              
              
              5,989Adoption
      of FASB Interpretation No. 48
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,368
              
              
              
              3,368Foreign
      currency translation adjustment, net of tax of $199
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (311
              )
              
              
              
              
              
              
              (311
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,046Exercise
      of stock options, including excess tax benefit of $5
              
              
              17,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              30
              
              
              
              -
              
              
              
              -
              
              
              
              30Issuance
      of common stock
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Share-based
      payment compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              90
              
              
              
              -
              
              
              
              -
              
              
              
              90Beneficial
      conversion feature attributable to 8% Notes, net of tax of
    $3
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              46
              
              
              
              -
              
              
              
              -
              
              
              
              46Balance
      at December 30, 2007
              
              
              17,387,553
              
              
              
              174
              
              
              
              13,398
              
              
              
              15,081
              
              
              
              48,356
              
              
              
              (256
              )
              
              
              (72,858
              )
              
              
              (9,503
              )Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,886
              
              
              
              5,886Foreign
      currency translation adjustment, net of tax of $181
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (266
              )
              
              
              
              
              
              
              (266
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,620Issuance
      of common stock
              
              
              7
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Share-based
      payment compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              65
              
              
              
              -
              
              
              
              -
              
              
              
              65Beneficial
      conversion feature attributable to 8% Notes, net of tax of
    $26
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (15
              )
              
              
              -
              
              
              
              -
              
              
              
              (15
              )Balance
      at December 28, 2008
              
              
              17,387,560
              
              
              
              174
              
              
              
              13,398
              
              
              $
              15,081
              
              
              $
              48,406
              
              
              $
              (522
              )
              
              $
              (66,972
              )
              
              $
              (3,833
              )




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





F-5


COMFORCE
CORPORATION AND SUBSIDIARIES




Consolidated
Statements of Cash Flows


Fiscal
years ended December 28, 2008, December 30, 2007 and December 31,
2006


(in
thousands)




December
      28, 2008
              
              
              December
      30, 2007
              
              
              December
      31, 2006Cash
      flows from operating activities:Net
      income
              
              $
              5,886
              
              
              
              5,989
              
              
              
              4,078Adjustments
      to reconcile net income to
                net
      cash provided by operating activities:Depreciation
      and amortization of property and equipment
              
              
              3,156
              
              
              
              2,803
              
              
              
              3,055Amortization
      of intangible assets
              
              
              -
              
              
              
              -
              
              
              
              40Amortization
      of deferred financing costs
              
              
              173
              
              
              
              204
              
              
              
              386Net
      recoveries of bad debts
              
              
              (60
              )
              
              
              (103
              )
              
              
              (8
              )Deferred
      income taxes
              
              
              1,428
              
              
              
              1,413
              
              
              
              1,357Interest
      expense paid by the issuance of convertible notes
              
              
              134
              
              
              
              124
              
              
              
              115Gain
      from sale of discontinued niche telecom operations
              
              
              -
              
              
              
              (1,000
              )
              
              
              -Loss
      on repurchase of Senior Notes
              
              
              278
              
              
              
              443
              
              
              
              169Loss
      on disposal of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              48Share-based
      payment compensation expense
              
              
              65
              
              
              
              90
              
              
              
              98Excess
      tax benefit from stock option exercises
              
              
              -
              
              
              
              (5
              )
              
              
              (135
              )Changes
      in assets and liabilities:Accounts,
      funding and service fees receivable
              
              
              (19,938
              )
              
              
              (3,606
              )
              
              
              (7,874
              )Prepaid
      expenses and other assets
              
              
              1,463
              
              
              
              466
              
              
              
              1,016Income
      taxes receivable
              
              
              (19
              )
              
              
              (121
              )
              
              
              37Accounts
      payable and accrued expenses
              
              
              27,156
              
              
              
              6,124
              
              
              
              12,343Net
      cash provided by operating activities
              
              
              19,722
              
              
              
              12,821
              
              
              
              14,725Cash
      flows from investing activities:Purchases
      of property and equipment
              
              
              (5,490
              )
              
              
              (4,427
              )
              
              
              (3,219
              )Net
      cash used in investing activities
              
              
              (5,490
              )
              
              
              (4,427
              )
              
              
              (3,219
              )Net
      cash provided by discontinued investing activities
              
              
              -
              
              
              
              1,000
              
              
              
              -Cash
      flows from financing activities:Net
      (repayments) borrowings under line of credit agreements
              
              
              (2,300
              )
              
              
              5,140
              
              
              
              7,283Repurchases
      of Senior Notes
              
              
              (11,884
              )
              
              
              (11,482
              )
              
              
              (23,461
              )Debt
      financing costs
              
              
              -
              
              
              
              (13
              )
              
              
              (368
              )Excess
      tax benefit from stock option exercises
              
              
              -
              
              
              
              5
              
              
              
              135Proceeds
      from exercise of stock options
              
              
              -
              
              
              
              25
              
              
              
              209Repayments
      under capital lease obligations
              
              
              (236
              )
              
              
              (152
              )
              
              
              (6
              )Net
      cash used in financing activities
              
              
              (14,420
              )
              
              
              (6,477
              )
              
              
              (16,208
              )Net
      (decrease) increase in cash and cash equivalents
              
              
              (188
              )
              
              
              2,917
              
              
              
              (4,702
              )Effect
      of exchange rates on cash
              
              
              (329
              )
              
              
              (45
              )
              
              
              67Cash
      and cash equivalents, beginning of fiscal year
              
              
              6,654
              
              
              
              3,782
              
              
              
              8,417Cash
      and cash equivalents, end of fiscal year
              
              $
              6,137
              
              
              
              6,654
              
              
              
              3,782Supplemental
      cash flow information:Cash
      paid during the fiscal year for:Interest
              
              $
              4,429
              
              
              
              7,651
              
              
              
              9,333Income
      taxes
              
              
              1,009
              
              
              
              2,317
              
              
              
              3,650Supplemental
      schedule of significant non-cash
                investing
      and financing activities:Capital
      lease obligations incurred for the
                purchase
      of new equipment
              
              
              -
              
              
              
              723
              
              
              
              -





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


F-6


(1)
            Nature
      of Business and Basis of
Presentation




COMFORCE
Corporation (“COMFORCE”) is a provider of outsourced staffing management
services that enable Fortune 1000 companies and other large employers to
consolidate, automate and manage staffing, compliance and oversight processes
for their contingent workforces.  The Company also provides specialty
staffing, consulting and other outsourcing services to Fortune 1000 companies
and other large employers for their healthcare support services, technical and
engineering, information technology, telecommunications and other staffing
needs.  In addition, the Company provides funding and back office
support services to independent consulting and staffing companies.




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




(2)
            Summary
      of Significant Accounting Policies




Fiscal
Year




The
Company’s fiscal year consists of the 52 or 53 weeks ending on the last Sunday
in December.  The Company’s most recently completed fiscal year ended
on December 28, 2008.  Fiscal years 2008 and 2007 each contained 52
weeks and fiscal year 2006 contained 53 weeks.




Principles
of Consolidation




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




Revenue
Recognition




Staff Augmentation and Human Capital
Management Services:The Company provides supplemental staff
to its customers under arrangements that typically require supervision by the
customers’ management for a period of time.  In these arrangements,
the Company is solely responsible for employees engaged to provide services to a
customer.  The Company is the sole employer of record, pays the
employees’ wages, pays unemployment taxes and workers compensation insurance
premiums, provides health insurance and other benefits to eligible employees,
and is responsible for paying all related taxes.  The Company enters
into service agreements with its customers, negotiates the terms of the
services, including pricing, and bears the credit risk relative to customer
payments.  The Company bills its customers for these services with
payment generally due upon receipt of the invoice.  Revenue under
these arrangements is recognized upon the performance of the service by the
Company’s employees.  The associated payroll costs are recorded as
cost of sales.  There is no right of cancellation or refund provisions
in these arrangements and the Company has no further obligations once the
services are rendered by the employee.




The
Company’s contingent staffing management services enable customers to manage the
selection, procurement and supervision of contingent staffing suppliers through
its web-enabled proprietary and third party software, and include providing
Company operating and support personnel to assist customers.  The
Company does not sell its software to customers, but rather utilizes it in
connection with providing services.  Consultant consolidation
services, provided as a component of contingent staffing management services,
comprise the management of invoicing for a customer’s multiple services
providers that results in the consolidation of invoices for all of a customer’s
individual staffing vendors.  The Company recognizes revenue for the
amount of its fees for these services, which are determined as a percentage of
the gross billings to customers from the contingent staffing suppliers, as the
services are performed.  The Company invoices its customers for its
fees together with the billings from the contingent staffing suppliers, which
are reflected in accounts receivable as there is no right of offset with the
liabilities for amounts due the




F-7




contingent
staffing suppliers.  Amounts invoiced related to contingent staffing
supplier billings are included in accrued expenses and are settled after our
collection of the related receivables.





We rely
on our billable employees, staffing suppliers and clients to timely submit their
work and expense reports.  It is our policy to record all activity
(net sales of services and cost of services) performed during each reporting
period for which we receive and process the submissions of our billable
employees, staffing suppliers and clients within two weeks after the end of each
of our first three quarters and within five weeks after the end of our fiscal
year.




In
accordance with Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of
Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,
reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue.





The
Company follows Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, in the presentation of revenues and
expenses.  This guidance requires that the Company assess whether it
acts as a principal in the transaction or as an agent acting on behalf of
others.  In situations where the Company is the principal in the
transaction and has the risks and rewards of ownership, the transactions are
recorded gross in our consolidated statements of income.





