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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the fiscal year ended December 28, 2003



OR



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
|- | --------------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 1-6081



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COMFORCE Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 36-2262248                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York    |  | 11797                            
|(Address of principal executive offices)                       |  | (Zip Code)                       



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



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



|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of Each Exchange on Which Registered
|Common stock, $0.01 par value |  | American Stock Exchange                  



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



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes ̈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: $5,237,072.



Indicate the number of shares outstanding
of each of the issuers classes of common stock, as of the latest practicable date. At March 24, 2004, there were 16,659,402 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 29, 2004 are incorporated herein by reference in Items 10, 11, 12, 13 and 14.



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PART I



ITEM 1. BUSINESS



Overview



COMFORCE
Corporation (COMFORCE) is a leading provider of specialty staffing, consulting and outsourcing services primarily to Fortune 500 companies for their healthcare support, technical and engineering services, information technology,
telecommunications and other staffing services. 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 40 offices (31 company-owned and 9 licensed), the Company recruits and places highly skilled
contingent personnel and provides financial and outsourcing services for a broad customer base. The Companys labor force consists primarily of computer programmers, systems consultants, telecommunication engineers, analysts, engineers,
technicians, scientists, researchers, healthcare professionals and skilled office support personnel.



Recent Developments



Sale of
Niche Telecom Operations



In March 2004, COMFORCE sold
a controlling interest in two telecom subsidiaries that operated in the customer premise equipment services niche of the telecom sector and contracted to sell its remaining minority interest in these companies by June 30, 2004. These subsidiaries
operated in niche businesses that remained outside of the Companys core competency in telecom, which was and continues to be primarily but not exclusively in the engineer, furnish and install (EF&I) area. The buyer, Spears Holding Company,
Inc., is controlled by an individual who was one of the principals of these companies when they were sold to COMFORCE in 1998.



The total consideration to which the Company is entitled (including the deferred sale of the minority interest) is cash of $2.4 million payable through
June 30, 2004 and five-year notes in the face amount of $3.7 million valued at $1.4 million by an independent valuation firm. The Company plans to pay down its bank debt with available net cash proceeds from this sale. The Company will recognize no
gain on this transaction until cash payments (including payments under the notes) received are in excess of its investment in the business sold. Revenues for the subsidiaries that were sold represented less than 3.5% of the Companys
consolidated revenues in fiscal 2003.



Retirement of Senior Notes



In the first quarter of 2004, the Company repurchased
$13.5 million principal amount of its 12% Senior Notes due 2007 (Senior Notes) for $11.3 million in separate transactions with unrelated parties. As a result of these repurchases, the Company will recognize a gain on debt extinguishment
of $2.0 million in the first quarter of 2004, including a reduction of approximately $219,000 of deferred financing costs. The purpose of these transactions was to improve the Companys balance sheet through the elimination of high interest
rate debt.



Services



The Company provides a wide range of staffing, consulting, financial and
outsourcing services, including web-enabled solutions for the effective procurement, tracking and engagement of contingent or non-employee labor. 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, telecommunication 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 and permanent personnel costs.



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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 Unlimited subsidiary. The Staff Augmentation segment
provides healthcare support, including RightSourcing Vendor Management Services, technical, information technology (IT), telecom and other staffing services. The Financial Outsourcing Services segment provides payroll, funding and outsourcing
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



The Company provides Human Capital Management services through its PrO
Unlimited subsidiary. PrO Unlimited has become a market leader in providing end-to-end web-enabled solutions for the effective procurement, tracking and engagement of contingent or non-employee labor. PrO Unlimited utilizes a combination of
proprietary web-based software and intellectual capital to manage all aspects of this rapidly growing segment of the workforce. While the Company focuses on selling its services primarily to Fortune 500 companies, PrO Unlimiteds contingent
workforce management tools are suitable for a cross-section of large employers throughout the United States and in the Canadian and European offices maintained by U.S. employers. The contingent labor force consists of independent contractors,
temporary workers, consultants, returning retirees and freelancers. A growing number of corporations are utilizing contingent labor solutions to enable them to manage their cost structures more effectively and to better position them to weather
business strategy transition and maintain streamlined just-in-time labor pools. PrO Unlimited has been a pioneer in assisting companies with government regulatory compliance regarding contingent personnel, particularly the management,
tax, benefit and liability issues associated with the contingent workforce.



PrO Unlimiteds program is designed to replace vendor-on-premise programs that large companies have been using in recent years to manage their contingent workforces. PrO Unlimited seeks to draw upon its own
resources as well as Internet-based information and tools, and to provide a range of services through its web-enabled software (described below) that enable large companies to effectively manage their contingent workforces. Rather than competing
with traditional staffing firms, PrO Unlimited acts as a vendor neutral facilitator providing customized management reports and proprietary Total Quality Management (TQM) programs that are designed to generate cost savings
and improve efficiencies for client companies. PrO Unlimiteds typical client is a large company that relies upon contingent labor to meet important elements of its staffing needs. PrO Unlimited currently provides the following services:



| |  | Contingent Staffing Management provides a consolidated vendor-neutral staffing desk solution for procuring contingent employees by utilizing many different service
providers to provide clients hiring managers with the most qualified candidate in the shortest period of time at the lowest cost.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The 1099 Management Solution  helps customers manage the tax and benefit risks associated with the use of independent contractors to ensure compliance with all
governmental regulations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consultant Consolidation Services  acts as single-source supplier by consolidating and managing invoicing for, and negotiating and monitoring services provided by, its
customers multiple service providers, including small consulting firms and true independent contractors.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Professional Payrolling Services  provides automated payroll services and worker benefits as a third party processor.
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | Workforce Alliance Network Direct (WAND) PrO Unlimiteds exclusive web-enabled WAND system provides an end-to-end solution for the engagement,
management and tracking of the contingent workforce. This allows hiring managers and staffing vendors to communicate 24 hours a day to place job orders, check the status of job orders, submit resumes, review resumes, schedule interviews, select
candidates and create custom reports on staffing activity. In addition, workers can utilize WANDs e-timecarding capabilities to submit time and expense reports online. WAND also provides extensive reporting, consolidated billing, security
check and screening services.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Staff Augmentation Segment



Healthcare Support Services and RightSourcing



The Company has identified the healthcare support services market as a source of significant growth potential. In this
sector, 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 medical reimbursements and other
personnel in support of insurance claims processing, billing, medical recordkeeping and utilization review/case management professionals.



The Company also offers its RightSourcing Vendor Management Services Program to medical facilities, including to five hospitals. Through this program the
Company offers cost savings and process improvement to its clients by managing all aspects of their staffing services program including management of all staffing vendors, order process, invoice approval and data capture and analysis.



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



Information Technology



In the IT field, the Company provides highly skilled developers, technical support personnel, systems consultants and 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.



The Companys IT customers operate in diverse industry sectors and include a number of Fortune 100 companies.



Telecom



The Company provides professional and skilled telecom personnel to plan,
design, engineer, furnish, install and maintain wireless, wire line, PBX and enterprise telecommunications systems (known as EF&I services). The Companys EF&I services include outside plant engineering and construction. COMFORCE
Telecom maintains a Tier-1 status among the various telecommunications manufacturers and service providers and its customer base includes two wireless companies. In 2003, COMFORCE Telecom became registered to the TL 9000 standard. As described in
Recent Developments in this Item 1, in March 2004, the Company sold a controlling interest in two niche telecom subsidiaries and contracted to sell its remaining minority interest in these companies by June 30, 2004.



The Companys telecom customers include national and regional telecom
providers.



Technical and Engineering 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 Technical Services division also provides its clients with draft/design services in addition to skilled technicians
along with quality control and quality 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.



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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, mortgage staffing support, general clerical, data entry and billing support, and telemarketing and call center staffing. 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.



Financial Outsourcing Services Segment



The Company provides funding and back office support services to approximately 70 independent consulting and staffing
companies. The Companys back office services include payroll processing, billing and funding, preparation of various management reports and analysis, 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 pursues the collection of all
receivables with independent consulting and staffing companies; however, the amount of any accounts receivable that are not collected within a specified period after billing is charged back by the Company to such firm.



Customers



The Company provides staffing, consulting and outsourcing services to a broad range of customers, including investment
banking firms, computer software and hardware manufacturers, automotive industry, government agencies, aerospace and avionics firms, utilities, national laboratories, pharmaceutical companies, cosmetics companies, healthcare facilities,
telecommunication equipment manufacturers, telecommunication service providers, educational institutions and accounting firms. Services to Fortune 500 companies represent a majority of the Companys revenues.



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



The Company generally
invoices its customers weekly, bi-weekly or monthly. IT, telecom and professional staffing customers generally obtain the Companys services on a purchase order basis, while technical and engineering services, healthcare support and Human
Capital Management Services customers generally enter into longer term contracts with the Company.



During the fiscal year December 28, 2003, no single customer accounted for 10% or more of the Companys revenues. The largest four customers of the
Company accounted for approximately 20.5% of the Companys revenues.



Sales and Marketing



The Company services its
customers through a network of 31 company-owned and 9 licensed offices located in 19 states across the United States and its corporate headquarters located in Woodbury, New York. The Companys sales and marketing strategy is focused on
increasing its share of existing customer business, expanding its business with existing customers through cross-selling and by establishing relationships with new customers. The Company solicits customers through personal sales presentations,
telephone marketing, direct mail solicitation, referrals from customers, and advertising in a variety of local and national media including the Yellow Pages, magazines, newspapers, trade publications and through the Companys website
(www.comforce.com).



The Companys Sales and Resource
Managers are responsible for maintaining contact with existing clients, maximizing the number of requisitions that the Company will have the opportunity to fill, and then working with the recruiting staff to offer the client the candidate or
candidates that best fit the specification. New account targets are



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chosen by assessing: (1) the need for contract labor with 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 500 client base, it also places a significant marketing focus on faster-growing middle-market companies and on
governmental agencies and large not-for-profit institutions such as hospitals and research facilities.



Billable Employees



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,
places advertisements in local newspapers, trade magazines, its website and otherwise actively recruits through the Internet. The Company continuously updates its proprietary database to reflect changes in personnel skill levels and availability.
Upon receipt of assignment specifications, the Company searches the database to identify suitable personnel. Once an 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.



Management believes that the Company enhances its ability to attract recruits by making extensive training opportunities available to its employees. The Company employs Internet-based educational programs to train employees in the latest
developments in IT, telecommunications and other technologies. In addition, the Company maintains a telephone hot line to assist its clerical employees with software problems or questions.



The Company provides assignments with high-profile customers that make use of
advanced technology and offers the 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 functions,
without utilizing the Companys recruitment capabilities. Although the Company does not recruit the workers in such instances, they are nonetheless employees of the Company.



Information Systems



The Company uses the Pure Internet Architecture of PeopleSoft® 8.0 for its back office HRMS and Financials application software. Utilizing the state
of the art PeopleSoft architecture has enabled the company to consolidate its back office operations, improve business processes, improve efficiency and productivity and enhance customer relationships. Through this system, the Company has also been
able to integrate the management information systems of its 10 acquired companies by creating a single database repository of shared business information.



The Company has expanded the use of the EZAccess® recruiting and sales database application, which has allowed it to consolidate the resume databases
of its acquired companies. This software has enabled the Company to streamline the processes of identifying, recruiting and hiring on a national basis. The Company believes that EZAccess has enhanced both its recruiting efforts and its customer
service capabilities. Separately, the Companys PrO Unlimited subsidiary has developed and maintains its proprietary web-enabled 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.



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



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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 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 any requisition for job openings.



In an environment of declining unemployment, the availability and quality of candidates, the effective monitoring of job performance and the scope of
geographic service increasingly become the principal elements of competition. The availability of quality contingent personnel is an especially important facet of competition in many cases. 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 500 full-time
staff employees at its headquarters and company-owned offices. The Company issued approximately 19,000 W-2s to employees of the Company who provided services to its customers during 2003, not including W-2s issued as part of the Financial
Outsourcing Services segment back office services provided by the Company to its customers. In addition to employees on assignment, the Company maintains a proprietary database of prospective employees with expertise in the disciplines served by the
Company. Billable employees are employed by the Company on an as-needed basis, dependent on customer demand and are paid only for time they actually work (plus any accrued vacation time). Non-billable administrative personnel provide management,
sales and marketing and other services in support of the Companys services in all of its segments.



Licensed Offices



The
Company has granted 7 licenses to operate 9 COMFORCE offices. The most recent license for a new office was granted in July 1992, and the Company does not presently expect to grant more licenses. Licensees recruit contingent personnel and promote
their services to both existing and new clients obtained through the licensees marketing efforts. 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) registration
of the employer/employees; (2) licensing, record keeping and recording requirements; and (3) substantive limitations on operations. The Company is governed by laws regulating the employer/employee relationship, such as tax withholding or reporting,
social security or retirement, anti-discrimination and workers compensation. In particular, in the healthcare support sector, the Company is subject to extensive federal and state regulations as well as those of public and private healthcare
organizations and authorities. In addition, 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.