Staff
Augmentation:  A portion of the Company’s revenue is
attributable to license agreements.  Under the terms of such license
agreements, the Company is fully responsible for the payment of the
employees.  The Company submits all invoices for services performed to
the customers and they are required to remit their payments for services
performed directly to the Company.  The Company includes these
revenues and related direct costs in its net sales of services and cost of
services on a gross basis.  The net distribution to the licensee is
based on a percentage of gross profit generated.  The net
distributions to licensees included in selling, general and administrative
expenses for the fiscal years ended December 28, 2008, December 30, 2007 and
December 31, 2006 were approximately $1,852,000, $2,147,000 and $2,519,000,
respectively.





Financial Outsourcing Services:The Company provides back office support to unaffiliated independently
owned staffing companies.  These arrangements typically require the
Company to process the payrolls and invoicing for these unaffiliated staffing
companies through the use of the Company’s information technology
system.  In return, these unaffiliated staffing companies (the
Company’s customers) pay the Company a fixed percentage of the weekly billings
it processed for them.  Payment of the Company’s fees is due upon the
completion of the processing of weekly payrolls and
invoicing.  Revenue is recognized over the period as the Company
performs these services for the amount of the fixed fee the Company receives as
stipulated in the applicable contract.  There is no right of
cancellation or refund provisions in these arrangements and the Company has no
further obligations once the services are rendered.




The
Company also provides funding services to unaffiliated independently owned
staffing companies.   These arrangements typically require the
Company to advance funds to these unaffiliated staffing companies (the Company’s
customers) in exchange for the receivables related to invoices remitted to their
clients for services performed during the prior week.  The advances
are repaid through the remittance of payments of receivables by their clients
directly to the Company.  The Company withholds from these advances an
administrative fee and other charges as well as the amount of receivables
relating to prior advances that remain unpaid after a specified number of
days.  These administrative fees and other charges are recognized as
revenue when earned.  There is no right of cancellation or refund
provisions in these arrangements and the Company has no further obligations once
the services are rendered.





Cash
Equivalents





The
Company considers all highly liquid short-term investments with an original
maturity at the time of purchase of three months or less to be cash
equivalents.  Cash equivalents consist of overnight deposits and
certificates of deposit.  The Company reflects book overdraft
positions within operating cash flows, when the bank has not advanced cash to
the Company.




F-8




Accounts
Receivable




The
Company’s accounts receivable balances are comprised of trade and unbilled
receivables.  The Company maintains an allowance for doubtful accounts
recorded as an estimate of the accounts receivable balance that may not be
collected.  This allowance is calculated on the trade receivables with
consideration for the Company’s historical write-off experience, the current
aging of receivables, general economic climate and the financial condition of
customers.  After giving due consideration to these factors, the
Company establishes specific allowances for uncollectible
accounts.  The allowance for the funding and service fee receivables
is calculated with consideration for the ability of the Company’s clients to
absorb chargebacks due to the uncollectibility of the funded receivables. Bad
debt expense, which increases the allowance for doubtful accounts, is recorded
as an operating expense in our consolidated statements of income.




Property
and Equipment




Property
and equipment are carried at cost.  Depreciation is provided 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 of
the related asset are capitalized.  The Company capitalizes its
internal costs related to the development of software for internal use under the
provisions of SOP 98-1, which are amortized over the estimated life of the
software of approximately three to five years.




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 in
accordance with Financial Accounting Standards Board (“FASB”) Statement No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets (“SFAS 144”).  If the sum of
the expected undiscounted future cash flows is less than the carrying amount of
the long-lived asset, an impairment loss is recognized for the difference
between the fair value and carrying amount of the asset.




Goodwill




The
Company applies FASB No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), to evaluate goodwill impairment annually and
whenever events or circumstances make it more likely than not that an impairment
may have occurred.  SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level.  The Company’s reporting units
are represented by the reportable segments (see note 16).  Goodwill is
tested for impairment using a two-step process.  In the first step,
the fair market value of a reporting unit is compared to its carrying
value.  If the fair value of a reporting unit exceeds the carrying
value of the net assets assigned to a reporting unit, goodwill is not considered
impaired and no further testing is required.  The Company engages an
independent valuation specialist to assist with the determination of the fair
value of reporting units which is based on a combination of both the income
approach and the market approach of the valuation analysis.  Under the
income approach, fair value is determined based on estimated future cash flows
discounted by an estimated weighted-average cost of capital, which reflects the
overall level of inherent risk of the Company.  Estimated future cash
flows are based on the Company’s internal projection model and include
significant judgment relating to growth rates, discount factors, tax rates and
other considerations.  Under the market approach, comparable companies
based on valuation multiples are used to arrive at a fair value.  For
reasonableness, the summation of reporting units’ fair values is compared to the
Company’s market capitalization.




If the
carrying value of the net assets assigned to a reporting unit exceeds the fair
value of a reporting unit, a second step of the impairment test is performed in
order to determine the implied fair value of a reporting unit’s
goodwill.  Determining the implied fair value of goodwill requires
valuation of a reporting unit’s tangible and intangible assets and liabilities
in a manner similar to the allocation of purchase price in a




F-9




business
combination.  If the carrying value of a reporting unit’s goodwill
exceeds it implied fair value, goodwill is deemed impaired and is written down
to the extent of the difference.




There was
no indication of goodwill impairment for the years ended December 28, 2008,
December 30, 2007 and December 31, 2006.




Income
Taxes




Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and net
operating loss and tax credit carryforwards.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those differences are expected to be
recovered or settled. The Company records a valuation allowance against deferred
tax assets for which realization of the asset is not considered
more-likely-than-not.




In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 “Accounting for Income
Taxes” (“FIN 48”).  Under FIN 48, the Company may recognize the
tax benefit from an uncertain tax position only if it is more-likely-than-not
that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the tax position.  The
tax benefits recognized in the financial statements from such tax position
should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement.  The
Company adopted the provisions of FIN 48 effective January 1,
2007.  The impact upon adoption was to decrease accumulated deficit in
2007 by approximately $3.4 million and to decrease accruals for uncertain tax
positions and related penalties and interest by a corresponding
amount.




The
Company recognizes accrued interest and penalties related to income tax matters
within provision for income tax expense.




Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Some of the significant estimates involved are the
collectibility of receivables, the recoverability of long-lived assets, deferred
tax assets, goodwill, accrued workers compensation liabilities, reserves for
litigation and contingencies and the fair value of share-based payment
compensation.  Given that global economies are undergoing a period of
substantial uncertainty, estimates are subject to a greater degree of
uncertainty and actual results could differ from those estimates.




Fair
Values of Financial Instruments




The
carrying amounts of cash equivalents, accounts receivable, funding and service
fees receivable, accounts payable and accrued expenses are believed to
approximate fair value due to the short-term maturity of these financial
instruments.  The carrying amounts of the Company’s revolving line of
credit obligations is believed to approximate its fair value since the interest
rate fluctuates with market changes in interest rates.




The
Company’s remaining fixed rate debt obligations are not traded, and their fair
value may fluctuate significantly due to changes in the demand for securities of
their type, the overall level of interest rates, conditions in the high yield
capital markets, and perceptions as to the Company’s condition and
prospects.  After giving consideration to similar debt issues, and
other market information, the Company believes that its remaining outstanding
fixed rate debt instruments, being $1.8 million outstanding principal amount of




F-10




its 8%
Convertible Subordinated Notes, had an approximate fair value of $1.7 million at
December 28, 2008.




Deferred
Financing Costs




Deferred
financing costs consist of costs associated with the issuance of the Company’s
debt.  Such costs are amortized over the life of the related debt,
which ranges from 3 to 13 years, and unamortized costs are fully expensed upon
discharge of indebtedness.  The Company wrote-off deferred financing
costs of $108,000 in fiscal 2008, $137,000 in fiscal 2007 and $128,000 in fiscal
2006 due to the early extinguishment of debt (see note 8) which costs are
included in loss on debt extinguishment in the consolidated statements of
income.




Income
Per Share




Basic
income per common share is computed by dividing net income available to common
stockholders by the weighted average number of shares of common stock
outstanding during each period.  Diluted income per share is computed
assuming the exercise of stock options and warrants with exercise prices less
than the average market value of the common stock during the period, and the
conversion of convertible debt and preferred stock into common stock, if
dilutive.




Foreign
Currency




Assets
and liabilities of foreign subsidiaries are translated into U.S. dollars using
the exchange rate in effect at the balance sheet date.  Results of
operations are translated using the average exchange rates during the fiscal
year.  Related translation adjustments are accumulated in a separate
component of stockholders’ deficit and transaction gains and losses are
recognized in the consolidated statement of income when realized.




Accrued
Workers Compensation Liability




The
Company is generally self-insured with respect to workers compensation claims,
but maintains excess workers compensation coverage to limit exposure for amounts
over $4.5 million.  The Company records its estimate of the ultimate
cost of, and liabilities for, workers compensation obligations based on
actuarial computations using the Company's loss history as well as industry
statistics.  In determining its liabilities, the Company includes
amounts for estimated claims incurred but not reported.




The
ultimate cost of workers compensation will depend on actual costs incurred to
settle the claims and may differ from the liabilities established by the Company
for those claims.  Accruals for workers compensation claims are
included in accrued expenses in the consolidated balance sheets.




Stock
Compensation Plans




Effective
December 26, 2005, the Company adopted the provisions of the FASB Statement
123(R), Share-Based Payments(“SFAS No. 123(R)”).  Under the provisions of SFAS 123(R),
share-based payments are measured at the grant date, based on the fair value of
the award, and are expensed over the requisite service period.  The
Company adopted SFAS 123(R) using the modified-prospective method and,
accordingly, prior period results have not been restated to reflect the fair
value method of recognizing compensation expense relating to stock
options.  All new awards are subject to the provisions of SFAS
123(R).  Since all outstanding option awards were fully vested on the
date of adoption, no compensation expense was recorded for outstanding
awards.  For the fiscal year ended December 28, 2008, $65,000 of
compensation expense was recorded within selling, general and administrative
expense and the Company recognized an income tax benefit of $28,000 related to
such expense.  For the fiscal year ended December 30, 2007, $90,000 of
compensation expense was recorded within selling, general and




F-11




administrative
expense and the Company recognized an income tax benefit of $35,000 related to
such expense.  For the fiscal year ended December 31, 2006, $98,000 of
compensation expense was recorded within selling, general and administrative
expense and the Company recognized an income tax benefit of $38,000 related to
such expense.




Under the
modified-prospective method, SFAS 123(R) applies to all new awards and to awards
outstanding on the effective date that are subsequently modified or cancelled
since all outstanding awards on the date of adoption were fully
vested.  The Company recognizes compensation expense for the fair
value of all awards on a straight-line basis over the total requisite service
period.  Cumulative compensation expense recognized at any date will
at least equal the grant date fair value of the vested portion of the award at
that time.




The
Company estimates the fair value of share-based payments using the Black-Scholes
option pricing model.  Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by the employees
who receive equity awards.




The per
share weighted average fair value of stock options granted was $0.93 during the
year ended December 28, 2008, $1.28 during the year ended December 30, 2007, and
$1.40 during the year ended December 31, 2006.  In addition to the
exercise and grant date prices of the awards, certain weighted average
assumptions that were used to estimate the fair value of stock option grants
during the past three fiscal years are listed in the table below:




Fiscal
      YearDecember
      28, 2008
                        
                        
                        December
      30, 2007
                        
                        
                        December
      31, 2006Expected
      dividend yield
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %Expected
      volatility
                        
                        
                        47.2
                        %
                        
                        
                        49.0
                        %
                        
                        
                        55.0
                        %Risk-free
      interest rate
                        
                        
                        3.5
                        %
                        
                        
                        5.2
                        %
                        
                        
                        5.0
                        %Expected
      term (years)
                        
                        
                        5
                        
                        
                        
                        5
                        
                        
                        
                        5





The
Company estimates expected volatility based primarily on historical daily price
changes of the Company’s stock and other known or expected
trends.  The risk-free interest rate is based on the United States
(“U.S.”) treasury yield curve in effect at the time of grant.  The
expected option term is the number of years that the Company estimates that
options will be outstanding prior to exercise.  The expected term of
these awards was determined using the “simplified method” prescribed in SEC
Staff Accounting Bulletin (“SAB”) No. 107.





No stock
options were exercised in fiscal 2008 and, consequently, no income tax benefits
were realized by the Company.  The income tax benefit realized
relating to the exercise of stock option awards was $5,000 for the year ended
December 30, 2007, all of which is classified as a financing cash inflow in the
Company’s consolidated statement of cash flows.   The income tax
benefit realized relating to the exercise of stock option awards was $212,000
for the year ended December 31, 2006, of which $135,000 is classified as a
financing cash inflow in the Company’s  consolidated statement of cash
flows.




Out-
of-Period Adjustments




In the
fourth quarter of 2008, the Company recorded an adjustment to decrease
accumulated other comprehensive income and increase other income for
approximately $223,000, net of tax, relating to immaterial errors that
originated in each of the prior quarters of 2008.  Since these errors,
either individually or in the aggregate, were not material to any of the prior
2008 quarterly periods, and the error had no impact on the full year 2008
financial statements, the Company recorded the out-of-period correction of these
errors in the fourth quarter results.  The out-of-period correction
had no impact on the financial position of the Company since the activity was
contained within stockholders’ deficit.




New
Accounting Pronouncements




F-12




In
December 2007, the FASB issued SFAS 141-R, Business Combinations(“SFAS
141-R”).  This statement is effective for us on January 1, 2009,
and applies prospectively to business combinations for which the acquisition
date is on or after January 1, 2009. SFAS 141-R significantly changes the
accounting for acquisitions. Some of the major provisions are that acquisition
related costs will generally be expensed as incurred, contingent consideration
will be recorded at fair value on the acquisition date, with adjustments to
certain forms of contingent liabilities impacting the results of operations. The
impact that SFAS 141-R will have on our consolidated financial statements after
adoption will depend on the nature, terms, and size of the acquisitions, if any,
we consummate after adoption.




In
December 2007, the FASB issued FAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“FAS 160”). FAS 160 re-characterizes
minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity.
Under FAS 160, a change in control will be measured at fair value, with any gain
or loss recognized in earnings. The effective date for FAS 160 is for annual
periods beginning on or after December 15, 2008. Early adoption and
retroactive application of FAS 160 to fiscal years preceding the effective date
are not permitted. We currently do not have minority interests in our
consolidated subsidiaries.







(3)           Property
and Equipment




Property
and equipment as of December 28, 2008 and December 30, 2007, consisted of (in
thousands):




Estimated
      useful lives in years
                              
                              
                              2008
                              
                              
                              2007Computer
      equipment and related software
                              
                              
                              3-7
                              
                              
                              $
                              32,208
                              
                              
                              
                              26,948Furniture
      and fixtures
                              
                              
                              3-10
                              
                              
                              
                              2,426
                              
                              
                              
                              2,431Leasehold
      improvements
                              
                              
                              3-7
                              
                              
                              
                              676
                              
                              
                              
                              65735,310
                              
                              
                              
                              30,036Less
      accumulated depreciation and amortization
                              
                              
                              
                              
                              
                              
                              (25,253
                              )
                              
                              
                              (22,313
                              )$
                              10,057
                              
                              
                              
                              7,723





Depreciation
and amortization expense related to property and equipment was $3,156,000,
$2,803,000 and $3,055,000 for the fiscal years ended December 28, 2008, December
30, 2007 and December 31, 2006, respectively.





(4)           Goodwill




As of
December 28, 2008 and December 30, 2007, the carrying amount of the Company’s
goodwill was attributable to its Staff Augmentation segment ($22.9 million) and
its Human Capital Management segment ($9.2 million).





There
have been no changes in the carrying amount of goodwill during the past three
fiscal years.





(5)           Accrued
Expenses




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




2008
                          
                          
                          2007Payroll,
      payroll taxes and sub-vendor payables
                          
                          $
                          106,310
                          
                          
                          
                          85,043Book
      overdrafts
                          
                          
                          13,497
                          
                          
                          
                          11,322Other
                          
                          
                          11,634
                          
                          
                          
                          9,460$
                          131,441
                          
                          
                          
                          105,825




F-13





(6)           Foreign
Currency




We
conduct our operations in a number of foreign countries and the results of our
local operations are reported in the applicable foreign currencies and then
translated into U.S. dollars at the applicable foreign currency exchange rates
for inclusion in our consolidated financial statements.  We are
subject to exposure for devaluations and fluctuations in currency exchange
rates.  These risks are heightened in the current volatile economic
environment, including the recent volatility in the value of the U.S. dollar and
other currencies worldwide and instability in the credit markets.




In 2008,
we experienced $1.0 million in losses on foreign currency transactions as
compared to gains on foreign currency transactions in 2007 of
$723,000.  We have not entered into any swap agreements or other
hedging transactions as a means of limiting exposure to interest rate or foreign
currency fluctuations.




(7)           Income
Taxes




The
Company’s income tax provision for the years ended as of December 28, 2008,
December 30, 2007, and December 31, 2006, was as follows (in
thousands):





2008
                
                
                2007
                
                
                2006Income
      from continuing operations
                
                $
                4,535
                
                
                
                3,309
                
                
                
                3,373





The
income tax provision for the fiscal years ended December 28, 2008, December 30,
2007, and December 31, 2006, consisted of (in thousands):





2008
                              
                              
                              2007
                              
                              
                              2006Current:Federal
                              
                              $
                              2,538
                              
                              
                              
                              1,318
                              
                              
                              
                              1,734State
                              
                              
                              429
                              
                              
                              
                              315
                              
                              
                              
                              165Foreign
                              
                              
                              120
                              
                              
                              
                              263
                              
                              
                              
                              117Total
      current
                              
                              
                              3,087
                              
                              
                              
                              1,896
                              
                              
                              
                              2,016Deferred:Federal
                              
                              
                              1,125
                              
                              
                              
                              1,237
                              
                              
                              
                              1,059State
                              
                              
                              307
                              
                              
                              
                              176
                              
                              
                              
                              298Foreign
                              
                              
                              16
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      deferred
                              
                              
                              1,448
                              
                              
                              
                              1,413
                              
                              
                              
                              1,357Total
      income tax provision (benefit)
                              
                              $
                              4,535
                              
                              
                              
                              3,309
                              
                              
                              
                              3,373





Total
income tax provision relating to continuing operations differed from income
taxes at the statutory federal income tax rate of 34% as a result of the
following items (in thousands):





2008
                              
                              
                              2007
                              
                              
                              2006Income
      taxes at statutory federal   tax rate of
    34.0%
                              
                              $
                              3,543
                              
                              
                              
                              2,821
                              
                              
                              
                              2,533State
      and local taxes, net of federal tax
                              
                              
                              576
                              
                              
                              
                              384
                              
                              
                              
                              221Change
      in tax rates
                              
                              
                              -
                              
                              
                              
                              20
                              
                              
                              
                              54Foreign
      taxes
                              
                              
                              80
                              
                              
                              
                              263
                              
                              
                              
                              6Tax
      contingency matters
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              247Loss
      on subsidiary stock
                              
                              
                              -
                              
                              
                              
                              (476
                              )
                              
                              
                              -Non-deductible
      meals
                              
                              
                              399
                              
                              
                              
                              245
                              
                              
                              
                              354Other
      non-deductible expenses
                              
                              
                              (63
                              )
                              
                              
                              52
                              
                              
                              
                              (42
                              )Income
      tax provision
                              
                              $
                              4,535
                              
                              
                              
                              3,309
                              
                              
                              