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 750-square foot executive suites to facilities exceeding 10,000 square feet in



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size. The remaining terms under the Companys leases range from less than six months to five 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. 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 notice that it is a potentially responsible party at Chicagos Lake Calumet Cluster Site, which for decades
beginning in the late 19thcentury had served as a waste site. The Companys predecessor, Apeco Corporation, a
manufacturer of photocopiers, allegedly sent waste material to this site. The state of Illinois has proposed that the site be designated as a Superfund site. The Company is one of over 400 potentially responsible parties (many of which may no longer
be in operation) to which notice was sent, and the Company has joined a working group of approximately 130 members representing over 170 potentially responsible parties for the purpose of responding to the United States and Illinois environmental
protection agencies. These agencies have not reached agreement as to the appropriate remedies and are expected to ask the potentially responsible parties to perform additional site studies.



Until these site studies are completed (which could take two or more years)
and the responsible agencies agree upon remedies, meaningful estimates of clean-up costs cannot be made. Consequently, no assessment can be made as to any potential liability to the Company. The Company is initiating inquiries of the insurance
carriers for Apeco to determine if it has coverage under old insurance policies. In addition, a former affiliate of Apeco, ARTRA Group Incorporated, entered into an agreement with the Company in 1996 to indemnify the Company against environmental
liabilities. While ARTRA has been fully cooperative in this process, it is currently in bankruptcy and may not have adequate resources to honor this obligation unless the claims are within the coverage of its old insurance policies, which it is
presently seeking to determine.



The Company is a party to
routine contract and employment-related litigation matters arising in the ordinary course of its business. Except as described above, there are no other pending matters, individually or in the aggregate, if adversely determined, are believed by
management to be material to the business or financial condition of the Company. The Company maintains general liability insurance, property insurance, automobile insurance, fidelity insurance, errors and omissions insurance, professional medical
malpractice insurance, fiduciary insurance and directors and officers liability insurance. 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
2003.



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 American Stock Exchange
(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:



|     |  |                |  |      |  |     
|---- |  | -------------- |  | ---- |  | ----
|     |  |                |  | High |  | Low 
|2002 |  | First Quarter  |  | 1.30 |  | 1.00
|     |  | Second Quarter |  | 1.30 |  | 0.95
|     |  | Third Quarter  |  | 1.29 |  | 0.70
|     |  | Fourth Quarter |  | 0.94 |  | 0.35
|     |  |                | 
|2003 |  | First Quarter  |  | 0.75 |  | 0.40
|     |  | Second Quarter |  | 0.65 |  | 0.30
|     |  | Third Quarter  |  | 1.03 |  | 0.40
|     |  | Fourth Quarter |  | 0.80 |  | 0.49



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The closing price of the Common Stock of the Company on March 26, 2004 was $1.63. As of such date, there
were approximately 4,400 shareholders of record and 11,574,970 shares of Common Stock held by non-affiliates. The aggregate market value of the voting stock held by nonaffiliates of the registrant at March 26, 2004 was $18,867,201.



No dividends were declared or paid on the Common Stock during 2003. The terms
of the Companys debt obligations effectively prohibit its payment of dividends. In addition, until cumulated dividends on its Series 2003A and Series 2003B Preferred Stock ($406,000 at December 28, 2003) 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.



Recent Sales of Unregistered Securities



In February 2003, the Company issued $6.1 million face amount (6,100 shares) of its new Series 2003A Preferred Stock having a fair market value of $4.3
million in exchange for $12.3 million of its outstanding PIK Debentures (including accrued interest) from the Fanning CPD Assets, LP, a limited partnership in which John C. Fanning, the Companys chairman and chief executive officer, holds the
principal economic interest (the Fanning Partnership). Rosemary Maniscalco, a director of the Company, is the general partner of the Fanning Partnership, but has no pecuniary interest therein. The Company obtained the opinion of an
independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a financial point of view, and the Companys independent directors approved the terms of the transaction.
The consideration paid to the Fanning Partnership in February 2003 for the principal amount of the PIK Debentures exchanged in this transaction approximated in value the consideration that the Fanning Partnership had previously been paid to the
unrelated third party sellers of the PIK Debentures. The Companys offer to exchange PIK Debentures for Series 2003A Preferred Stock was extended to all holders of the PIK Debentures that remained outstanding.



In September 2003, the Company issued shares of its Series 2003B Preferred
Stock having a face amount and fair market value of $513,000 (513 shares) in exchange for $2.0 million aggregate amount of the Companys 8.0% Subordinated Convertible Notes due 2009 (the Convertible Notes), including accrued
interest, in a transaction with the Fanning Partnership. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a financial
point of view, and the Companys directors approved the terms of the transaction. The consideration paid to the Fanning Partnership in September 2003 for the principal amount of the Convertible Notes exchanged in this transaction was
substantially less than the consideration paid by the Fanning Partnership for the securities it had previously exchanged for the Convertible Notes. As a result of this transaction, the Company recorded a contribution to capital of $913,000, net of
taxes, in lieu of recognizing a gain on the extinguishment of debt. The conversion price of $0.54 per share for the Series 2003B Preferred Stock, as discussed below, represents the average closing price of the common stock for the 15 trading days
immediately preceding the date of the effective date of the transaction (September 26, 2003), which was lower than the $0.82 per share closing price as of the effective date. As a result of this beneficial conversion feature, the Company recorded a
preferred stock dividend of $266,000 in the fiscal 2003.



The
rights and preferences of the Series 2003A and Series 2003B Preferred Stock are substantially identical except that the conversion price is $1.05 for the Series 2003A Preferred Stock and $0.54 for the Series 2003B Preferred Stock. The conversion
price is the price at which a holder of shares of Series 2003A or 2003B Preferred Stock may convert such shares 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).



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Each share of Series 2003A and 2003B Preferred Stock has a face amount of $1,000, and bears annual
cumulative dividends of $75 per share (7.5% per annum). As of December 28, 2003, there were accumulated, unpaid and undeclared dividends of $406,000. Upon liquidation, the holders of the Series 2003A and 2003B Preferred Stock will be entitled to a
liquidation preference of $1,000 per share plus the amount of accumulated, unpaid and undeclared 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 Series 2003A and 2003B Preferred Stock outstanding shall have otherwise consented, no series or class of preferred stock having rights or preferences that are not junior to the Series 2003A and 2003B Preferred
Stock shall be issued by the Company.



The Company can only pay
dividends on the Series 2003A and 2003B 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, (iii) payment of the dividend is permitted under the terms of the Companys bank credit facility, and (iv) the Company has sufficient funds to upstream in accordance with the restricted payments tests under the indenture
governing the Senior Notes.



In the event that the conversion
of Series 2003A and 2003B Preferred Stock into common stock of COMFORCE would result in either (i) the occurrence of a change of control as defined in the indenture governing COIs Senior Notes, or (ii) require stockholder approval
in accordance with the rules and regulations of the Securities and Exchange Commission or the American Stock Exchange (or any other exchange or quotation system on which the Companys shares are then listed), then the Series 2003A and 2003B
Preferred Stock held by such holder shall not be convertible into common stock, but rather shall be 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 2003A and 2003B Preferred Stock had occurred directly)
if the conversion will not result in a change of control as defined in the indenture governing the Senior Notes or require stockholder approval in accordance with the rules and regulations of the Securities and Exchange Commission or the
American Stock Exchange (or any other exchange or quotation system on which the Companys shares are then listed).



Equity Compensation Plan Information



The following table describes options and warrants issued as part of the Companys equity compensation plans.



|                                                               |  |                                                                                             |  |                                                                             |      |                                                                                                                                               |        
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | --------------------------------------------------------------------------------------------------------------------------------------------- | -------
|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 forfuture issuance under equity compensation plans (excluding securities reflected
in first column).
|Equity compensation plans approved by security holders (1)     |  | 3,284,000                                                                                   |  | $                                                                           | 4.61 |                                                                                                                                               | 940,000
|Equity compensation plans not approved by security holders (2) |  | 724,628                                                                                     |  |                                                                             | 2.27 |                                                                                                                                               |       
|                                                               |  |                                                                                             |  |                                                                             |      |                                                                                                                                               |        
|Total                                                          |  | 4,008,628                                                                                   |  |                                                                             | 4.19 |                                                                                                                                               | 940,000
|                                                               |  |                                                                                             |  |                                                                             |      |                                                                                                                                               |        



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|(1) | At December 28, 2003, 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 are issuable under the 1993 Plan after December 31, 2002. Accordingly, the number of securities shown in the third column as being available for future issuance include 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes options to purchase 555,628 shares of the Companys common stock issued to Austin Iodice and Anthony Giglio, former officers of the Company, as settlement of
litigation concerning the continuing validity of options originally granted to them under a plan approved by the stockholders. Although these options were issued outside of the 1993 Plan, the Board elected to treat them as issued under the 1993 Plan
solely for the purpose of determining the shares remaining available for issuance under the 1993 Plan. The balance of these securities are warrants issued as additional compensation to debtholders for extending credit to the Company.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, 2003. The Company derived the statement of operations and balance sheet data as of and for each of the five fiscal years in the period ended December 28, 2003 from its audited historical consolidated financial
statements (in thousands, except per share data).



|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                                              |  | 1999 |         |   | 2000 |   |         | 2001 |  |   | 2002    |   |  | 2003 |        
|Statement of Operations Data: (1)                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net sales of services (2)                                                                                                                     |  | $    | 436,221 |   |      | $ | 492,864 |      |  | $ | 445,888 |   |  | $    | 381,501 |   |  | $ | 381,687 |  
|Costs and expenses:                                                                                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cost of services (2)                                                                                                                          |  |      | 352,101 |   |      |   | 392,141 |      |  |   | 355,635 |   |  |      | 311,821 |   |  |   | 317,593 |  
|Selling, general and administrative expenses                                                                                                  |  |      | 55,596  |   |      |   | 66,806  |      |  |   | 65,388  |   |  |      | 54,096  |   |  |   | 50,315  |  
|Restructuring credit                                                                                                                          |  |      | (163    | ) |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Litigation settlement                                                                                                                         |  |      |        |   |      |   | 1,056   |      |  |   |        |   |  |      |        |   |  |   |        |  
|Goodwill impairment (3)                                                                                                                       |  |      |        |   |      |   |        |      |  |   |        |   |  |      | 19,000  |   |  |   | 28,000  |  
|Depreciation and amortization (4)                                                                                                             |  |      | 6,824   |   |      |   | 7,424   |      |  |   | 7,835   |   |  |      | 4,000   |   |  |   | 4,247   |  
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total costs and expenses                                                                                                                      |  |      | 414,358 |   |      |   | 467,427 |      |  |   | 428,858 |   |  |      | 388,917 |   |  |   | 400,155 |  
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Operating income (loss)                                                                                                                       |  |      | 21,863  |   |      |   | 25,437  |      |  |   | 17,030  |   |  |      | (7,416  | ) |  |   | (18,468 | )
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Other income (expense):                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest expense                                                                                                                              |  |      | (21,825 | ) |      |   | (23,266 | )    |  |   | (19,990 | ) |  |      | (16,007 | ) |  |   | (13,931 | )
|Gain on debt extinguishment (5)                                                                                                               |  |      |        |   |      |   | 4,667   |      |  |   | 15,858  |   |  |      |        |   |  |   | 9,582   |  
|Write-off of deferred financing costs                                                                                                         |  |      |        |   |      |   | (742    | )    |  |   |        |   |  |      |        |   |  |   | (431    | )
|Restricted covenant release                                                                                                                   |  |      |        |   |      |   | 1,000   |      |  |   |        |   |  |      |        |   |  |   |        |  
|Other income, net                                                                                                                             |  |      | 93      |   |      |   | 247     |      |  |   | 40      |   |  |      | 27      |   |  |   | 637     |  
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                                                                                              |  |      | (21,732 | ) |      |   | (18,094 | )    |  |   | (4,092  | ) |  |      | (15,980 | ) |  |   | (4,143  | )
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before tax                                                                                                                      |  |      | 131     |   |      |   | 7,343   |      |  |   | 12,938  |   |  |      | (23,396 | ) |  |   | (22,611 | )
|Provision (benefit) for income taxes                                                                                                          |  |      | 2,169   |   |      |   | 4,956   |      |  |   | 6,898   |   |  |      | (2,149  | ) |  |   | 625     |  
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) before a cumulative effect of a change in accounting principle                                                                  |  |      | (2,038  | ) |      |   | 2,387   |      |  |   | 6,040   |   |  |      | (21,247 | ) |  |   | (23,236 | )
|Income (loss) available to common stockholders before a cumulative effect of a change in accounting principle                                 |  |      | (2,038  | ) |      |   | 2,387   |      |  |   | 6,040   |   |  |      | (21,247 | ) |  |   | (23,908 | )
|Cumulative effect of a change in accounting principle - goodwill impairment, net of tax benefit of $2,200 (6)                                 |  |      |        |   |      |   |        |      |  |   |        |   |  |      | (52,800 | ) |  |   |        |  
|Income (loss) available to common stockholders                                                                                                |  |      | (2,038  | ) |      |   | 2,387   |      |  |   | 6,040   |   |  |      | (74,047 | ) |  |   | (23,908 | )
|Diluted income (loss) per share:Income (loss) available to common stockholders before a cumulative effect of a change in accounting
principle |  | $    | (0.12   | ) |      | $ | 0.14    |      |  | $ | 0.34    |   |  | $    | (1.28   | ) |  | $ | (1.44   | )
|Cumulative effect of a change in accounting principle                                                                                         |  |      |        |   |      |   |        |      |  |   |        |   |  |      | (3.17   | ) |  |   |        |  
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss) available to common stockholders                                                                                            |  | $    | (0.12   | ) |      | $ | 0.14    |      |  | $ | 0.34    |   |  | $    | (4.45   | ) |  | $ | (1.44   | )
|                                                                                                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance Sheet data:                                                                                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Working capital                                                                                                                               |  | $    | 65,808  |   |      | $ | 88,942  |      |  | $ | 59,024  |   |  | $    | 47,386  |   |  | $ | 44,577  |  
|Trade receivables, net                                                                                                                        |  |      | 81,834  |   |      |   | 119,067 |      |  |   | 80,029  |   |  |      | 73,609  |   |  |   | 76,104  |  
|Goodwill, net                                                                                                                                 |  |      | 139,010 |   |      |   | 137,655 |      |  |   | 134,283 |   |  |      | 60,242  |   |  |   | 32,242  |  
|Total assets                                                                                                                                  |  |      | 249,710 |   |      |   | 283,414 |      |  |   | 241,131 |   |  |      | 162,864 |   |  |   | 134,313 |  
|Total debt, including current maturities                                                                                                      |  |      | 182,346 |   |      |   | 197,421 |      |  |   | 154,720 |   |  |      | 142,779 |   |  |   | 127,960 |  
|Stockholders equity (deficit)                                                                                                                |  |      | 43,163  |   |      |   | 46,374  |      |  |   | 52,537  |   |  |      | (21,241 | ) |  |   | (38,624 | )