                              3,373




F-14





The
components of deferred tax assets and liabilities at December 28, 2008 and
December 30, 2007 (in thousands) are as follows:





2008
                                      
                                      
                                      2007Deferred
      tax assets:Receivable
      allowances
                                      
                                      $
                                      44
                                      
                                      
                                      
                                      68Tax
      benefit of foreign NOL carry forwards
                                      
                                      
                                      213
                                      
                                      
                                      
                                      -Unrealized
      gains and losses
                                      
                                      
                                      568
                                      
                                      
                                      
                                      -Excess
      book amortization expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      339Accrued
      liabilities and other
                                      
                                      
                                      2,134
                                      
                                      
                                      
                                      2,399Foreign
      tax credits
                                      
                                      
                                      -
                                      
                                      
                                      
                                      263Share-based
      payment compensation
                                      
                                      
                                      112
                                      
                                      
                                      
                                      86Tax
      benefit of capital loss carryforward
                                      
                                      
                                      2,165
                                      
                                      
                                      
                                      2,165Tax
      benefit of state NOL carryforwards,
                                        net of federal
    effect
                                      
                                      
                                      716
                                      
                                      
                                      
                                      7345,952
                                      
                                      
                                      
                                      6,054Less
      valuation allowance
                                      
                                      
                                      (2,855
                                      )
                                      
                                      
                                      (2,803
                                      )Total
      deferred tax assets
                                      
                                      
                                      3,097
                                      
                                      
                                      
                                      3,251Deferred
      tax liabilities:Prepaids
                                      
                                      
                                      504
                                      
                                      
                                      
                                      722Excess
      tax depreciation
                                      
                                      
                                      3,065
                                      
                                      
                                      
                                      1,797Excess
      tax amortization
                                      
                                      
                                      249
                                      
                                      
                                      
                                      -Other
                                      
                                      
                                      -
                                      
                                      
                                      
                                      180Total
      deferred tax liabilities
                                      
                                      
                                      3,818
                                      
                                      
                                      
                                      2,699Net
      deferred tax asset
                                      
                                      $
                                      (721
                                      )
                                      
                                      
                                      552





At
December 28, 2008, the Company had approximately $13.0 million of state net
operating losses which expire in the tax years 2009 through 2028, if
unused.  In addition, the Company had approximately $736,000 of
foreign net operating losses which expire 2012 through 2016 except for the
United Kingdom and Namibia which have indefinite carry forward
periods.  At December 28, 2008, the Company had approximately $5.5
million of capital loss carry forwards which expire in the tax years 2009
through 2012, if unused.




The
increase in the Company’s valuation allowance was primarily related to
additional state net operating losses of $101,000, and foreign net operating
losses of $214,000 for which management has determined that it may not realize
the future tax benefits on a more likely-than-not basis, net of write-offs of
previously deferred tax assets and a related valuation allowance of
$263,000.




In
assessing the realizability of deferred tax assets, management considers whether
it is more-likely-than-not that some portion or all of the deferred tax assets
will not be realized.  A valuation allowance is provided when it is
more-likely-than-not that some portion, or all, of the deferred tax assets will
not be realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income, the ability to carryback
future losses to recover income taxes paid and tax planning strategies that
could be implemented.  As of December 28, 2008, the Company’s deferred
tax asset valuation allowance related to: capital loss carry forwards ($2.2
million), net operating loss carry forwards ($476,000), and foreign net
operating loss carry forwards of ($214,000).




A
reconciliation of the total amounts of the Company’s unrecognized tax benefits
for the fiscal year ended December 28, 2008 is as follows (in
thousands):





Unrecognized
      tax benefits at 12/30/2007
                      
                      $
                      83Increases
      (decreases) in unrecognized tax benefits – tax positions taken during a
      prior period
                      
                      
                      437Increases
      (decreases) in unrecognized tax benefits – tax positions taken during the
      current period
                      
                      
                      358
     F-15
  Increases
      (decreases) in unrecognized tax benefits – settlements with taxing
      authorities
                    
                    
                    -Reductions
      in unrecognized tax benefits – lapses of the statutes of
      limitations
                    
                    
                    -Unrecognized
      tax benefits as of December 28, 2008
                    
                    $
                    878







As of
and for the fiscal year ended December 28, 2008, interest and penalties
recognized in the Company’s consolidated balance sheets or statements of income
were immaterial.  If recognized, the total amount of the Company’s
unrecognized tax benefits as of December 28, 2008 would affect the Company’s
effective tax rate.





The
Company files U.S., state and foreign income tax returns in jurisdictions with
varying statutes of limitations.  The 2005 through 2008 tax years
generally remain subject to examination by federal, most state tax, and foreign
authorities.  In addition to the U.S., the Company’s major taxing
jurisdictions include Hong Kong and Japan.  The Company has not been
nor is it currently under examination for any of the tax years within the
statute of limitations.




(8)           Debt




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




2008
                      
                      
                      200712%
      Senior Notes, due December 1, 2010
                      
                      $
                      -
                      
                      
                      
                      11,7148%
      Subordinated Convertible Note, due December 2, 2009
                      
                      
                      1,778
                      
                      
                      
                      1,644Revolving
      line of credit, due July 24, 2010, with interest payable at prime and/or
      LIBOR plus a stated percentage with a weighted average rates of 3.4%
      (LIBOR plus 1.50%) at December 28, 2008 and 6.9% (LIBOR plus 1.75%) at
      December 30, 2007
                      
                      
                      68,200
                      
                      
                      
                      70,500Total
      long-term and short-term debt
                      
                      $
                      69,978
                      
                      
                      
                      83,858







Contractual
maturities of long-term debt are as follows (in thousands):




2010
                
                $
                68,200Total
                
                $
                68,200





Senior
Notes:  In November 1997,
COI issued $110 million of 12% Senior Notes due December 1, 2007, subsequently
extended until December 1, 2010 (the “Senior Notes”), principally to fund its
acquisition of Uniforce Services, Inc.  The Senior Notes provided for
semi-annual payments of interest at the rate of 12% per annum.  On
August 25, 2008, the Company redeemed all of the remaining Senior Notes then
outstanding at a redemption price equal to 102% of their outstanding principal
amount ($5.2 million), plus accrued interest from June 1, 2008 to the redemption
date.  The total redemption price, including accrued interest and the
2% premium, was $5.5 million.




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




As a
result of the Company’s redemption of the remaining Senior Notes in August 2008
and its earlier repurchase of $6.5 million principal amount of Senior Notes in
April 2008 from an unrelated party (at a




F-16




price
equal to 101% of the principal amount, plus accrued interest), the Company
recognized a loss on debt extinguishment of $278,000 in the year ended December
28, 2008, including the write-off of $108,000 of deferred financing
costs.    The Company effected the redemption and repurchase
of the Senior Notes in 2008 utilizing available funds under the Company’s
revolving line of credit agreement to pay the redemption price (see “Revolving
Line of Credit,” below, in this note 8).




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





Under the
terms of the Convertible Note, interest is payable either in cash or in-kind at
the Company’s election.  Debt service costs associated with the
Convertible Note have been satisfied through additions to principal through
December 1, 2008 (the most recent semi-annual interest payment
date).  Additional principal is convertible into common stock on the
same basis as other amounts outstanding under the Convertible Note, which
provides for conversion into common stock at the rate of $1.70 per
share.  As a result of its election to pay interest in-kind under the
Convertible Note, the Company recognized beneficial conversion features of
$14,000 during fiscal 2008 and $43,000 during fiscal 2007, which resulted in an
increase in deferred financing costs and paid-in capital.  The
Convertible Note may be prepaid in whole or in part, provided that the market
value of the Company’s common stock exceeds $2.13 per share for a specified
period of time.  The holder has 10 days to convert the Convertible
Note following notice of prepayment.  The holder of the Convertible
Note is a related party (see note 17 to our consolidated financial
statements).  The Company is currently in discussions with the holder
of the Convertible Note to potentially extend this obligation beyond its current
maturity date of December 2, 2009.  No assurance can be given that the
Company will resolve such discussions on a satisfactory basis.  As of
the date of the issuance of these consolidated financial statements, the Company
had sufficient excess availability under its bank credit facility, based upon
the borrowing base as defined in the loan agreement, to fully repay the
Convertible Note (see “--Revolving Line of Credit,” below.




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




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




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




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




F-17




transactions,
making acquisitions and incurring additional indebtedness.  The PNC
Credit Facility also  limits capital expenditures to $6.0 million
annually.




The PNC
Credit Facility was amended to provide for a temporary reduction in the required
availability under the facility for the purpose of enabling the Company to
redeem all of the Senior Notes that remained outstanding ($5.2 million principal
amount), which were redeemed on August 25, 2008 (see “Senior Notes,” above, in
this note 8).  The PNC Credit Facility permitted the Company to use
loan proceeds to repurchase its Senior Notes subject to the Company’s obligation
to restore excess availability under the facility to $5.0 million, which the
Company has done.




Under the
PNC Credit Facility, the Company had outstanding $4.2 million of standby letters
of credit, principally as security for the Company’s obligations under its
workers compensation insurance policies   and had remaining
availability of $23.6 million as of December 28, 2008 based upon the borrowing
base as defined in the loan agreement.  The Company was in compliance
with all financial covenants under the PNC Credit Facility at December 28,
2008.  The Company has had preliminary discussions with PNC to extend
the PNC Credit Facility beyond its current maturity date of July 24,
2010.  No assurance can be given that the Company will resolve such
discussions on a satisfactory basis.  If we are unable to
satisfactorily resolve such discussions with PNC or otherwise find a source of
capital to repay or refinance this obligation, we will be unable to repay the
PNC Credit Facility at maturity, which would have a material adverse effect on
our financial condition.  The credit markets have tightened
significantly since the second quarter of 2008.  We cannot predict
whether capital will be available to us with interest rates and on terms
acceptable to us, if at all, when the PNC Credit Facility matures.




(9)
            Income
      Per Share





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





2008
                              
                              
                              2007
                              
                              
                              2006Basic
      income per common share:Net
      income
                              
                              $
                              5,886
                              
                              
                              
                              4,989
                              
                              
                              
                              4,078Dividends
      on preferred stock:Series
      2003A
                              
                              
                              461
                              
                              
                              
                              461
                              
                              
                              
                              461Series
      2003B
                              
                              
                              38
                              
                              
                              
                              38
                              
                              
                              
                              38Series
      2004A
                              
                              
                              506
                              
                              
                              
                              506
                              
                              
                              
                              5061,005
                              
                              
                              
                              1,005
                              
                              
                              
                              1,005Income
      available to common stockholders
                              
                              $
                              4,881
                              
                              
                              
                              3,984
                              
                              
                              
                              3,073Weighted
      average common shares outstanding
                              
                              
                              17,388
                              
                              
                              
                              17,385
                              
                              
                              
                              17,317Basic
      income per common share
                              
                              $
                              0.28
                              
                              
                              
                              0.23
                              
                              
                              
                              0.18




F-18





Diluted
      income per common share:Income
      available to common stockholders
                                        
                                        $
                                        4,881
                                        
                                        
                                        
                                        3,984
                                        
                                        
                                        
                                        3,073Dividends
      on preferred stock:Series
      2003A
                                        
                                        
                                        461
                                        
                                        
                                        
                                        461
                                        
                                        
                                        
                                        461Series
      2003B
                                        
                                        
                                        38
                                        
                                        
                                        
                                        38
                                        
                                        
                                        
                                        38Series
      2004A
                                        
                                        
                                        506
                                        
                                        
                                        
                                        506
                                        
                                        
                                        
                                        5061,005
                                        
                                        
                                        
                                        1,005
                                        
                                        
                                        
                                        1,005After
      tax equivalent of interest expense on 8% Subordinated Convertible
      Note
                                        
                                        
                                        76
                                        
                                        
                                        
                                        76
                                        
                                        
                                        
                                        70Income
      for purposes of computing diluted income per common share
                                        
                                        $
                                        5,962
                                        
                                        
                                        
                                        5,065
                                        
                                        
                                        
                                        4,148Weighted
      average common shares outstanding
                                        
                                        
                                        17,388
                                        
                                        
                                        
                                        17,385
                                        
                                        
                                        
                                        17,317Dilutive
      stock options
                                        
                                        
                                        102
                                        
                                        
                                        
                                        278
                                        
                                        
                                        
                                        363Assumed
      conversion of 8% Subordinated Convertible Note
                                        
                                        
                                        974
                                        
                                        
                                        
                                        900
                                        
                                        
                                        
                                        832Assumed
      conversion of Preferred Stock:Series
      2003A
                                        
                                        
                                        7,990
                                        
                                        
                                        
                                        7,549
                                        
                                        
                                        
                                        7,111Series
      2003B
                                        
                                        
                                        1,253
                                        
                                        
                                        
                                        1,182
                                        
                                        
                                        
                                        1,111Series
      2004A
                                        
                                        
                                        4,873
                                        
                                        
                                        
                                        4,576
                                        
                                        
                                        
                                        4,278Weighted
      average common shares outstanding for purposes of computing diluted income
      per share
                                        
                                        
                                        32,580
                                        
                                        
                                        
                                        31,870
                                        
                                        
                                        
                                        31,012Diluted
      income per common share from continuing operations
                                        
                                        $
                                        0.18
                                        
                                        
                                        
                                        0.16
                                        
                                        
                                        
                                        0.13





In
addition, options and warrants to purchase 1,939,000, 1,295,000 and 1,295,000
shares of common stock were outstanding as of the end of the fiscal years 2008,
2007 and 2006, respectively, but were not included in the computation of diluted
income per share because their effect would be anti-dilutive.




(10)
            Preferred
      Stock




The
Company’s certificate of incorporation authorizes the Company to issue up to
10,000,000 shares, par value $.01 per share, of preferred stock in such series
and having such rights and preferences as determined by the Company’s board of
directors.  The board has created three series of preferred stock,
Series 2003A with 6,500 authorized shares, Series 2003B with 3,500 authorized
shares and Series 2004A with 15,000 authorized shares.





The
rights and preferences of the Company’s Series 2003A, 2003B and 2004A
Convertible Preferred Stock  (collectively, the “Series Preferred
Stock”) are substantially identical except that the conversion price is $1.05
per share for the Series 2003A Preferred Stock, $0.54 per share for the Series
2003B Preferred Stock and $1.70 per share for the Series 2004A Preferred
Stock.  The conversion price is the price at which a holder of shares
of Series Preferred Stock may convert such instruments into common stock (or, in
certain circumstances, into a participating preferred stock which in turn will
be convertible into common stock at the same effective rate).  The
Company is permitted to require conversion of the Series Preferred Stock if the
average market price of its common stock for any six month period is at least
$3.25 per share for the Series 2003A and 2003B Preferred Stock or $4.50 per
share for the Series 2004A Preferred Stock, but only if the shares of Series
Preferred Stock can be converted into freely tradable common stock.





Each
share of Series Preferred Stock has a face amount of $1,000, has no voting
rights and bears annual cumulative dividends of $75 per share (7.5% per
annum).  Upon liquidation, the holders of the Series Preferred Stock
will be entitled to a liquidation preference of $1,000 per share plus the amount
of cumulated, unpaid dividends before any distributions shall be made to the
holders of common stock or any other junior series or class of stock of the
Company.  Unless the holders of two-thirds of the shares of the Series
Preferred Stock outstanding shall have otherwise consented, no series or class
of preferred stock




F-19




having
rights or preferences that are not junior to the Series Preferred Stock shall be
issued by the Company.  The holders of the Series Preferred Stock have
no redemption rights.





The
Company can only pay dividends on the Series Preferred Stock if (i) dividends
can legally be paid in accordance with Delaware law, (ii) the Company’s board of
directors, in its discretion upon the exercise of its fiduciary duties, declares
that a dividend be paid, and (iii) payment of the dividend is permitted under
the terms of the PNC Credit Facility.  At December 28, 2008, there
were cumulative, unpaid and undeclared dividends of $2.7 million on the Series
2003A Preferred Stock, $202,000 on the Series 2003B Preferred Stock and $2.1
million on the Series 2004A Preferred Stock.





In the
event that the conversion of Series Preferred Stock into common stock of
COMFORCE would require stockholder approval in accordance with the rules and
regulations of the Securities and Exchange Commission or the NYSE Alternext U.S.
(formerly, the American Stock Exchange), or any other exchange or quotation
system on which the Company’s shares are then listed, the Series Preferred Stock
held by such holder shall not be convertible into common stock, but rather is
convertible into shares of non-voting participating preferred stock having a
liquidation preference of $0.01 per share (but no other preferences) to be
created by the Company.  The participating preferred stock will in
turn be convertible into the Company’s common stock (on the same basis as if the
conversion to common stock from Series Preferred Stock had occurred directly) if
the conversion will not require stockholder approval in accordance with the
rules and regulations of the Securities and Exchange Commission or NYSE
Alternext U.S., or any other exchange or quotation system on which the Company’s
shares are then listed.   The holder of the Series Preferred
Stock is a related party (see note 17).





(11)         Stock
Options and Warrants




In 1993,
the Company adopted, with stockholder approval, a Long-Term Stock Investment
Plan (the “1993 Plan”) which, as amended, authorized the grant of options to
purchase up to 5,000,000 shares of the Company’s common stock to executives, key
employees and agents of the Company and its subsidiaries.  All
executive officers and other officers, directors and employees, as well as
independent agents and consultants, of the Company and its subsidiaries were
eligible to participate in the 1993 Plan and to receive option grants made
before December 31, 2002.  Effective as of December 31, 2002, no
additional options were issuable under the 1993 Plan.




In 2002,
the Company adopted with stockholder approval the 2002 Stock Option Plan (the
“2002 Plan”), which originally authorized the grant of options to purchase up to
1,000,000 shares of the Company’s common stock to executives, key employees and
agents of the Company and its subsidiaries.  In 2006, the stockholders
approved an amendment to the 2002 Plan to permit the issuance of an additional
1,000,000 shares under the plan.  All executive officers and other
officers, directors and employees, as well as independent agents and
consultants, of the Company and its subsidiaries are eligible to participate in
the 2002 Plan and to receive option grants.




The
following table summarizes stock option activity during the year ended December
28, 2008:




Number
                                          of
      Shares
                                        
                                        
                                        Weighted
                                          Average
                                          Exercise
      Price
                                        
                                        Weighted
                                          Average
                                          Remaining
                                          Contractual
      Term (Years)
                                        
                                        Aggregate
                                          Intrinsic
                                          Value
                                        
                                        Weighted
                                          Average
                                          Grant
      Date Option Fair ValueOutstanding
      at
                                          December
      30,2007
                                        
                                        
                                        2,371,100
                                        
                                        
                                        $
                                        2.81Granted
                                        
                                        
                                        70,000
                                        
                                        
                                        
                                        2.04
                                        
                                        
                                        
                                        
                                        
                                        
                                        0.93Forfeitures
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Expired
                                        
                                        
                                        (86,100
                                        )
                                        
                                        
                                        8.98Exercised
                                        
                                        
                                        -
  F-20
   Outstanding
      and exercisable at December 28, 2008
                              
                              
                              2,355,000
                              
                              
                              $
                              2.57
                              
                              4.17
                              
                              $
                              2,700





There
were no stock option exercises in 2008.  The total cash received from
stock option exercises for the years ended December 30, 2007 and December 31,
2006 was $26,000 and $209,000, respectively.  The aggregate intrinsic
value of exercised options for December 30, 2007 and December 31, 2006 was
$12,472 and $539,906, respectively.  The Company expects to settle
future employee stock option exercises with the issuance of new
shares.