---

|(1) | Results for the year ended December 31, 2000 include results of Gerri G. Inc. from the acquisition date of February 6, 2000 through December 31, 2000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | The Company adopted Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred
(EITF 01-14), effective as of December 31, 2001. Accordingly, reimbursements received by the Company for out-of-pocket expenses are now characterized as revenue. Prior to the adoption of EITF 01-14, the Company characterized such amounts
as a reduction of cost of sales. The selected financial data for 2001 and 2000 has been reclassified in accordance with EITF 01-14.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The Company recorded a goodwill impairment charge of $19.0 million during the fourth quarter of 2002 and $28.0 million during the third quarter of 2003, in each case as a charge
against operating income in accordance with the provisions of the Financial Accounting Standards Board (FASB) issued Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). See note 4 to the consolidated
financial statements for further discussions.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Effective as of December 31, 2001, the Company changed the manner in which it accounts for goodwill and other intangible assets upon the adoption of SFAS 142 and, in accordance
therewith, ceased amortizing goodwill. See note 4 to the consolidated financial statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | During 2000, the Company repurchased Senior Notes. The gain on debt extinguishment that was realized by these repurchases was $4.7 million, which includes the reduction of $200,000
of deferred financing costs associated with the repurchases. During 2001, the Company repurchased Senior Notes and PIK Debentures. The gain on debt extinguishment that was realized by these repurchases was $15.9 million, which includes the reduction
of $1.1 million of deferred financing costs associated with the repurchases. During 2003, the Company repurchased Senior Notes and PIK Debentures. As a result of these transactions, the Company recognized a gain on debt extinguishment of $9.6
million, which includes the reduction of approximately $319,000 of deferred financing costs. See Financial Condition, Liquidity and Capital Resources in Item 7.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The Company recorded a goodwill impairment charge of $52.8 million net of tax as a cumulative effect of a change in accounting principle during the first quarter of 2002 in
accordance with the provisions of SFAS 142. See note 4 to the consolidated financial statements for further discussions.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The discussion set forth below supplements the information found in the consolidated financial statements and related notes.



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Overview



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



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



Management of the Company has observed improvement in the business environment for staffing companies beginning in the
fourth quarter of 2003. Recent industry statistics generally support managements observations subject to concerns as to the rate of job creation in the United States. The Company has sought to position itself competitively in what it expects
to be an improving marketplace. In addition to taking steps to improve operational efficiencies, management has sought to improve the Companys balance sheet. Including repurchases effected in the first quarter of 2004, since June 2000, the
Company has reduced its public debt from $138.8 million to $69.0 million. As a result, it has reduced its annual interest expense by approximately $7.0 million, including by borrowing at the lower rates available under the PNC Credit Facility to
effectuate repurchases and by exchanging preferred equity and lower interest rate convertible notes for this public debt.



Recent Developments



In the first quarter of 2004, the Company sold certain of its niche telecom operations and repurchased $13.5 million of it Senior Notes. See Recent
Developments in Item 1.



Replacement of Credit Facility



In June 2003, COMFORCE, COI and various of their
operating subsidiaries entered into a 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 $75.0 million revolving credit facility with available borrowings based, generally, on 85.0% of the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions.
At closing, the Company borrowed $32.7 million and repaid the Companys then existing revolving credit facility agented by Whitehall Business Credit Corporation (the Whitehall Credit Facility), which was thereupon terminated. The
Whitehall Credit Facility, which the Company entered into in December 2000, as subsequently amended, provided for borrowings of up to $85.0 million. The Company incurred a write-off of deferred financing costs of $431,000 in the second quarter of
2003 related to the early retirement of the Whitehall Credit Facility.



Borrowings under the PNC Credit Facility bear interest, at the Companys option, at a per annum rate equal to either (1) the greater of the base commercial lending rate of PNC as announced from time to time or the federal funds rate
plus 0.5%, or (2) LIBOR plus a margin ranging from 2.5% if the Companys fixed charged coverage ratio is greater than 1.30:1 to 3.0% if this ratio is 1.05:1 (with the initial fixed and first calculated margins having been 2.75% from funding in
June 2003 through the end of fiscal 2003). The obligations evidenced by 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 agreements evidencing the PNC Credit Facility contain various financial and other covenants and conditions, including, but not limited to, limitations on paying dividends, engaging in affiliate transactions, making
acquisitions and incurring additional indebtedness. The scheduled maturity date of the PNC Credit Facility is June 24, 2007. The PNC Credit Facility affords the Company greater borrowing flexibility and has a maturity date close to three years
beyond the maturity date of the Whitehall Credit Facility.



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As of December 28, 2003, the Company had remaining availability based upon then outstanding eligible
accounts receivable of $19.7 million, which provides for borrowings of up to $75.0 million based, generally, on 85.0% of the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions. The Company was in
compliance with all financial covenants under the PNC Credit Facility at the end of fiscal 2003 and expects to remain in compliance throughout fiscal 2004. In the event that the Company is unable to meet any of such covenants, it will request a
modification (or waiver) of such covenants. If the Companys revenues in fiscal 2004 exceed current projections, management intends to ask its bank lenders to increase the availability under the PNC Credit Facility to fund potentially higher
levels of receivables.



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.



Allowance for Doubtful Accounts



The Company has 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 the customer. After giving due consideration to these factors, the Company establishes specific allowances for bad debt. The allowance for the funding and service fee receivable 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 the consolidated statements of operations.
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.



Reserves for Workers Compensation



The Company records its estimate of the ultimate cost of, and reserves for, workers compensation based on actuarial computations using the Companys
loss history as well as industry statistics. Furthermore, in determining its reserves, the Company includes reserves 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 amounts reserved by the Company for those claims.



Accruals for workers compensation claims are included in accrued expenses in the 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.



Income Taxes



The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) issued Statement No. 109,
Accounting for 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 utilization of the asset is not likely.



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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 tax rate. In determining this rate, management estimates taxable income for each of the states where the Company operates, as well as the tax rate that will be in effect for each state. 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 SFAS 142 as of the end of each fiscal year or earlier during each fiscal year as circumstances require. The Company tested for goodwill impairment as of the end of each of the third and fourth quarters of fiscal 2003. As a
result of the testing in the third quarter of 2003, the Company wrote-off $28.0 million of goodwill in the Staff Augmentation segment. The Company also performed its annual testing for goodwill impairment in the fourth quarter of fiscal 2003 and
determined that no additional write-offs were required to be taken. In connection with these goodwill tests, the Company engaged 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 utilized a discounted cash flow analysis as well as various other valuation approaches, including (a) recent values paid by investors and
purchasers of companies in businesses similar to that of the Company, (b) capitalization multiples of companies with investment characteristics resembling those of the reporting units, (c) the enterprise value of the Company, and (d) 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. Based on managements assessment of the circumstances and considering the firms findings, the Company recognized an impairment loss of $28.0 million due to the
Companys inability to meet previous growth expectations. These impairment losses relate primarily to the goodwill attributable to staffing companies acquired by the Company in 1996 through 1998, during which time staffing companies were
customarily valued using higher multiples, and these companies had significantly higher earnings. See note 4 to the consolidated financial statements.



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.



Results of Operations



Fiscal Year Ended December 28, 2003 Compared to Fiscal Year Ended December 29, 2002



Net sales of services for the fiscal year December
28, 2003 were $381.7 million, which represents a slight increase from the $381.5 million in net sales of services realized for the fiscal year December 29, 2002. The Company experienced a decrease in net sales of services in Staff Augmentation and
Financial Outsourcing Services segments, offset by an increase in the Human Capital Management Services segment. Net sales of services in the Human Capital Management Services segment increased by $22.5 million or 13.5%, principally due to an
increase in its client base. In the Staff Augmentation segment, the decrease of $20.0 million (9.7%) is principally attributable to reduced sales to IT and telecom customers, as a result of the continuing effects of the soft economy, partially
offset by increased sales to



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##### Table of Contents

healthcare and RightSourcing support customers, and technical services customers under government contracts. Also,
principally as a result of general economic conditions and a reduced client base, net sales of services were lower by $2.3 million (25.4%) in the Financial Outsourcing Services segment.



Cost of services for the fiscal year December 28, 2003 was 83.2% of net sales of services as compared to cost of services of
81.7% for the fiscal year December 29, 2002. The cost of services as a percentage of net sales for the fiscal year December 28, 2003 increased from 2002 principally as a result of a decrease in permanent placement fee revenues, a decrease in
Financial Outsourcing Services revenues, increased competitive pressures impacting fees and higher growth in Human Capital Management Services (which have a higher cost of services as a percentage of net sales of services).



Selling, general and administrative expenses as a percentage of net sales of
services were 13.2% for the fiscal year December 28, 2003, compared to 14.2% for the fiscal year December 29, 2002. Excluding the $1.6 million insurance recovery in the first quarter of 2003 related to uncollectible funding and service fees
receivable that were written-off in the fourth quarter of 2001, selling, general and administrative expenses as a percentage of net sales of services were 13.6% for the fiscal year December 28, 2003. Management continued to undertake initiatives to
reduce selling, general and administrative costs by renegotiating existing vendor contracts, reducing the size of or closing marginal offices, reducing back office support staff and re-evaluating incentive compensation plans, and has reduced costs
as sales decreased in the Staff Augmentation and the Financial Outsourcing Services segments.



Operating loss for the fiscal year December 28, 2003 was $18.5 million as compared to operating loss of $7.4 million for the fiscal year December 29, 2002. The increase in operating loss for the fiscal year December
28, 2003 is principally attributable to the Companys third quarter $28.0 million non-cash write-off related to the impairment of goodwill discussed above and a decrease in gross margins in Staff Augmentation and Financial Outsourcing Services
segments, partially offset by the $1.6 million insurance claim recovery discussed above. By comparison, in 2002, the Company wrote-off $19.0 million related to goodwill impairment, exclusive of the write-off of $55.0 million earlier in 2002 that was
recorded as the cumulative effect of a change in accounting principle.



The Companys interest expense for the fiscal year December 28, 2003 was principally attributable to interest recorded on its bank credit facility (the Whitehall Credit Facility until June 25, 2003 and the PNC Credit Facility
thereafter), the Convertible Notes and the Senior Notes and an assessment made in the second quarter of 2003 of $170,000 of interest as part of a settlement with the IRS in connection with its audit of tax years 1999 through 2001. The interest
expense was lower for the fiscal year December 28, 2003 as compared to the fiscal year December 29, 2002 principally due to lower market interest rates and the retirement of PIK Debentures in the first quarter of 2003, Senior Notes in the second
quarter of 2003 and Convertible Notes in the third quarter of 2003, partially offset by the assessment of interest in connection with the IRS settlement. See Replacement of Credit Facility and Financial Condition, Liquidity and
Capital Resources in this Item 7.



The Company incurred a
write-off of deferred financing costs of $431,000 in the second quarter of 2003 related to the early retirement of the Whitehall Credit Facility.



The gain on debt extinguishment realized by the Company during the fiscal year December 28, 2003 was the result of the Companys repurchase of Senior
Notes in the second and fourth quarters of 2003, and the Companys exchange and repurchase of PIK Debentures in the first quarter of 2003. As a result of these transactions, the Company recognized a gain on debt extinguishment of $9.6 million,
which includes the reduction of approximately $319,000 of deferred financing costs, in 2003.



The income tax provision for the fiscal year December 28, 2003 was $625,000 on loss before tax of $22.6 million. The income tax benefit for the fiscal year December 29, 2002 was $2.1 million on a loss before tax of
$23.4 million. The difference between the federal statutory income tax rate and the Companys effective tax rate relates primarily to the nondeductibility of a portion of the goodwill impairments in fiscal 2003 and 2002, discussed above,
interest expense associated with the PIK Debentures, state income taxes, and a disallowance for travel and entertainment expenses. Included in income tax for the fiscal year December 28, 2003 is an assessment of $975,000 based on an income tax audit
by the IRS for tax years 1999 through 2001.