Warrants:




At
December 28, 2008 and December 30, 2007, the Company had outstanding warrants to
purchase a total of 169,000 shares of common stock at a price of $7.55 per
share.  These warrants are fully vested and expire in
2009.




(12)        Litigation
and Contingencies




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




The
Illinois EPA took control of the site and began to construct a cap on the
site.  In 2008, the Company received a demand from the U.S. EPA for
more than $2.0 million in past costs and a demand from the Illinois
Environmental Protection Agency (“IEPA”) for over $14.0 million in IEPA's past
costs for its partial work on the cap.  The agencies are also
demanding that the parties complete construction of the cap and investigate
whether a groundwater remedy is required.  Cost estimates for that
work have not yet been made and a final allocation of costs among the
potentially responsible parties have not yet been made and a group has not yet,
but will likely form to address these demands.  The Company's share is
expected to be less than 1% of the total liability for these costs assuming that
the level of participation remains at least as high as it has been in the
past.  The group believes that it has some defenses and challenges to
the government's past cost claims and will likely try to negotiate a reduction
in the amount of the claims.  Furthermore, the Company has made
inquiries of the insurance carriers for Apeco to determine if it has coverage
under old insurance policies.  No assurance can be given that the
costs to the Company to resolve this claim will be within management’s
estimates.




Pipeline Case:  In
July 2005, the Company’s subsidiary, COMFORCE Technical Services, Inc. (“CTS”)
was served with an amended complaint in the suit titled Reyes V. East Bay
Municipal Utility District, et al, filed in the Superior Court of California,
Alameda County, in connection with a gas pipeline explosion in November 2004
that killed five workers and injured four others.  As part of a
construction project to lay a water transmission line, a backhoe operator
employed by a construction contractor unaffiliated with CTS allegedly struck and
breached a gas pipeline and an explosion occurred when leaking gas
ignited.  The complaint names various persons involved in the
construction project as defendants, including CTS.  The complaint
alleges, among other things, that CTS was negligent in failing to properly mark
the location of the pipeline.  The complaint did not specify specific
monetary damages.




F-21




CTS was
subsequently named as a defendant in 15 other lawsuits concerning this accident
in the Superior Court of California which have been consolidated with the Reyes
case in a single coordinated action styled as the Gas Pipeline Explosion Cases
in the Superior Court of California, Contra Costa County.  Two
co-defendants brought cross-claims against CTS.  In addition, a
company that provided insurance coverage to a private home and property damaged
by the explosion brought a subrogation action against CTS.  CTS denies
any culpability for this accident.  Following an investigation of the
accident, Cal-OSHA issued citations to four unrelated contractors on the
project, but declined to issue any citations against CTS.  Although
Cal-OSHA did not issue a citation against CTS, it will not be determinative in
the pending civil cases.




CTS
requested that its insurance carriers defend it in these actions, and the
carrier under the primary policy appointed counsel and has defended CTS in these
actions.  As of June 2007, CTS settled with 17 of the 19 plaintiffs,
in each case within the limits of its primary policy, except as described
below.  With the settlements, the limits under the primary policy have
been reached.  The umbrella insurance carrier for CTS had previously
denied the claims of CTS for coverage, claiming that the matter was within
the policy exclusions.  This carrier also initiated a declaratory
action in Contra Costa County, California in which it asked the court to
determine whether the claims against CTS were within the policy
exclusions.  In March 2007, CTS and this carrier reached a tentative
settlement under which the carrier agreed to dismiss CTS from the declaratory
action and defend and insure CTS in the remaining cases when the primary
coverage limits have been reached, subject to an agreed upon contribution by CTS
and the carrier's reservation of rights to seek recovery against CTS for the
claims of Mountain Cascade, Inc., a co-defendant not related to CTS
that served as a contractor for East Bay Municipal Utility
District.  Management of CTS (and the Company) believes that any
losses in respect of Mountain Cascade should be covered under the umbrella
policy.  However, the carrier has declined to release
its reservation of rights as to this unresolved Mountain Cascade claim, and
the amount that CTS will be required to contribute to any settlement of or
judgment on the remaining plaintiffs’ cases is not determinable.  As
of February 2009 one of the two remaining matters was settled as the unresolved
portion of a settlement was finalized as an appeal that was being taken from a
prior ruling on the settlement was not pursued timely and dismissed by the court
at the same time we were advised the party was discontinuing its pursuit and
would accept its allocated portion of a prior settlement.  This leaves
only the claim by Mountain Cascade, Inc.
unresolved.   Accordingly, management of CTS (and the Company)
cannot estimate the amount of losses that CTS may ultimately incur in connection
with these cases, if any, other than to estimate that any losses will be less
than $1.5 million. No assurance can be given that the costs to CTS to resolve
all remaining claims will be within management’s estimates.




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




The
contract did not directly address taxes payable to foreign jurisdictions, but
the contracting officer advised CTS by letter that it should not make tax
payments or withholdings in the host countries because the Agency had negotiated
or would negotiate with the host countries and expected these discussions to
lead to bilateral agreements exempting contractors and contractor personnel from
all tax liability.  The contract provides that CTS will be reimbursed
for “all fines, penalties, and reasonable litigation expenses incurred as a
result of compliance with specific contract terms and conditions or written
instructions from the Contracting Officer.”




The
contracting officer subsequently advised CTS that the U.S. government has
concluded its efforts to obtain bilateral agreements, and directed CTS to
itself  undertake mitigation efforts.  CTS engaged an
independent accounting firm to assist it with these efforts, which have been
substantially completed except in some countries experiencing social unrest and
government instability.  As a result of its analysis of host country
tax laws and negotiations with host country governments, in most cases, CTS has
either determined that no liability exists for wage tax liabilities or it has
instituted procedures to withhold or pay applicable wage taxes for its
employees.  As for any remaining host countries, management has
concluded that it is not probable that wage tax assessments will be made against
CTS or, if made, that they will be enforced




F-22




against
it.  Although the Agency has agreed to reimburse us with respect to
any such wage tax liabilities, any amounts assessed against CTS for wage tax
liabilities could potentially exceed the amount available to us from our own
resources or under the PNC Credit Facility.  In such event, it is
anticipated that the Company would request PNC to make a special advance or
request the Agency to pre-fund these liabilities.




Other Matters:  The
Company is also a party to contract and employment-related litigation matters,
and audits of state and local tax returns arising in the ordinary course of its
business.  In the opinion of Management, the aggregate liability, if
any, with respect to any such legal proceedings that arise in the ordinary
course of business will not materially adversely affect our financial position,
results of operations, or cash flows.  The Company expenses legal
costs associated with contingencies when incurred.  The Company
maintains general liability insurance, property insurance, automobile insurance,
fidelity insurance, errors and omissions insurance, professional/medical
malpractice insurance, fiduciary insurance, cyber insurance and directors’ and
officers’ liability insurance for domestic and foreign operations as management
deems appropriate and prudent. The Company is generally self-insured with
respect to workers compensation, but maintains excess workers compensation
coverage to limit its maximum exposure to such claims.




(13)        Savings
Incentive and Profit Sharing Plan





The
Company provides a savings incentive and profit sharing plan (the
“Plan”).  All eligible employees may make contributions to the Plan on
a pre-tax salary deduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code.  No contributions to the Plan
were made by the Company in 2008, 2007 and 2006.




Certain
employees who perform work for governmental agencies are required to be covered
under a separate defined contribution plan.  During 2008, 2007 and
2006, the Company recorded approximately $641,000, $858,000 and $1,325,000,
respectively, of expense related to these benefits.




(14)         Lease
Commitments




The
Company leases certain office space and equipment.  Rent expense for
all operating leases in 2008, 2007 and 2006 approximated $3,235,000, $3,177,000
and $3,183,000, respectively.




As of
December 28, 2008, future minimum rent payments due under the terms of
noncancelable operating leases excluding amounts that will be paid for operating
costs are (in thousands):




2009
                                
                                $
                                2,9332010
                                
                                
                                1,8372011
                                
                                
                                1,1822012
                                
                                
                                700Thereafter
                                
                                
                                23$
                                6,675





(15)        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 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.




At the
end of fiscal 2008, the Company had three customers that accounted for 29.1% of
the Company’s total accounts receivable, one of which had accounts receivable
balances in excess of 10% of the Company’s total accounts
receivable.  At the end of fiscal 2007, the Company had five customers
that




F-23




accounted
for 42.5% of the Company’s total accounts receivable, one of which had accounts
receivable balances in excess of 10% of the Company’s total accounts
receivable.  For fiscal 2006, the Company had four customers that
accounted for 38.5% of the Company’s total accounts receivable, two of which had
accounts receivable balances in excess of 10% of the Company’s total accounts
receivable.  The largest four customers of the Company accounted for
an aggregate of approximately 26.3%, 24.7% and 25.3% of the Company’s revenues
for the fiscal years 2008, 2007 and 2006, respectively.




(16)         Segment
Information




The
Company’s reportable segments are distinguished principally by the types of
services offered to the Company’s clients.  The Company manages its
operations and reports its results through three operating segments -- Human
Capital Management Services, Staff Augmentation and Financial Outsourcing
Services.  The Human Capital Management Services segment primarily
provides contingent workforce management services.  The Staff
Augmentation segment provides healthcare support, technical and engineering,
information technology (IT), telecommunications and other staffing services. The
Financial Outsourcing Services segment provides funding and back office support
services to independent consulting and staffing companies.




COMFORCE
evaluates the performance of its segments and allocates resources to them based
on operating contribution, which represents segment revenues less direct costs
of operations, excluding the allocation of corporate general and administrative
expenses.  Assets of the operating segments reflect primarily accounts
receivable and goodwill associated with segment activities; all other assets are
included as corporate assets.  The Company does not evaluate or
account for expenditures for long-lived assets on a segment basis.




The table
below presents information on revenues and operating contribution for each
segment for the years ended December 28, 2008, December 30, 2007 and December
31, 2006, and items which reconcile segment operating contribution to COMFORCE’s
reported income from continuing operations before income taxes (in
thousands):




December
      28, 2008
                                              
                                              
                                              December
      30, 2007
                                              
                                              
                                              December
      31, 2006Net
      sales of services:Human
      Capital Management Services
                                              
                                              $
                                              389,482
                                              
                                              
                                              
                                              363,696
                                              
                                              
                                              
                                              337,741Staff
      Augmentation
                                              
                                              
                                              213,912
                                              
                                              
                                              
                                              219,471
                                              
                                              
                                              
                                              226,304Financial
      Outsourcing Services
                                              
                                              
                                              3,242
                                              
                                              
                                              
                                              3,518
                                              
                                              
                                              
                                              3,776$
                                              606,636
                                              
                                              
                                              
                                              586,685
                                              
                                              
                                              
                                              567,821Operating
      contribution:Human
      Capital Management Services
                                              
                                              $
                                              16,975
                                              
                                              
                                              
                                              16,140
                                              
                                              
                                              
                                              14,878Staff
      Augmentation
                                              
                                              
                                              18,527
                                              
                                              
                                              
                                              18,207
                                              
                                              
                                              
                                              20,085Financial
      Outsourcing Services
                                              
                                              
                                              3,034
                                              
                                              
                                              
                                              3,078
                                              
                                              
                                              
                                              2,85438,536
                                              
                                              
                                              
                                              37,425
                                              
                                              
                                              
                                              37,817Consolidated
      expenses:Corporate
      general and administrative
                                                expenses
                                              
                                              
                                              19,217
                                              
                                              
                                              
                                              18,856
                                              
                                              
                                              
                                              17,744Depreciation
      and amortization
                                              
                                              
                                              3,156
                                              
                                              
                                              
                                              2,803
                                              
                                              
                                              
                                              3,095Interest
      and other, net
                                              
                                              
                                              5,464
                                              
                                              
                                              
                                              7,025
                                              
                                              
                                              
                                              9,358Loss
      on debt extinguishment
                                              
                                              
                                              278
                                              
                                              
                                              
                                              443
                                              
                                              
                                              
                                              16928,115
                                              
                                              
                                              
                                              29,127
                                              
                                              
                                              
                                              30,366Income
      from continuing operations before income taxes
                                              
                                              $
                                              10,421
                                              
                                              
                                              
                                              8,298
                                              
                                              
                                              
                                              7,451Total
      assets:Human
      Capital Management Services
                                              
                                              $
                                              113,775
                                              
                                              
                                              
                                              96,120
  F-24
   Staff
      Augmentation
                                              
                                              
                                              59,061
                                              
                                              
                                              
                                              54,116Financial
      Outsourcing Services
                                              
                                              
                                              8,941
                                              
                                              
                                              
                                              13,101Corporate
                                              
                                              
                                              19,959
                                              
                                              
                                              
                                              20,047$
                                              201,736
                                              
                                              
                                              
                                              183,384





(17)
            Related
      Party Transactions





Convertible Note
and Preferred Stock:  Fanning CPD Assets, LP (the “Fanning
Partnership”) is the holder of the following instruments issued by the Company:
the Convertible Note, of which $1.8 million in principal was outstanding at
December 28, 2008, 6,148 shares of Series 2003A Preferred Stock, 513 shares of
Series 2003B Preferred Stock and 6,737 shares of Series 2004A Preferred Stock,
the terms of which are described under notes 8 and 10.  The Fanning
Partnership is a limited partnership in which John C. Fanning, the Company’s
chairman and chief executive officer, holds an 82.4% economic interest. Rosemary
Maniscalco, a director of the Company, is the general partner of the Fanning
Partnership, but has no pecuniary interest in the partnership.  Harry
V. Maccarrone, a director and the executive vice president and chief financial
officer of the Company, is the trustee of a trust and the general partner of a
partnership that are limited partners in the Fanning Partnership, but he has
only a nominal pecuniary interest.





In 2008,
the Fanning Partnership received $134,000 in in-kind interest payments under the
Convertible Note at the annual rate of 8.0%.  In addition, each of the
Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per
annum.  Dividends have cumulated in the amount of $2.7 million on the
Series 2003A Preferred Stock, $202,000 on the Series 2003B Preferred Stock and
$2.1 million on the Series 2004A Preferred Stock.  Although these
cumulated dividends have not been declared by the Company’s board of directors
and are not payable, the Fanning Partnership can elect to convert all or any
portion of these shares of Series Preferred Stock, including the cumulated
dividends, into common stock (or, in certain circumstances, into a participating
preferred stock which in turn will be convertible into common stock at the same
effective rate) at a conversion price of $1.05 per share for the Series 2003A
Preferred Stock, $0.54 per share for the Series 2003B Preferred Stock and $1.70
per share for the Series 2004A Preferred Stock.  The Convertible Note
is also convertible on substantially the same basis as the Series Preferred
Stock at a conversion price of $1.70 per share.  The conversion price
is the price at which the Fanning Partnership may convert the Series Preferred
Stock or Convertible Note into common stock (or the equivalent preferred
stock).





Other
Transactions:  Rosemary Maniscalco, through a company owned by
her, provides consulting services to the Company, at the rate of up to $1,500
per day, plus expenses.  During 2008, 2007 and 2006, the Company paid
$113,923, $124,420 and $71,220, respectively, for such consulting
services.  Rosemary Maniscalco is the Vice Chairman of the Company’s
Board.





(18)
            Sale of Niche Telecom
      Operations





In 2004,
COMFORCE sold its interest in two telecom subsidiaries in the Staff Augmentation
segment.  The buyer, Spears Holding Company, Inc. (“Spears”), is
controlled by an individual who was one of the principals of these companies
when they were sold to COMFORCE in 1998.  The consideration included
cash of $1,448,000 and short-term promissory notes of $1,150,000 which were paid
during fiscal 2004.  Consideration also included three long-term
promissory notes totaling $3.7 million which were valued at $1.4 million by an
independent valuation firm. The sale resulted in a gain of $1,102,000, which
represented the excess of the net proceeds (cash and short-term notes of
$2,598,000 plus the fair value of the long-term notes of $1,400,000, less
transaction costs of $144,000), over the net book value of the net assets of the
business sold of $2,752,000.  The Company did not recognize any gain
on this transaction until the cash payments it received exceeded its investment
($2,896,000) in the business sold.  The cash received under the sale
agreement, including principal and interest on the notes, was recorded as a
reduction of, and, during the second quarter of 2005, had eliminated the balance
in net assets held for sale.  Cash received during 2005 in excess of
net assets held for sale of $101,000 has been recorded as a gain from the sale
of discontinued operations.  This was partially offset by $31,000, net
of tax, of legal fees which resulted in income from discontinued operations for
fiscal 2005 of $70,000.




F-25





Following
mediation and extended negotiations, the parties reached settlement in
September, 2007 under which $1.0 million was received in the fourth quarter of
2007 in full satisfaction of all amounts due to the Company.  The $1.0
million was recorded as a gain from the sale of discontinued operations in
2007.  The settlement resulted in a capital loss for income tax
purposes.  Accordingly, no provision for income taxes was
recorded.




(19)
              Selected Quarterly Financial Data
      (unaudited)(In
      thousands, except per share data and
footnotes)





Fiscal
      2008 (2)
                              
                              QuarterFirst
                              
                              
                              Second
                              
                              
                              Third
                              
                              
                              Fourth
                              
                              
                              Year
      ended
                                December
      28, 2008Net
      sales of services
                              
                              $
                              150,210
                              
                              
                              $
                              152,756
                              
                              
                              $
                              149,435
                              
                              
                              $
                              154,235
                              
                              
                              $
                              606,636Gross
      profit
                              
                              
                              23,808
                              
                              
                              
                              24,391
                              
                              
                              
                              23,551
                              
                              
                              
                              24,698
                              
                              
                              
                              96,448Net
      income
                              
                              
                              992
                              
                              
                              
                              1,599
                              
                              
                              
                              1,347
                              
                              
                              
                              1,948
                              
                              
                              
                              5,886Income
      per share: (1)Basic
                              
                              $
                              0.04
                              
                              
                              $
                              0.08
                              
                              
                              $
                              0.06
                              
                              
                              $
                              0.10
                              
                              
                              $
                              0.28Diluted
                              
                              $
                              0.03
                              
                              
                              $
                              0.05
                              
                              
                              $
                              0.04
                              
                              
                              $
                              0.06
                              
                              
                              $
                              0.18





Fiscal
      2007
                          
                          QuarterFirst
                          
                          
                          Second
                          
                          
                          Third
                          
                          
                          Fourth
                          
                          
                          Year
      ended
                            December
      30,
                            2007Net
      sales of services
                          
                          $
                          141,603
                          
                          
                          $
                          149,696
                          
                          
                          $
                          150,667
                          
                          
                          $
                          144,719
                          
                          
                          $
                          586,685Gross
      profit
                          
                          
                          22,149
                          
                          
                          
                          23,254
                          
                          
                          
                          23,164
                          
                          
                          
                          24,014
                          
                          
                          
                          92,581Net
      income
                          
                          
                          914
                          
                          
                          
                          1,074
                          
                          
                          
                          1,789
                          
                          
                          
                          2,212
                          
                          
                          