17



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##### Table of Contents

Fiscal Year Ended December 29, 2002 Compared to Fiscal Year Ended December 30, 2001



Net sales of services for the fiscal year December 29, 2002 were $381.5
million, a decrease of 14.4% from net sales of services for the fiscal year December 30, 2001 of $445.9 million. The Company suffered a decrease in net sales of services in Staff Augmentation and Financial Outsourcing Services segments, partially
offset by an increase in the Human Capital Management Services segment. Net sales of services in the Human Capital Management Services segment increased by $37.8 million or 29.4%, principally due to an increase in its client base. In the Staff
Augmentation segment, the decrease of $99.2 million (32.5%) is principally attributable to reduced sales to IT, telecom, technical and other staffing services customers as a result of the continuing effects of the soft economy. Also, principally as
a result of the current economic conditions, net sales of services were lower by $3.0 million (25.1%) in the Financial Outsourcing Services segment.



Cost of services for the fiscal year December 29, 2002 was 81.7% of net sales of services as compared to cost of services of 79.8% for the fiscal year
December 30, 2001. The cost of services as a percentage of net sales for the fiscal year December 29, 2002 increased from the comparable period in 2001 principally as a result of a decrease in permanent placement fees and a higher growth in Human
Capital Management Services which has a higher cost of services as a percentage of net sales of services, partially offset by a reduction in workers compensation expense due to favorable claims settlement history under the Companys workers
compensation policy.



Selling, general and administrative
expenses as a percentage of net sales of services were 14.2% for the fiscal year December 29, 2002, compared to 14.7% for the fiscal year December 30, 2001. However, in fiscal 2001, the Company recorded a charge of $2.4 million related to
uncollectible funding and service fees receivable. Excluding that charge, selling, general and administrative expenses as a percentage of net sales of services were 14.1% for fiscal 2001. Due to lower sales, management continued to undertake
initiatives to reduce selling, general and administrative costs by renegotiating existing vendor contracts, reducing the size of or closing marginal offices, reducing back office support staff and reevaluating incentive compensation plans, and has
been successful in controlling costs as sales decreased. These costs were further reduced by lower commissions as a result of the decrease of sales discussed above.



Operating loss for the fiscal year December 29, 2002 was $7.4 million as compared to operating income of $17.0 million for
the fiscal year December 30, 2001. This operating loss for the fiscal year December 29, 2002 is principally attributable to the Companys fourth quarter $19.0 million write-off related to the impairment of goodwill discussed above and a
decrease in sales and gross margins in Staff Augmentation and Financial Outsourcing Services segments, partially offset by a reduction of $4.2 million in goodwill amortization due to the adoption of SFAS 142 as well as the more favorable workers
compensation history for fiscal 2002 discussed above.



The
Companys interest expense for the fiscal year December 29, 2002 and December 30, 2001 is attributable to the Whitehall Credit Facility, the Convertible Notes, the Senior Notes and the PIK Debentures. The interest expense was lower for the
fiscal year December 29, 2002 as compared to the fiscal year December 30, 2001 due to lower market interest rates and lower borrowing levels under the Whitehall Credit Facility as well as the reduction of Senior Notes and PIK Debentures through the
transactions described below and in note 8 to the consolidated financial statements.



During 2001, the Company repurchased $13.0 million principal amount of Senior Notes for $8.9 million and $5.2 million principal amount of PIK Debentures for $2.5 million (including accrued and unpaid interest of
$340,000), the repurchase prices of which were paid from lower interest rate borrowings under the Whitehall Credit Facility. In 2001, the Company also completed the exchange of $18.0 million principal amount of PIK Debentures for its 8% Convertible
Notes in the original principal amount of $8.0 million, plus $1.0 million in cash. The gain on debt extinguishment realized by the Company during the fiscal year December 30, 2001 as a result of the repurchases (including the exchange) was $15.9
million, which includes the reduction of $1.1 million of deferred financing costs associated with these transactions.



The income tax benefit for the fiscal year December 29, 2002 was $2.1 million on a loss before tax of $23.4 million. The income tax provision for the
fiscal year December 30, 2001 was $6.9 million on income before tax of $12.9 million. The difference between the federal statutory income tax rate and the Companys effective tax rate relates primarily to the nondeductibility of a portion of
the $19.0 million goodwill impairment discussed above, interest expense associated with the PIK Debentures and state income taxes, disallowance for travel and entertainment and the 2001 amortization expense associated with goodwill that was not
deductible.



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The Company recorded a goodwill impairment charge of $52.8 million net of tax as a cumulative effect of a
change in accounting principle during the first quarter of 2002 in accordance with the provisions of SFAS 142. See note 4 to the consolidated financial statements for further discussions.



Financial Condition, Liquidity and Capital Resources



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



During the fiscal year December 28, 2003, the Company had no off-balance sheet arrangements other than operating leases entered into in the normal course
of business, as indicated in the table below. The following table represents contractual commitments associated with operating agreements (excluding interest on debt obligations):



|                                         |  |                                       |       |        |   |       |  |      |         |            |   |       |  |   |      
|---------------------------------------- |  | ------------------------------------- | ----- | ------ | - | ----- |  | ---- | ------- | ---------- | - | ----- |  | - | -----
|                                         |  | Payments due by period (in thousands)
|                                         |  | 2004                                  |       | 2005-6 |   | 2007  |  | 2008 |         | Thereafter
|Operating Leases                         |  | $                                     | 3,149 |        | $ | 4,093 |  | $    | 1,347   |            | $ | 1,080 |  | $ | 1,566
|PNC Credit Facilityprincipal repayments |  |                                       |      |        |   |      |  |      | 38,040  |            |   |      |  |   |     
|Senior Notes - principal repayments      |  |                                       |      |        |   |      |  |      | 82,500  |            |   |      |  |   |     
|Convertible Notes - principal repayments |  |                                       |      |        |   |      |  |      |        |            |   |      |  |   | 7,420
|                                         |  |                                       |       |        |   |       |  |      |         |            |   |       |  |   |      
|Total                                    |  | $                                     | 3,149 |        | $ | 4,093 |  | $    | 121,887 |            | $ | 1,080 |  | $ | 8,986
|                                         |  |                                       |       |        |   |       |  |      |         |            |   |       |  |   |      



The Company also had
standby letters of credit outstanding at December 28, 2003 in the aggregate amount of $4.4 million.



During the fiscal year December 28, 2003, the Companys primary sources of funds to meet working capital needs were from borrowings under the PNC
Credit Facility and the Whitehall Credit Facility. Effective June 25, 2003, the Company retired the Whitehall Credit Facility upon entering into the PNC Credit Facility. See Replacement of Credit Facility above in this Item 7. Cash and
cash equivalents increased $1.2 million during the fiscal year December 28, 2003. Cash flows provided by operating activities of $3.3 million were exceeded by cash flows used in financing activities of $1.1 million and cash flows used in investing
activities of $1.0 million.



At December 28, 2003, the Company
had outstanding $38.0 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 3.93% per annum. At such date, the Company had remaining availability of $19.7 million under the PNC Credit Facility, which
provides for borrowings of up to $75.0 million based, generally, on 85.0% of the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions.



At December 28, 2003, the Company also had outstanding (i) $82.5 million principal amount of Senior Notes bearing interest
at a rate of 12% per annum, (ii) $7.4 million principal amount of Convertible Notes bearing interest at the rate of 8% per annum, and (iii) had no PIK Debentures outstanding. The Company has sought to improve its balance sheet. Since the beginning
of fiscal 2003, it has done so principally through the issuance of equity securities in exchange for debt obligations, or repurchases of debt, including the following transactions:



| |  | PIK Debentures: In February 2003, the Company issued $6.1 million face amount of its new Series 2003A Preferred Stock having a fair market value of $4.3
million in exchange for $12.3 million of its outstanding PIK Debentures (including accrued interest) from a related party (the Fanning Partnership) and repurchased additional PIK Debentures ($59,000 including interest) from unrelated
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | parties for a cash payment of $21,000. As a result of this transaction, the Company recognized a gain on debt extinguishment of $7.8 million, which includes
the reduction of approximately $240,000 of deferred financing costs, in the third quarter of 2003. The related party transactions were treated as gains on the extinguishment of debt and not as contributions to capital since the related party
purchased the PIK Debentures (it exchanged for Series 2003A Preferred Stock) from unrelated parties at a discount and the Company received the benefits of this pricing in its transactions with the related party. In May 2003, principally in order to
eliminate the costs associated with the administration of the PIK Debentures, the Company redeemed the remaining $42,000 of PIK Debentures in accordance with the procedures set forth in the indenture. See notes 8 and 18 to the consolidated financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Senior Notes: In June 2003, the Company repurchased $2.0 million principal amount of Senior Notes for $980,000, resulting in a gain on debt extinguishment of $983,000, which
includes the reduction of approximately $37,000 of deferred financing costs. In December 2003, the Company repurchased $2.5 million principal amount of Senior Notes for $1.6 million, resulting in a gain on debt extinguishment of $808,000, which
includes the reduction of approximately $42,000 of deferred financing costs. In February and March 2004, the Company repurchased $13.5 million principal amount of its 12% Senior Notes for $11.3 million. As a result of these repurchases, the Company
will recognize a gain on debt extinguishment of $2.0 million in the first quarter of 2004, including a reduction of approximately $219,000 of deferred financing costs. See notes 8 and 18 to the consolidated financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Convertible Notes: In September 2003, the Company issued 513 shares of its Series 2003B Preferred Stock having an aggregate face amount and fair market value of $513,000 in
exchange for $2.0 million principal amount of Convertible Notes, plus accrued interest, in a transaction with a related party (the Fanning Partnership). The consideration paid to the related party in September 2003 for the principal amount of the
Convertible Notes exchanged in this transaction was substantially less than the consideration paid by it for the securities it had previously exchanged for the Convertible Notes. As a result of this transaction, the Company recorded a contribution
to capital of $913,000, net of taxes, in lieu of recognizing a gain on the extinguishment of debt. See notes 8 and 18 to the consolidated financial statements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Substantially all of the consolidated net assets of the Company are assets of COI and all of the net income that had been
generated by the Company was attributable to the operations of COI. Except for permitted distributions, these assets and any cumulated net income are restricted as to their use by COMFORCE. The indenture governing the Senior Notes imposes
restrictions on COI making specified payments, which are referred to as restricted payments, including making distributions or paying dividends (referred to as upstreaming funds) to COMFORCE. Under the indenture, COI is not permitted to
make cash distributions to COMFORCE other than (1) to upstream $2.0 million annually to pay public company expenses, (2) to upstream up to $10.0 million to pay income tax related to deemed forgiveness of PIK Debentures to facilitate the purchase or
exchange by COMFORCE of PIK Debentures at less than par, (3) under certain circumstances in connection with a disposition of assets, to upstream proceeds therefrom to repay the PIK Debentures, and (4) to upstream funds to the extent COI meets the
restricted payments test under the indenture, the most significant component of which is based upon a percentage of net income generated by COI since January 1, 1998 on a cumulative basis, less prior distributions made in reliance on this provision.



Management believes that $2.0 million annually (if COI has
funds available for this purpose) will be sufficient to pay COMFORCEs annual public company expenses for the foreseeable future. Principally as a result of losses incurred by COI in fiscal 2001, 2002 and 2003 and prior distributions made by
COI to COMFORCE, COI can make no distributions to COMFORCE based upon the cumulative net income provisions of the indenture. It is anticipated that COI must generate net income of approximately $6.5 million before it will be able to upstream any
funds to COMFORCE under the restrictive payments test of the indenture in order to pay cash interest on the Convertible Notes (which is required beginning on June 1, 2005) or to repay the Convertible Notes at their maturity on December 2, 2009. In
calculating net income for this purpose, under the terms of the indenture, the Company must apply generally accepted accounting principles as in effect at the time the indenture was entered into in 1997.



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Through December 1, 2004, interest on the Convertible Notes is payable, at the option of COMFORCE, in
cash or in kind through the issuance of additional Convertible Notes. COMFORCE has paid all interest under the Convertible Notes in kind though December 1, 2003. Beginning with the interest payment due June 1, 2005, COMFORCE will be required to pay
interest on the Convertible Notes in cash. Its ability to do so is expected to be dependent on its availability of funds for this purpose, whether through borrowings by COI under the PNC Credit Facility, funds from COIs operations or
otherwise, and on COIs ability to upstream funds in accordance with the restricted payments test under the indenture for the Senior Notes. COMFORCEs ability to repay Convertible Notes at their maturity on December 2, 2009, or on any
earlier required repayment or repurchase dates, will also be dependent on any restrictions under its loan agreements as then in effect and availability of funds.



In March 2004, the holder of the Convertible Notes, which is a partnership in which John Fanning, the Companys
chairman and chief executive officer, holds the principal economic interest, agreed to extend the payment-in-kind terms under the Convertible Notes from the original termination date on December 1, 2003 for one additional year. The Companys
board has directed management, in consultation with an independent financial advisor, to advise the board as to appropriate consideration to pay to the holder for agreeing to this accommodation. This consideration will be recorded in fiscal 2004.