                          5,989Income
      per share:  (1)Basic
                          
                          $
                          0.04
                          
                          
                          $
                          0.05
                          
                          
                          $
                          0.09
                          
                          
                          $
                          0.11
                          
                          
                          $
                          0.29Diluted
                          
                          $
                          0.03
                          
                          
                          $
                          0.03
                          
                          
                          $
                          0.06
                          
                          
                          $
                          0.07
                          
                          
                          $
                          0.19


(1)           Since
per share information is computed independently for each quarter and the full
year, based on the respective average number of common shares outstanding, the
sum of the quarterly per share amounts does not necessarily equal the per share
amounts for the fiscal year.
   F-26





COMFORCE CORPORATION AND
SUBSIDIARIES




Schedule
II Valuation and Qualifying Accounts




Fiscal
years ended December 28, 2008, December 30, 2007 and December 31,
2006




(in
thousands)








Balance
      at beginning of period
              
              
              Impact
      of Adopting SAB 108
              
              
              Charged
      to costs and expenses
              
              
              Charged
      to other accounts
              
              
              Deductions
                  (Net
      (write-offs) recoveries)
              
              
              Balance
                  at
      end of periodFor
      the fiscal year ended December 28, 2008:Allowance
      for doubtful accounts
              
              $
              173
              
              
              
              -
              
              
              
              1
              
              
              
              -
              
              
              
              (62
              )
              
              
              112For
      the fiscal year ended December 30, 2007:Allowance
      for doubtful accounts
              
              $
              276
              
              
              
              -
              
              
              
              89
              
              
              
              -
              
              
              
              (192
              )
              
              
              173For
      the fiscal year ended December 31, 2006:Allowance
      for doubtful accounts
              
              $
              705
              
              
              
              (421
              )
              
              
              85
              
              
              
              -
              
              
              
              (93
              )
              
              
              276





F-27
   
  EXHIBIT
INDEX
 
 Unless
otherwise indicated, for documents incorporated herein by reference to exhibits
included in SEC filings of COMFORCE Corporation, the registration number for
COMFORCE Corporation is 001-06801.
 
 3.1
                Restated
      Certificate of Incorporation of COMFORCE Corporation, 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 COMFORCE Corporation
      filed with the Commission on May 10, 1996 (Registration No. 033-6043) and
      incorporated herein by reference).3.2
                Certificate
      of Ownership (Merger) of COMFORCE Corporation into Lori Corporation
      (included as an exhibit to COMFORCE Corporation’s Annual Report on Form
      10-K for the fiscal year December 31, 1995 and incorporated herein by
      reference).3.3
                Certificate
      of Amendment of Certificate of Incorporation of COMFORCE Corporation filed
      with the Secretary of State of Delaware on October 28, 1996 (included as
      an exhibit to COMFORCE Corporation’s Registration Statement on Form S-8 of
      COMFORCE Operating, Inc. filed with the Commission on March 13, 2000
      (Registration No. 333-56962) and incorporated herein by
      reference).3.4
                Certificate
      of Ownership (Merger) of AZATAR into COMFORCE Corporation (included as an
      exhibit to COMFORCE Corporation's Current Report on Form 8-K dated
      November 8, 1996 and incorporated herein by reference).3.5
                Amended
      and Restated Certificate of Designation and Determination of Rights and
      Preferences of Series 2003A, 2003B and 2004A Convertible Preferred Stock
      of COMFORCE Corporation filed with the Secretary of State of Delaware on
      December 8, 2004 (included as an exhibit to COMFORCE Corporation's Current
      Report on Form 8-K dated December 13, 2004 and incorporated herein by
      reference).3.6
                Bylaws
      of COMFORCE Corporation, as amended and restated effective as of February
      26, 1997 (included as an exhibit to COMFORCE Corporation’s Annual Report
      on Form 10-K for the fiscal year December 31, 1996 and incorporated herein
      by reference).3.7
                Amendment
      to Amended and Restated Bylaws of COMFORCE Corporation, as adopted and
      effective as of May 3, 2006 (included as an exhibit to COMFORCE
      Corporation’s Current Report on Form 8-K filed May 4, 2006 and
      incorporated herein by reference).3.8
                Amendment
      to Amended and Restated Bylaws of COMFORCE Corporation, as adopted on
      December 20, 2007 and effective as of January 1, 2008 (included as an
      exhibit to COMFORCE Corporation’s Current Report on Form 8-K filed
      December 20, 2007 and incorporated herein by
reference).4.1
                Second
      Amended and Restated 8% Subordinated Convertible Note due December 2, 2009
      of COMFORCE Corporation (included as an exhibit to COMFORCE Corporation's
      Current Report on Form 8-K dated December 13, 2004 and incorporated herein
      by reference).10.1
                Amended
      and Restated Employment Agreement dated as of March 31, 2008 between
      COMFORCE Corporation, COMFORCE Operating, Inc. and John C. Fanning (filed
      as an exhibit to the Company’s Current Report on Form 8-K filed April 2,
      2008 and incorporated herein by reference).
  
  
 10.2
                Amended
      and Restated Employment Agreement dated as of March 31, 2008 between
      COMFORCE Corporation, COMFORCE Operating, Inc. and Harry V. Maccarrone
      (filed as an exhibit to the Company’s Current Report on Form 8-K filed
      April 2, 2008 and incorporated herein by reference).10.3
                Company’s
      2002 Stock Option Plan adopted at the Company’s 2002 annual meeting of
      stockholders held June 13, 2002 (included as Annex A to the definitive
      proxy statement of COMFORCE Corporation filed April 29, 2002 and
      incorporated herein by reference).10.4
                Amendment
      to the Company’s 2002 Stock Option Plan adopted at the Company’s 2006
      annual meeting of stockholders held June 7, 2006 (included as an exhibit
      to COMFORCE Corporation’s Quarterly Report on Form 10-Q for the quarter
      ended June 25, 2006 and incorporated herein by
  reference).10.5
                Second
      Restated Deferred Compensation Plan approved as of March 31, 2008 (filed
      as an exhibit to the Company’s Current Report on Form 8-K filed April 2,
      2008 and incorporated herein by reference).10.6
                Second
      Restated Deferred Vacation Plan approved as of March 31, 2008 (filed as an
      exhibit to the Company’s Current Report on Form 8-K filed April 2, 2008
      and incorporated herein by reference).10.7
                Revolving
      Credit and Security Agreement dated as of June 25, 2003 among the Company,
      PNC Bank, National Association, as lender and administrative agent, and
      other named lenders (included as an exhibit to COMFORCE Corporation's
      Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and
      incorporated herein by reference).10.8
                Waiver
      and Amendment No. 1 dated as of March 17, 2004 to Revolving Credit and
      Security Agreement dated as of June 25, 2003 among the Company, PNC Bank,
      National Association, as lender and administrative agent, and other named
      lenders (included as an exhibit to COMFORCE Corporation's Quarterly Report
      on Form 10-Q for the quarter ended March 28, 2004 and incorporated herein
      by reference).10.9
                Amendment
      No. 2 to Revolving Credit and Security Agreement dated as of September 29,
      2004 among the Company and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (included as an exhibit to COMFORCE
      Corporation's Quarterly Report on Form 10-Q for the quarter ended
      September 26, 2004 and incorporated herein by
  reference).10.10
                Amendment
      No. 3 to Revolving Credit and Security Agreement dated as of February 3,
      2005 among the Company and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (filed as an exhibit to the Company’s Current
      Report on Form 8-K filed February 9, 2005 and incorporated herein by
      reference).10.11
                Amendment
      No. 4 to Revolving Credit and Security Agreement dated as of May 13, 2005
      among the Registrant and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (included as an exhibit to COMFORCE
      Corporation’s Current Report on Form 8-K filed May 18,
    2005).10.12
                Amendment
      No. 5 to Revolving Credit and Security Agreement dated as of December 22,
      2005 among the Company and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (included as an exhibit to COMFORCE
      Corporation’s Current Report on Form 8-K filed July 18, 2006 and
      incorporated herein by reference).
  
  
 10.13
                Amendment
      No. 6 to Revolving Credit and Security Agreement dated as of July 12, 2006
      among the Company and certain of its operating subsidiaries, as borrowers,
      and PNC Bank, National Association, as agent and lender, and other
      participating lenders (included as an exhibit to COMFORCE Corporation’s
      Current Report on Form 8-K filed July 18, 2006 and incorporated herein by
      reference).10.14
                Amendment
      No. 7 to Revolving Credit and Security Agreement dated as of May 24, 2007
      among the Company and certain of its operating subsidiaries, as borrowers,
      and PNC Bank, National Association, as agent and lender, and other
      participating lenders (included as an exhibit to COMFORCE Corporation’s
      Quarterly Report on Form 10-Q for the quarter ended July 1, 2007 and
      incorporated herein by reference).10.15
                Amendment
      No. 8 to Revolving Credit and Security Agreement dated as of June 6, 2008
      among the Company and certain of its operating subsidiaries, as borrowers,
      and PNC Bank, National Association, as agent and lender, and other
      participating lenders (included as an exhibit to COMFORCE Corporation’s
      Quarterly Report on Form 10-Q for the quarter ended June 29, 2008 and
      incorporated herein by reference).21.1*
                List
      of Subsidiaries.23.1*
                Consent
      of KPMG LLP.31.1*
                Rule
      13a-14(a) certification of chief executive officer in accordance with
      section 302 of the Sarbanes-Oxley Act of 2002.31.2*
                Rule
      13a-14(a) certification of chief financial officer in accordance with
      section 302 of the Sarbanes-Oxley Act of 200232.1*
                Section
      1350 certification of chief executive officer in accordance with section
      906 of the Sarbanes-Oxley Act of 2002.32.2*
                Section
      1350 certification of chief financial officer in accordance with section
      906 of the Sarbanes-Oxley Act of
2002.
 _________________________
  * Filed
herewith.