As of December 28, 2003, approximately $32.2 million, or
24.0%, of the Companys total assets were goodwill recorded in connection with the Companys acquisitions. The Company evaluated the recoverability of goodwill on its books under the new standards under SFAS 142 (i) at its adoption in the
first quarter of 2002, resulting in its write-off of $55.0 million of goodwill, (ii) in the fourth quarter of 2002, resulting in an additional write-off of $19.0 million of goodwill, (iii) in the third quarter of 2003 (as described above in this
Item 7 under Goodwill Impairment), resulting in an additional write-off of $28.0 million, and (iv) in the fourth quarter of fiscal 2003, resulting in no additional impairment charges. The Company must test goodwill for impairment in
accordance with the provisions of SFAS 142 at least annually as of the end of each fiscal year or earlier during each fiscal year as circumstances require. 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.



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 throughout 2004. The Company has made significant progress in improving its capital structure, most recently through the elimination of debt in connection with its repurchase of PIK Debentures (formerly public debt, now fully
retired), Senior Notes (which continue to be public debt) and Convertible Notes during fiscal 2003, as described above, but no assurance can be given that opportunities to further eliminate high interest rate debt will be available on favorable
terms. Including repurchases effected in the first quarter of 2004, since June 2000, the Company has reduced its public debt from $138.8 million to $69.0 million. As a result, COMFORCE has reduced its annual interest expense by approximately $7.0
million, including by borrowing at the lower rates available under the PNC Credit Facility to effectuate repurchases and by exchanging preferred equity and lower interest rate convertible notes for this public debt. The Company was in compliance
with all financial covenants under the PNC Credit Facility at the end of fiscal 2003 and expects to remain in compliance throughout fiscal 2004. In the event that the Company is unable to meet any of such covenants, it will request a modification
(or waiver) of such covenants. If the Companys revenues in fiscal 2004 exceed current projections, management intends to ask its bank lenders to increase the availability under the PNC Credit Facility to fund potentially higher levels of
receivables.



Impact of Recently Issued Accounting Standards



In May 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). This accounting standard establishes standards for
classifying and measuring certain financial instruments with characteristics of both liabilities and equity. It requires that certain financial instruments that were previously classified as equity now be classified as a liability. This accounting
standard is effective for financial instruments entered into or modified after May 31, 2003, and otherwise at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on
the consolidated financial statements.



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Seasonality



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



Forward Looking
Statements



Various statements made in this Report
concerning the manner in which the Company intends to conduct its future operations, and potential trends that may impact future results of operations, are forward looking statements. The Company may be unable to realize its plans and objectives due
to various important factors, including, but not limited to the following: weakness in job growth or renewed economic malaise generally or in key industries served by the Company, such as aircraft manufacturing and information technology, a
reduction in government spending in key sectors served by the Company, or a reduction in the demand for outsourcing services generally which could heighten competition among staffing companies and negatively impact revenues and margins; the
Companys significant leverage may leave it with a diminished ability to obtain additional financing for working capital or other capital expenditures, for retiring higher interest rate debt or for otherwise improving the Companys
competitiveness and capital structure or expanding its operations; SFAS 142, which requires the Company to evaluate at least annually the recoverability of goodwill on its books, could cause the Company to write-off goodwill in future periods (in
addition to the write-offs of $74.0 million in 2002 and $28.0 million in 2003), which could have a material adverse impact on the Companys financial condition and results of operations; or, if COI fails to generate sufficient consolidated net
income (after covering its cumulative deficit at December 28, 2003 of $6.5 million) or to have any other funds available to upstream to COMFORCE under the restricted payments test of the Senior Notes indenture in order for it to pay cash interest on
the Convertible Notes (which is required beginning on June 1, 2005) or to repay the Convertible Notes at their maturity on December 2, 2009, or on any earlier required repayment or repurchase date, then, unless COMFORCE obtains a loan or sells its
capital stock or other securities to provide funds for this purpose, the Company will default under the indenture governing the Senior Notes and under the PNC Credit Facility, or under any replacement facilities, debt instruments or indentures.



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



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Most of the Companys borrowings are fixed rate obligations, including $82.5 million principal amount of Senior Notes bearing interest at a fixed
rate of 12% per annum, $7.4 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, 2003 was $69.3 million for the Senior Notes, and $3.7
million for the Convertible Notes. Management of the Company does not believe that a 10% increase in interest rates would have a material impact to the fair value of these fixed rate obligations. Borrowings under the PNC Credit Facility aggregating
$38.0 million at December 28, 2003 are at variable interest rates and interest expense will be impacted by changes in interest rates generally prevailing in the United States and internationally. Assuming an immediate 10% increase in the weighted
average interest rate of 3.93%, the impact to the Company in annualized interest payable would be approximately $149,000. Accordingly, the Company has not entered into any swap agreements or other hedging transactions as a means of limiting exposure
to interest rate fluctuations.



22



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##### Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



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



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



None.



ITEM 9A. CONTROLS AND PROCEDURES



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



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 29, 2004 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 29, 2004 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 29, 2004 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 29, 2004 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 29, 2004 and is incorporated by
reference herein.



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##### Table of Contents

PART IV



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



(a) Financial Statements



| | 1. | Financial Statements as listed on page F-1.
| | -- | -------------------------------------------



| | 2. | Financial Statement Schedules as listed on page F-1.
| | -- | ----------------------------------------------------



| | 3. | Exhibits as listed on the Exhibit Index.
| | -- | ----------------------------------------



(b) Reports on Form 8-K.



The Company filed a current report on Form 8-K on November 12, 2003 to furnish its press release reporting results for the quarter ended September 28,
2003.



(c) Exhibits



The exhibits filed herewith are listed on the Exhibit Index.



(d) 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.



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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. Fanning                 
|                     |  | John C. Fanning                     
|                     |  | Chairman and Chief Executive Officer



Date:
March 26, 2004



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 26, 2004
|                                           |  |                                                                                   
|/s/ Harry V. MaccarroneHarry V. Maccarrone |  | Executive Vice President and Director (Principal Financial and Accounting Officer) |  | March 26, 2004
|                                           |  |                                                                                   
|/s/ Rosemary ManiscalcoRosemary Maniscalco |  | Vice Chairman and Director                                                         |  | March 26, 2004
|                                           |  |                                                                                   
|/s/ Daniel RaynorDaniel Raynor             |  | Director                                                                           |  | March 26, 2004
|                                           |  |                                                                                   
|/s/ Gordon RobinettGordon Robinett         |  | Director                                                                           |  | March 26, 2004
|                                           |  |                                                                                   
|/s/ Kenneth J. DaleyKenneth J. Daley       |  | Director                                                                           |  | March 26, 2004



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES



Table of Contents



|                                                                                                                                                                                |  |     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors Report                                                                                                                                                    |  | F-2 
|                                                                                                                                                                                | 
|Consolidated Financial Statements:                                                                                                                                              |  |     
|                                                                                                                                                                                | 
|Consolidated Balance Sheets as of December 28, 2003 and December 29, 2002                                                                                                       |  | F-3 
|                                                                                                                                                                                | 
|Consolidated Statements of Operations for the fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001                                                     |  | F-4 
|                                                                                                                                                                                | 
|Consolidated Statements of Stockholders Equity (Deficit) and Comprehensive Income (Loss) for the fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001 |  | F-5 
|                                                                                                                                                                                | 
|Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001                                                     |  | F-6 
|                                                                                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                                                                                      |  | F-8 
|                                                                                                                                                                                | 
|Schedule:                                                                                                                                                                       |  |     
|                                                                                                                                                                                | 
|Schedule II  Valuation and Qualifying Accounts                                                                                                                                 |  | F-32



F-1



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##### Table of Contents

Independent Auditors Report



Board of
Directors and Stockholders

COMFORCE Corporation:



We have audited the accompanying consolidated balance sheets of COMFORCE Corporation and subsidiaries as of December 28, 2003 and December 29, 2002, and the related
consolidated statements of operations, stockholders (deficit) equity and comprehensive income (loss), and cash flows for each of the fiscal years in the three-fiscal year period ended December 28, 2003. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement schedule for each of the fiscal years in the three-fiscal year period ended December 28, 2003 as listed in the accompanying index. 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 financial statement schedule based on our audits.



We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2003 and December 29, 2002, and the results
of their operations and their cash flows for each of the fiscal years in the three-fiscal year period ended December 28, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule for each of the fiscal years in the three-fiscal year period ended December 28, 2003 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 disclosed in note 4 to the
consolidated financial statements, effective as of December 31, 2001, the Company changed the manner in which it accounts for goodwill and other intangible assets upon the adoption of the Financial Accounting Standards Board-issued Statement No.
142, Goodwill and Other Intangible Assets.



/s/ KPMG LLPKPMG LLP




Melville, New York

March 16, 2004



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES



Consolidated Balance Sheets

December 28, 2003 and December 29, 2002

(in thousands, except share and per share amounts)



|                                                                                                                                                    |  |                  |         |   |                  |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | ------- | -
|                                                                                                                                                    |  | December 28,2003 |         |   | December 29,2002 |        
|Assets                                                                                                                                              |  |                  |         |   |                  |         |  
|                                                                                                                                                    |  |                 
|Current assets:                                                                                                                                     |  |                  |         |   |                  |         |  
|Cash and cash equivalents                                                                                                                           |  | $                | 7,598   |   |                  | 6,378   |  
|Accounts receivable, less allowance of $377 and $548 in 2003 and 2002, respectively                                                                 |  |                  | 52,378  |   |                  | 45,244  |  
|Funding and service fees receivable, less allowance of $515 and $671 in 2003 and 2002, respectively                                                 |  |                  | 23,726  |   |                  | 28,365  |  
|Prepaid expenses and other current assets                                                                                                           |  |                  | 4,026   |   |                  | 6,391   |  
|Deferred income taxes, net                                                                                                                          |  |                  | 1,733   |   |                  | 1,858   |  
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Total current assets                                                                                                                                |  |                  | 89,461  |   |                  | 88,236  |  
|                                                                                                                                                    |  |                 
|Deferred income taxes, net                                                                                                                          |  |                  | 1,695   |   |                  |        |  
|Property and equipment, net                                                                                                                         |  |                  | 8,499   |   |                  | 11,612  |  
|Intangible assets, net                                                                                                                              |  |                  | 132     |   |                  | 198     |  
|Goodwill, net                                                                                                                                       |  |                  | 32,242  |   |                  | 60,242  |  
|Deferred financing costs, net                                                                                                                       |  |                  | 2,284   |   |                  | 2,576   |  
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Total assets                                                                                                                                        |  | $                | 134,313 |   |                  | 162,864 |  
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Liabilities and Stockholders Deficit                                                                                                               |  |                  |         |   |                  |         |  
|                                                                                                                                                    |  |                 
|Current liabilities:                                                                                                                                |  |                  |         |   |                  |         |  
|Accounts payable                                                                                                                                    |  | $                | 2,757   |   |                  | 2,957   |  
|Accrued expenses                                                                                                                                    |  |                  | 42,127  |   |                  | 37,893  |  
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Total current liabilities                                                                                                                           |  |                  | 44,884  |   |                  | 40,850  |  
|                                                                                                                                                    |  |                 
|Long-term debt                                                                                                                                      |  |                  | 127,960 |   |                  | 142,779 |  
|Deferred income taxes, net                                                                                                                          |  |                  |        |   |                  | 161     |  
|Other liabilities                                                                                                                                   |  |                  | 93      |   |                  | 315     |  
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Total liabilities                                                                                                                                   |  |                  | 172,937 |   |                  | 184,105 |  
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Commitments and contingencies                                                                                                                       |  |                  |         |   |                  |         |  
|                                                                                                                                                    |  |                 
|Stockholders deficit:                                                                                                                              |  |                  |         |   |                  |         |  
|Common stock, $.01 par value; 100,000,000 shares authorized, 16,659,397 and 16,659,360 shares issued and outstanding in 2003 and 2002,
respectively |  |                  | 167     |   |                  | 167     |  
|Preferred stock, $.01 par value, 10,000 shares authorized, 6,661 shares issued and outstanding in 2003                                              |  |                  | 4,817   |   |                  |        |  
|Additional paid-in capital                                                                                                                          |  |                  | 50,501  |   |                  | 49,588  |  
|Accumulated other comprehensive income (loss)                                                                                                       |  |                  | 76      |   |                  | (47     | )
|Accumulated Deficit, since January 1, 1996 (note 1)                                                                                                 |  |                  | (94,185 | ) |                  | (70,949 | )
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Total stockholders deficit                                                                                                                         |  |                  | (38,624 | ) |                  | (21,241 | )
|                                                                                                                                                    |  |                  |         |   |                  |         |  
|Total liabilities and stockholders deficit                                                                                                         |  | $                | 134,313 |   |                  | 162,864 |  
|                                                                                                                                                    |  |                  |         |   |                  |         |  



See
accompanying notes to consolidated financial statements.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES



Consolidated Statements of Operations

For the fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001

(in thousands, except per share amounts)



|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|--------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | ------- | - | ---------------- | ------- | -
|                                                                                                          |  | December 28,2003 |         |   | December 29,2002 |         |   | December 30,2001 |        
|Revenue:                                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|Net sales of services                                                                                     |  | $                | 381,687 |   |                  | 381,501 |   |                  | 445,888 |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Costs and expenses:                                                                                       |  |                  |         |   |                  |         |   |                  |         |  
|Cost of services                                                                                          |  |                  | 317,593 |   |                  | 311,821 |   |                  | 355,635 |  
|Selling, general and administrative expenses                                                              |  |                  | 50,315  |   |                  | 54,096  |   |                  | 65,388  |  
|Goodwill impairment                                                                                       |  |                  | 28,000  |   |                  | 19,000  |   |                  |        |  
|Depreciation and amortization                                                                             |  |                  | 4,247   |   |                  | 4,000   |   |                  | 7,835   |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Total costs and expenses                                                                                  |  |                  | 400,155 |   |                  | 388,917 |   |                  | 428,858 |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Operating (loss) income                                                                                   |  |                  | (18,468 | ) |                  | (7,416  | ) |                  | 17,030  |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Other income (expense):                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|Interest expense                                                                                          |  |                  | (13,931 | ) |                  | (16,007 | ) |                  | (19,990 | )
|Gain on debt extinguishment                                                                               |  |                  | 9,582   |   |                  |        |   |                  | 15,858  |  
|Write-off of deferred financing costs                                                                     |  |                  | (431    | ) |                  |        |   |                  |        |  
|Other income, net                                                                                         |  |                  | 637     |   |                  | 27      |   |                  | 40      |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|                                                                                                          |  |                  | (4,143  | ) |                  | (15,980 | ) |                  | (4,092  | )
|                                                                                                          |  |                  |        
|(Loss) income before tax and cumulative effect of a change in accounting principle                        |  |                  | (22,611 | ) |                  | (23,396 | ) |                  | 12,938  |  
|(Benefit) provision for income taxes                                                                      |  |                  | 625     |   |                  | (2,149  | ) |                  | 6,898   |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|(Loss) income before a cumulative effect of a change in accounting principle                              |  |                  | (23,236 | ) |                  | (21,247 | ) |                  | 6,040   |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Cumulative effect of a change in accounting principle - goodwill impairment, net of tax benefit of $2,200 |  |                  |        |   |                  | (52,800 | ) |                  |        |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Net (loss) income                                                                                         |  | $                | (23,236 | ) |                  | (74,047 | ) |                  | 6,040   |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Dividends on preferred stock                                                                              |  |                  | 672     |   |                  |        |   |                  |        |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Income (loss) available to common stockholders                                                            |  | $                | (23,908 | ) |                  | (74,047 | ) |                  | 6,040   |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Basic (loss) income per common share:                                                                     |  |                  |         |   |                  |         |   |                  |         |  
|(Loss) income before a cumulative effect of a change in accounting principle                              |  | $                | (1.44   | ) |                  | (1.28   | ) |                  | 0.36    |  
|Cumulative effect of a change in accounting principle - goodwill impairment                               |  |                  |        |   |                  | (3.17   | ) |                  |        |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Net (loss) income                                                                                         |  | $                | (1.44   | ) |                  | (4.45   | ) |                  | 0.36    |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Diluted (loss) income per common share:                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|(Loss) income before a cumulative effect of a change in accounting principle                              |  | $                | (1.44   | ) |                  | (1.28   | ) |                  | 0.34    |  
|Cumulative effect of a change in accounting principle - goodwill impairment                               |  |                  |        |   |                  | (3.17   | ) |                  |        |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Net (loss) income                                                                                         |  | $                | (1.44   | ) |                  | (4.45   | ) |                  | 0.34    |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Weighted average common shares outstanding, basic                                                         |  |                  | 16,659  |   |                  | 16,659  |   |                  | 16,659  |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  
|Weighted average common shares outstanding, diluted                                                       |  |                  | 16,659  |   |                  | 16,659  |   |                  | 18,159  |  
|                                                                                                          |  |                  |         |   |                  |         |   |                  |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES



Consolidated Statements of Stockholders Equity (Deficit) and Comprehensive Income (Loss)



Fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001



(in thousands, except share amounts)



|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ------------ |  | --------------- | --- | ------------------------ | ----- | ------------------------------------------ | - | ----- | ------------------ | - | ------ | ------------------------------------- | - | ---- | - |  | - | ------- | - |  | - | ------- | -
|                                                             |  | Common stock |  | Preferred stock |     | Additionalpaid-incapital |       | AccumulatedOtherComprehensiveIncome (Loss) |   |       | AccumulatedDeficit |   |        | Total stock- holdersequity (deficit) |  
|                                                             |  | Shares       |  | Amount          |     | Shares                   |       | Amount                                     |   |       |                    |  
|Balance at December 31, 2000                                 |  | 16,659,027   |  | $               | 167 |                          |      |                                            | $ |      |                    | $ | 49,149 |                                       | $ |     |   |  | $ | (2,942  | ) |  | $ | 46,374  |  
|                                                             |  |              |  |                 |     |                          |       |                                           
|Comprehensive income (loss):                                 |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Net income                                                   |  |             |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   |     |   |  |   | 6,040   |   |  |   | 6,040   |  
|Other comprehensive loss:                                    |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Foreign currency translation adjustment                      |  |             |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   | (309 | ) |  |   |        |   |  |   | (309    | )
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Total other comprehensive income                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   | 5,731   |  
|Issuance of common stock                                     |  | 146          |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   |     |   |  |   |        |   |  |   |        |  
|Issuance of options in connection with litigation settlement |  |             |  |                 |    |                          |      |                                            |   |      |                    |   | 432    |                                       |   |     |   |  |   |        |   |  |   | 432     |  
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Balance at December 30, 2001                                 |  | 16,659,173   |  |                 | 167 |                          |      |                                            |   |      |                    |   | 49,581 |                                       |   | (309 | ) |  |   | 3,098   |   |  |   | 52,537  |  
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Comprehensive income (loss):                                 |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Net income                                                   |  |             |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   |     |   |  |   | (74,047 | ) |  |   | (74,047 | )
|Other comprehensive loss:                                    |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Foreign currency translation adjustment                      |  |             |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   | 262  |   |  |   |        |   |  |   | 262     |  
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Total other comprehensive income                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   | (73,785 | )
|Issuance of common stock                                     |  | 187          |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   |     |   |  |   |        |   |  |   |        |  
|Stock compensation expense                                   |  |             |  |                 |    |                          |      |                                            |   |      |                    |   | 7      |                                       |   |     |   |  |   |        |   |  |   | 7       |  
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Balance at December 29, 2002                                 |  | 16,659,360   |  |                 | 167 |                          |      |                                            |   |      |                    |   | 49,588 |                                       |   | (47  | ) |  |   | (70,949 | ) |  |   | (21,241 | )
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Comprehensive income (loss):                                 |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Net loss                                                     |  |             |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   |     |   |  |   | (23,236 | ) |  |   | (23,236 | )
|Other comprehensive income:                                  |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Foreign currency translation adjustment                      |  |             |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   | 123  |   |  |   |        |   |  |   | 123     |  
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Total other comprehensive loss                               |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   | (23,113 | )
|Issuance of common stock                                     |  | 37           |  |                 |    |                          |      |                                            |   |      |                    |   |       |                                       |   |     |   |  |   |        |   |  |   |        |  
|Issuance of preferred stock                                  |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |        |  
|Series 2003A                                                 |  |              |  |                 |     |                          | 6,148 |                                            |   | 4,304 |                    |   |        |                                       |   |      |   |  |   |         |   |  |   | 4,304   |  
|Series 2003B                                                 |  |              |  |                 |     |                          | 513   |                                            |   | 513   |                    |   |        |                                       |   |      |   |  |   |         |   |  |   | 513     |  
|Capital contribution (see note 8 )                           |  |             |  |                 |    |                          |      |                                            |   |      |                    |   | 913    |                                       |   |     |   |  |   |        |   |  |   | 913     |  
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  
|Balance at December 28, 2003                                 |  | 16,659,397   |  | $               | 167 |                          | 6,661 |                                            | $ | 4,817 |                    | $ | 50,501 |                                       | $ | 76   |   |  | $ | (94,185 | ) |  | $ | (38,624 | )
|                                                             |  |              |  |                 |     |                          |       |                                            |   |       |                    |   |        |                                       |   |      |   |  |   |         |   |  |   |         |  



See
accompanying notes to consolidated financial statements.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows

Fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001

(in thousands)



|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|---------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | ------- | - | ---------------- | ------- | -
|                                                                                         |  | December 28,2003 |         |   | December 29,2002 |         |   | December 30,2001 |        
|Cash flows from operating activities:                                                    |  |                  |         |   |                  |         |   |                  |         |  
|Net income (loss)                                                                        |  | $                | (23,236 | ) |                  | (74,047 | ) |                  | 6,040   |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: |  |                  |         |   |                  |         |   |                  |         |  
|Depreciation and amortization of property and equipment                                  |  |                  | 4,181   |   |                  | 3,934   |   |                  | 3,542   |  
|Amortization of intangible and goodwill assets                                           |  |                  | 66      |   |                  | 66      |   |                  | 4,293   |  
|Amortization of deferred financing costs                                                 |  |                  | 679     |   |                  | 867     |   |                  | 789     |  
|Write-off of deferred financing costs                                                    |  |                  | 431     |   |                  |        |   |                  |        |  
|Provision for bad debts                                                                  |  |                  | 36      |   |                  | 556     |   |                  | 3,013   |  
|Cumulative effect of goodwill impairment                                                 |  |                  |        |   |                  | 55,000  |   |                  |        |  
|Goodwill impairment                                                                      |  |                  | 28,000  |   |                  | 19,000  |   |                  |        |  
|Deferred income taxes                                                                    |  |                  | (1,731  | ) |                  | (2,278  | ) |                  | 2,061   |  
|Issuance of notes in lieu of interest                                                    |  |                  | 636     |   |                  | 2,279   |   |                  | 2,768   |  
|Gain on sale of fixed assets                                                             |  |                  |        |   |                  | (156    | ) |                  |        |  
|Gain on repurchase of Senior Notes                                                       |  |                  | (1,791  | ) |                  |        |   |                  | (15,858 | )
|Gain on repurchase of PIK Debentures                                                     |  |                  | (7,791  | ) |                  |        |   |                  |        |  
|Changes in assets and liabilities, net of the effects of acquisitions of businesses:     |  |                  |         |   |                  |         |   |                  |         |  
|Accounts receivables                                                                     |  |                  | (2,408  | ) |                  | 6,626   |   |                  | 35,716  |  
|Prepaid expenses and other current assets                                                |  |                  | (477    | ) |                  | 443     |   |                  | (1,652  | )
|Income taxes receivable                                                                  |  |                  | 2,842   |   |                  | (1,601  | ) |                  | (614    | )
|Accounts payable and accrued expenses                                                    |  |                  | 3,865   |   |                  | 8,883   |   |                  | (6,173  | )
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Net cash provided by operating activities                                                |  |                  | 3,302   |   |                  | 19,572  |   |                  | 33,925  |  
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Cash flows from investing activities:                                                    |  |                  |         |   |                  |         |   |                  |         |  
|Purchase of property and equipment                                                       |  |                  | (1,000  | ) |                  | (2,812  | ) |                  | (3,680  | )
|Payments of contingent consideration                                                     |  |                  |        |   |                  | (323    | ) |                  | (746    | )
|Disposal of fixed assets                                                                 |  |                  |        |   |                  | 434     |   |                  |        |  
|Increase in deferred costs and other assets                                              |  |                  |        |   |                  |        |   |                  | (274    | )
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Net cash used in investing activities                                                    |  |                  | (1,000  | ) |                  | (2,701  | ) |                  | (4,700  | )
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Cash flows from financing activities:                                                    |  |                  |         |   |                  |         |   |                  |         |  
|Net borrowings (repayments) under line of credit agreements                              |  |                  | 3,040   |   |                  | (14,220 | ) |                  | (17,269 | )
|Repayment of senior notes and PIK debentures                                             |  |                  | (2,692  | ) |                  |        |   |                  | (11,336 | )
|Debt financing costs                                                                     |  |                  | (1,153  | ) |                  | (136    | ) |                  | (399    | )
|Cash consideration paid in exchange of convertible debt                                  |  |                  |        |   |                  |        |   |                  | (1,000  | )
|Net repayments under capital lease obligations                                           |  |                  | (277    | ) |                  | (204    | ) |                  | (94     | )
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Net cash used in financing activities                                                    |  |                  | (1,082  | ) |                  | (14,560 | ) |                  | (30,098 | )
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Increase (decrease) in cash and cash equivalents                                         |  |                  | 1,220   |   |                  | 2,311   |   |                  | (873    | )
|Cash and cash equivalents, beginning of fiscal year                                      |  |                  | 6,378   |   |                  | 4,067   |   |                  | 4,940   |  
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Cash and cash equivalents, end of fiscal year                                            |  | $                | 7,598   |   |                  | 6,378   |   |                  | 4,067   |  
|                                                                                         |  |                  |         |   |                  |         |   |                  |         |  



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COMFORCE CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows

Fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001

(in thousands)



|                                                                                                    |  |                  |        |                  |        |                  |       
|--------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ---------------- | ------ | ---------------- | ------
|                                                                                                    |  | December 28,2003 |        | December 29,2002 |        | December 30,2001
|Supplemental cash flow information:                                                                 |  |                  |       
|Cash paid during the fiscal year for:                                                               |  |                  |        |                  |        |                  |       
|Interest                                                                                            |  | $                | 11,798 |                  | 12,851 |                  | 15,257
|Income taxes                                                                                        |  |                  | 994    |                  | 438    |                  | 5,550 
|                                                                                                    |  |                  |       
|Supplemental schedule of significant noncash investing and financing activities:                    |  |                  |        |                  |        |                  |       
|Issuance of 2003A Convertible Preferred Stock in exchange for PIK Debentures                        |  |                  | 4,304  |                  |       |                  |      
|Issuance of 2003B Convertible Preferred Stock in exchange 8% Subordinated Convertible Notes         |  |                  | 513    |                  |       |                  |      
|Exchange in PIK Debentures for the issuance of 2003A Convertible Preferred Stock                    |  |                  | 12,356 |                  |       |                  |      
|Exchange in 8% Subordinated Convertible Notes for the issuance of 2003B Convertible Preferred Stock |  |                  | 2,052  |                  |       |                  |      
|Contribution of capital as a result of the exchange of 8% Subordinated Convertible Notes            |  |                  | 913    |                  |       |                  |      
|Capital lease obligations incurred for the purchase of new equipment                                |  |                  | 68     |                  | 422    |                  | 402   
|Issuance of 8% Subordinated Convertible Note in exchange for 15% PIK Debentures                     |  |                  |       |                  |       |                  | 8,000 



See
accompanying notes to consolidated financial statements.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29, 2002 and December 30, 2001



|(1) | Basis of Presentation
|--- | ---------------------



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



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



|(2) | Summary of Significant Accounting Policies
|--- | ------------------------------------------



Fiscal Year



Beginning with 2001, 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, 2003. Prior to 2001, the Companys fiscal years ended on December 31 in each year. Fiscal years 2003, 2002 and 2001 contain 52 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



The Company provides supplemental staff workers to its customers under arrangements that typically require the supervision of the customers
management for a period of time. In these arrangements, the Company is responsible for the employees engaged to provide services. The Company pays the employees wages and is responsible for paying or withholding related payroll and income
taxes. The Company bills its customers for these services at the end of the week with payment due upon receipt of the invoice. The customers are required to pay the Company a specified rate for each hour an employee works. Payment is customarily
remitted to the Company within 35 days. Revenue under these arrangements is recognized upon the performance of service by the Companys employee. There is no right of cancellation or refund provisions in these arrangements and the Company has
no further obligation once the services are rendered by the employee.



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 bills directly 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 and is included in selling, general and administrative expenses. The net distributions to the licensee included in selling, general and administrative expenses for the
fiscal years December 28, 2003, December 29, 2002 and December 30, 2001 were approximately $2,846,000, $2,835,000 and $3,799,000, respectively.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



The Company provides back office support to unaffiliated independently owned staffing companies.
These arrangements typically require the Company to process the payrolls and billings 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 billings. Revenue is recognized
over the period 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 obligation 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 money 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 then paid down subsequent to the funding through the direct remittance of payments by their clients to the Company. The
Company withholds from these advances an administrative fee and other charges as well as the amount of unpaid receivables that remain after a specified number of days. These administrative fees and other charges are recognized as revenue over the
period that they are earned. There is no right of cancellation or refund provisions in these arrangements and the Company has no further obligation once the services are rendered.



The Company adopted Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred effective as of the beginning of fiscal 2002. Accordingly, reimbursements received by the Company for out-of-pocket expenses are now characterized as revenue. Prior to adoption of EITF
01-14, the Company characterized such amounts as a reduction of cost of sales.



Cash and Cash Equivalents



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



Property and Equipment



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



In addition, in certain circumstances, the Company
capitalizes its internal costs related to the development of its software for internal use. These costs are capitalized under the provisions of SOP 98-1 and amortized over the estimated life of the software.



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 the Financial Accounting Standards Board (FASB) issued
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.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Goodwill



During June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142),
which prohibits the amortization of goodwill or identifiable intangible assets with an indefinite life, which the Company adopted on December 31, 2001. SFAS 142 also requires goodwill impairment reviews to be performed at least annually by applying
fair-value-based test at the reporting unit level, which represent operations of the segments that the Company reports. The first step in this test is to compare each reporting units estimated fair value to its carrying value. If the reporting
units estimated fair value is in excess of its carrying value, the test is complete and no impairment is recorded. However, if the reporting units estimated fair value is less than its carrying value, additional procedures are performed
to determine if any impairment of goodwill exists. The Company has recorded an impairment of $52.8 million net of tax, as a cumulative effect of a change in accounting principle during the first quarter of 2002 and also recorded goodwill impairment
charges of $19.0 million during the fourth quarter of 2002 and $28.0 million during the third quarter of 2003 (see note 4).



In connection with the goodwill impairment tests, the Company engaged an independent firm to assist management in the determination of the fair values of
its reporting units. In its determination of the fair values, the firm engaged by the Company primarily utilized a discounted cash flow analysis as well as various other valuation approaches, including (a) recent values paid by investors and
purchasers of companies in businesses similar to that of the Company, (b) capitalization multiples of companies with investment characteristics resembling those of the reporting units, (c) the enterprise value of the Company, and (d) 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.



Prior to adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over its useful life, which was estimated based on the facts and circumstances surrounding each individual acquisition, not to exceed 40 years.



Income Taxes



The Company accounts for income taxes in accordance with FASB Statement No.
109, Accounting for Income Taxes (SFAS 109). 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 basis, 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 utilization of the asset is not likely.



Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Some of the significant estimates involved are the collectibility of receivables, the fair value of goodwill, the recoverability of long-lived assets, workers compensation as well as deferred tax assets and the assessment of
litigation and contingencies. Actual results could differ from those estimates.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Fair Values of Financial Instruments



Cash and cash equivalents, accounts receivable, funding and service fees
receivable, accounts payable and accrued expenses are reflected in the financial statements at book value which is believed to represent fair value due to the short-term maturity of these financial instruments.



The Companys fixed rate debt obligations are traded infrequently, and
their fair market 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, indicated bid levels, and other market information, the Company believes that the approximate fair values of its outstanding debt instruments at December 28, 2003 were as follows: (i) was
$69.3 million for COIs 12% Senior Notes due 2007 in the then outstanding principal amount of $82.5 million, and (ii) $3.7 million for COMFORCEs 8% Convertible Subordinated Note due December 2, 2009 in the then outstanding principal
amount of $7.4 million.



Deferred Financing Costs



Deferred financing costs consist of costs associated
with the issuance of the Companys long-term debt. Such costs are amortized on a straight-line basis over the life of each financing source, which ranges from 3 to 12 years, and unamortized costs are fully recognized upon discharge of any
financing. Upon the repayment and termination in June 2003 of the Companys prior revolving credit with other institutional lenders, $431,000 in unamortized financing costs related thereto were expensed (see note 8). In addition, the Company
expensed $319,000 in fiscal 2003 and $1.1 million in fiscal 2001 relating to the early extinguishment of debt (see note 8).



Income (Loss) Per Share



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



Foreign Currency



Assets and
liabilities of the foreign subsidiary 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. As a result, the
translation adjustments are accumulated in a separate component of stockholders deficit.



Reserves for Workers Compensation



Workers compensation benefits are provided primarily under a self-insured plan for employees of the Company. The Company records its estimate of the ultimate cost of, and reserves for, workers compensation based on
actuarial computations using the Companys loss history as well as industry statistics. Furthermore, in determining its reserves, the Company includes reserves for estimated claims incurred but not reported.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



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



Stock Compensation Plans



During December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure(SFAS 148) which provides for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of FASB issued Statement No. 123, Accounting for Stock-Based Compensation(SFAS 123) to require more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.



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



|                              |  |                                                                                                                                     |         |                   |    |   |                  |   |     |                  |       |  |    
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | ------- | ----------------- | -- | - | ---------------- | - | --- | ---------------- | ----- |  | ---
|                              |  |                                                                                                                                     |         | Fiscal Year Ended
|                              |  |                                                                                                                                     |         | December 28,2003  |    |   | December 29,2002 |   |     | December 30,2001
|Net (loss) income as reported |  | $                                                                                                                                   | (23,236 | )                 |    | $ | (74,047          | ) |     | $                | 6,040
|                              |  |                                                                                                                                     |         |                  
|Deduct:                       |  | Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |         |                   | 33 |   |                  |   | 137 |                  |       |  | 233
|                              |  |                                                                                                                                     |         |                   |    |   |                  |   |     |                  |       |  |    
|Pro forma (loss) income       |  | $                                                                                                                                   | (23,269 | )                 |    | $ | (74,184          | ) |     | $                | 5,807
|                              |  |                                                                                                                                     |         |                   |    |   |                  |   |     |                  |       |  |    
|(Loss) income per share:      |  |                                                                                                                                     |         |                   |    |   |                  |   |     |                  |      
|As reported:                  |  |                                                                                                                                     |         |                   |    |   |                  |   |     |                  |      
|Basic                         |  | $                                                                                                                                   | (1.44   | )                 |    | $ | (4.45            | ) |     | $                | .36  
|Diluted                       |  |                                                                                                                                     | (1.44   | )                 |    |   | (4.45            | ) |     |                  | .34  
|Pro forma:                    |  |                                                                                                                                     |         |                   |    |   |                  |   |     |                  |      
|Basic                         |  |                                                                                                                                     | (1.44   | )                 |    |   | (4.45            | ) |     |                  | .35  
|Diluted                       |  |                                                                                                                                     | (1.44   | )                 |    |   | (4.45            | ) |     |                  | .32  



The per share
weighted-average fair value of each option granted on the date of grant was $0.19 in fiscal 2003; $0.21 in fiscal 2002; and $0.31 in fiscal 2001, in each case using the Black-Scholes options pricing model with the following weighted-average
assumptions used for grants: no dividend yield; expected volatility of 45.4% for fiscal 2003 and 45.6% for each of fiscal 2002 and 2001; risk-free weighted interest rates of 3.42% for fiscal 2003, 3.85% for fiscal 2002 and 4.74% for fiscal 2001; and
expected lives ranging from three to four years. Weighted-averages are used because of varying assumed exercise dates.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Impact of Recently Issued Accounting Standards



In May 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). This accounting standard establishes standards for
classifying and measuring certain financial instruments with characteristics of both liabilities and equity. It requires that certain financial instruments that were previously classified as equity now be classified as a liability. This accounting
standard is effective for financial instruments entered into or modified after May 31, 2003, and otherwise at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on
the consolidated financial statements.



Accounting for
Extinguishment of Debt



In April 2002, the FASB issued
Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections(SFAS 145). SFAS 145 rescinded Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 are now used to classify those gains and losses both on a prospective and
retrospective basis. The provisions of SFAS 145 were adopted during the second fiscal quarter of 2002.



The adoption of SFAS 145 had no impact upon the Companys consolidated balance sheet or net income in its consolidated statement of operations for
any period, but required a reclassification of the gain on the extinguishment of debt, net of related income tax effect, for fiscal 2001 and the quarterly periods during that year in which the Company repurchased its debt at a discount. For these
periods, the gain, before any tax effect, has been recorded as other income and the income (loss) before tax and the provision for income taxes line items have been adjusted accordingly.



|(3) | Property and Equipment
|--- | ----------------------



Property and equipment as of December 28, 2003 and December 29, 2002 consisted of (in thousands):



|                                               |  |                                |  |      |         |   |      |         |  
|---------------------------------------------- |  | ------------------------------ |  | ---- | ------- | - | ---- | ------- | -
|                                               |  | Estimated usefullives in years |  | 2003 |         |   | 2002 |        
|Computer equipment and related software        |  | 3-7                            |  | $    | 21,064  |   |      | 21,107  |  
|Furniture, fixtures and vehicles               |  | 3-7                            |  |      | 3,054   |   |      | 2,815   |  
|Leasehold improvements                         |  | 3-7                            |  |      | 710     |   |      | 636     |  
|                                               |  |                                |  |      |         |   |      |         |  
|                                               |  |                                |  |      | 24,828  |   |      | 24,558  |  
|Less accumulated depreciation and amortization |  |                                |  |      | (16,329 | ) |      | (12,946 | )
|                                               |  |                                |  |      |         |   |      |         |  
|                                               |  |                                |  | $    | 8,499   |   |      | 11,612  |  
|                                               |  |                                |  |      |         |   |      |         |  



Depreciation and
amortization expense was $4,181,000, $3,934,000 and $3,542,000 for the fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001, respectively.



|(4) | Goodwill
|--- | --------



In July 2001, FASB issued Statement No. 141, Business Combinations (SFAS 141), Statement No. 142,Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 eliminates the requirement to amortize
goodwill and intangible assets with indefinite useful lives. Instead, they will be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives and to their estimated residual values, and reviewed for impairment in accordance with SFAS 144.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



The Company is required to test goodwill for impairment in accordance with the provisions of SFAS 142
as of the end of each fiscal year or earlier during each fiscal year as circumstances require. The Company evaluated the recoverability of goodwill on its books under the new standards under SFAS 142 at its adoption in the first quarter of 2002, in
the fourth quarter of 2002 and again in the third and fourth quarters of 2003. In each instance, the Company engaged an independent firm to assist management in its determination of the fair values of its reporting units. In its determination of the
fair values, the firm engaged by the Company primarily utilized a discounted cash flow analysis as well as various other valuation approaches, including (a) recent values paid by investors and purchasers of companies in businesses similar to that of
the Company, (b) capitalization multiples of companies with investment characteristics resembling those of the reporting units, (c) the enterprise value of the Company, and (d) asset and liability structure.



Significant assumptions used in this analysis included (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. The Companys operating results during the periods in which analysis was performed, including the results of its more specialized operations, were negatively impacted by general economic
conditions. Based on managements assessment of the circumstances and considering the firms findings, the Company recognized the following impairment losses: In the first quarter of 2002, the Company recognized an impairment loss of $55.0
million ($43.7 million for Staff Augmentation, $9.4 million for Financial Outsourcing Services and $1.9 million for Human Capital Management Services) as a cumulative effect of a change in accounting principle in the accompanying financial
statements during the first quarter of 2002. In the fourth quarter of 2002, the Company recognized an additional impairment loss of $19.0 million as it relates to the staff augmentation segment due to the Companys failure to meet previous
growth expectations in the Staff Augmentation segment. In the third quarter of 2003, the Company recognized an impairment loss of $28.0 million due to the Companys inability to meet previous growth expectations in the Staff Augmentation
segment. The Company also performed its annual testing for goodwill impairment in the fourth quarter of fiscal 2003 and determined that no additional write-offs were required to be taken.



These impairment losses relate primarily to the goodwill attributable to
staffing companies acquired by the Company in 1996 through 1998, during which time staffing companies were customarily valued using higher multiples, and these companies had significantly higher earnings. 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.



The changes in the carrying amount of goodwill for the fiscal year ended December 28, 2003 is as follows (in thousands):



|                                |  |                   |         |   |                        |   |       |  |   |         |  
|------------------------------- |  | ----------------- | ------- | - | ---------------------- | - | ----- |  | - | ------- | -
|                                |  | StaffAugmentation |         |   | HumanCapitalManagement |   | Total | 
|Balance as of December 29, 2002 |  | $                 | 51,042  |   |                        | $ | 9,200 |  | $ | 60,242  |  
|Impairment losses               |  |                   | (28,000 | ) |                        |   |      |  |   | (28,000 | )
|                                |  |                   |         |   |                        |   |       |  |   |         |  
|Balance as of December 28, 2003 |  | $                 | 23,042  |   |                        | $ | 9,200 |  | $ | 32,242  |  
|                                |  |                   |         |   |                        |   |       |  |   |         |  



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Goodwill amortization for the fiscal year ended December 30, 2001 was $4.2 million and generated tax
benefits of $263,000. The following table shows the results of operations for fiscal 2003 and 2002, to which SFAS 142 was applicable, and for fiscal 2001 as if SFAS 142 were applicable (in thousands, except per share amounts):



|                                                                                          |  |                   |         |   |                  |         |   |                  |      
|----------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | ------- | - | ---------------- | -----
|                                                                                          |  | Fiscal year ended
|                                                                                          |  | December 28,2003  |         |   | December 29,2002 |         |   | December 30,2001
|Income (loss) before a cumulative effect of a change in accounting principle, as reported |  | $                 | (23,236 | ) |                  | (21,247 | ) |                  | 6,040
|Plus:                                                                                     |  |                   |         |   |                  |         |   |                  |      
|Goodwill amortization, net of tax                                                         |  |                   |        |   |                  |        |   |                  | 3,935
|                                                                                          |  |                   |         |   |                  |         |   |                  |      
|Adjusted income (loss) before a cumulative effect of a change in accounting principle     |  | $                 | (23,236 | ) |                  | (21,247 | ) |                  | 9,975
|                                                                                          |  |                   |         |   |                  |         |   |                  |      
|Basic income (loss) per common share:                                                     |  |                   |         |   |                  |         |   |                  |      
|Income (loss) before a cumulative effect of a change in accounting principle, as reported |  | $                 | (1.44   | ) |                  | (1.28   | ) |                  | 0.36 
|Goodwill amortization, net of tax                                                         |  |                   |        |   |                  |        |   |                  | 0.24 
|                                                                                          |  |                   |         |   |                  |         |   |                  |      
|Adjusted income (loss) before a cumulative effect of a change in accounting principle     |  | $                 | (1.44   | ) |                  | (1.28   | ) |                  | 0.60 
|                                                                                          |  |                   |         |   |                  |         |   |                  |      
|Diluted income (loss) per common share:                                                   |  |                   |         |   |                  |         |   |                  |      
|Income (loss) before a cumulative effect of a change in accounting principle, as reported |  | $                 | (1.44   | ) |                  | (1.28   | ) |                  | 0.34 
|Goodwill amortization, net of tax                                                         |  |                   |        |   |                  |        |   |                  | 0.22 
|                                                                                          |  |                   |         |   |                  |         |   |                  |      
|Adjusted income (loss) before a cumulative effect of a change in accounting principle     |  | $                 | (1.44   | ) |                  | (1.28   | ) |                  | 0.56 
|                                                                                          |  |                   |         |   |                  |         |   |                  |      



|(5) | Intangibles
|--- | -----------



The Company has adopted the provisions of SFAS 141 and SFAS 142 as of the beginning of fiscal year 2002. It has evaluated its existing intangible assets
and goodwill that were acquired in prior purchase business combinations and has reclassified $264,000 net carrying value of goodwill to intangible assets in order to conform to the new criteria in SFAS 141 for recognition apart from goodwill. The
Company has reassessed the useful lives and residual values of the intangible assets acquired, and has determined that no amortization period adjustments were necessary.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



The intangible assets with definite useful lives are comprised of covenants not to compete (being
amortized over periods ranging from 8 to 10 years) with a gross carrying amount of $558,000 and accumulated amortization of $426,000 as of December 28, 2003. The amortization expense for the fiscal year ended December 28, 2003 was $66,000. The
estimated amortization expense for the following years is as follows (in thousands):



|                                        |  |   
|--------------------------------------- |  | --
|For fiscal year ended December 26, 2004 |  | 51
|For fiscal year ended December 25, 2005 |  | 41
|For fiscal year ended December 31, 2006 |  | 20
|For fiscal year ended December 30, 2007 |  | 5 
|For fiscal year ended December 29, 2008 |  | 5 



|(6) | Accrued Expenses
|--- | ----------------



Accrued expenses as of December 28, 2003 and December 29, 2002 consisted of (in thousands):



|                           |  |      |        |      |       
|-------------------------- |  | ---- | ------ | ---- | ------
|                           |  | 2003 |        | 2002
|Payroll and payroll taxes  |  | $    | 20,296 |      | 14,623
|Outstanding payroll checks |  |      | 4,892  |      | 7,764 
|Vacation/pension plan      |  |      | 2,506  |      | 2,291 
|Income taxes payable       |  |      | 5,877  |      | 4,704 
|Commissions                |  |      | 926    |      | 1,043 
|Interest                   |  |      | 967    |      | 1,385 
|Other                      |  |      | 6,663  |      | 6,083 
|                           |  |      |        |      |       
|                           |  | $    | 42,127 |      | 37,893
|                           |  |      |        |      |       



|(7) | Income Taxes
|--- | ------------



Total income tax expense (benefit) as of December 29, 2003, December 30, 2002 and December 31, 2001 was allocated as follows (in thousands):



|                                                      |  |      |     |      |        |   |      |      
|----------------------------------------------------- |  | ---- | --- | ---- | ------ | - | ---- | -----
|                                                      |  | 2003 |     | 2002 |        |   | 2001
|Income from continuing operations                     |  | $    | 625 |      | (2,149 | ) |      | 6,898
|Cumulative effect of a change in accounting principle |  |      |    |      | (2,200 | ) |      |     
|                                                      |  |      |     |      |        |   |      |      
|                                                      |  | $    | 625 |      | (4,349 | ) |      | 6,898
|                                                      |  |      |     |      |        |   |      |      



The provision for
(recovery of) income taxes as of December 29, 2003, December 30, 2002 and December 31, 2001 consisted of (in thousands):



|                  |  |      |        |   |      |        |   |      |      
|----------------- |  | ---- | ------ | - | ---- | ------ | - | ---- | -----
|                  |  | 2003 |        |   | 2002 |        |   | 2001
|Current:          |  |      |        |   |      |        |   |      |      
|Federal           |  | $    | 1,807  |   |      | (2,222 | ) |      | 3,385
|State             |  |      | 549    |   |      | 152    |   |      | 1,452
|                  |  |      |        |   |      |        |   |      |      
|Total current     |  |      | 2,356  |   |      | (2,070 | ) |      | 4,837
|                  |  |      |        |   |      |        |   |      |      
|Deferred:         |  |      |        |   |      |        |   |      |      
|Federal           |  |      | (1,438 | ) |      | 395    |   |      | 1,574
|State             |  |      | (293   | ) |      | (474   | ) |      | 487  
|                  |  |      |        |   |      |        |   |      |      
|Total deferred    |  |      | (1,731 | ) |      | (79    | ) |      | 2,061
|                  |  |      |        |   |      |        |   |      |      
|Total tax expense |  | $    | 625    |   |      | (2,149 | ) |      | 6,898
|                  |  |      |        |   |      |        |   |      |      



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Total income tax expense (benefit) differed from the statutory federal income tax rate of 34% before
income taxes as a result of the following items (in thousands):



|                                                |  |      |        |   |      |        |   |      |       |  
|----------------------------------------------- |  | ---- | ------ | - | ---- | ------ | - | ---- | ----- | -
|                                                |  | 2003 |        |   | 2002 |        |   | 2001 |      
|Statutory federal tax rate at 34.0%             |  | $    | (7,688 | ) |      | (7,955 | ) |      | 4,399 |  
|State and local taxes, net of federal tax       |  |      | 169    |   |      | (212   | ) |      | 1,280 |  
|Change in deferred tax rates and estimates used |  |      | (71    | ) |      | (4     | ) |      | (202  | )
|Effect of non-deductible itemsgoodwill         |  |      | 7,072  |   |      | 5,643  |   |      | 1,196 |  
|Effect of non-deductible itemsother            |  |      | 262    |   |      | 379    |   |      | 225   |  
|Payment of prior year liability                 |  |      | 881    |   |      |       |   |      |      |  
|                                                |  |      |        |   |      |        |   |      |       |  
|                                                |  | $    | 625    |   |      | (2,149 | ) |      | 6,898 |  
|                                                |  |      |        |   |      |        |   |      |       |  



The components of
deferred tax assets and deferred tax liabilities at December 28, 2003 and December 29, 2002 (in thousands) are as follows:



|                                      |  |      |       |   |      |       |  
|------------------------------------- |  | ---- | ----- | - | ---- | ----- | -
|                                      |  | 2003 |       |   | 2002 |      
|Deferred tax assets:                  |  |      |       |   |      |       |  
|Reserves and allowances               |  | $    | 1,135 |   |      | 738   |  
|Excess book amortization expense      |  |      | 3,040 |   |      | 1,046 |  
|Deferred PIK interest                 |  |      |      |   |      | 2,030 |  
|Accrued liabilities and other         |  |      | 983   |   |      | 889   |  
|Tax benefit of state NOL carryforward |  |      | 752   |   |      | 504   |  
|                                      |  |      |       |   |      |       |  
|                                      |  |      | 5,910 |   |      | 5,207 |  
|Less valuation allowance              |  |      | (165  | ) |      | (165  | )
|                                      |  |      |       |   |      |       |  
|Total deferred tax assets             |  |      | 5,745 |   |      | 5,042 |  
|                                      |  |      |       |   |      |       |  
|Deferred tax liability:               |  |      |       |   |      |       |  
|Excess depreciation                   |  |      | 2,317 |   |      | 3,330 |  
|Other                                 |  |      |      |   |      | 15    |  
|                                      |  |      |       |   |      |       |  
|Total deferred tax liabilities        |  |      | 2,317 |   |      | 3,345 |  
|                                      |  |      |       |   |      |       |  
|Net deferred tax asset                |  | $    | 3,428 |   |      | 1,697 |  
|                                      |  |      |       |   |      |       |  



At December 28, 2003,
the Company has available $1,139,000 of state tax benefits from state net operating losses which are required under various state laws to be carried forward to future years. These tax benefits are available to offset future state income tax and
expire in the tax years indicated below (in thousands).



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



|          |  |             |        |  
|--------- |  | ----------- | ------ | -
|Year      |  | Tax Benefit |       
|2006      |  | $           | (13    | )
|2007      |  |             | (19    | )
|2008      |  |             | (50    | )
|2009      |  |             | (31    | )
|2010      |  |             | (27    | )
|2011-2022 |  |             | (999   | )
|          |  |             |        |  
|TOTAL     |  | $           | (1,139 | )
|          |  |             |        |  



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 on the generation of future taxable income and tax planning strategies implemented. The Company has established valuation
allowances for net operating loss carryforwards for certain states where management believes these loss carryforwards will expire unused. The valuation allowance for the fiscal year ended December 28, 2003 remains unchanged at $165,000. Based on the
Companys ability to carry back future reversals of deferred tax assets to taxes paid in current and prior years and the Companys historical taxable income record, management believes it is more likely than not that the Company will
realize the benefit of the net deferred tax assets existing at December 28, 2003. Further, management believes the existing net deductible temporary differences will reverse during periods in which the Company will generate net taxable income. There
can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings in the future. The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. In order to fully realize the net deferred tax assets, the Company will need to generate future taxable income of approximately $9.2 million.



|(8) | Debt
|--- | ----



Notes payable and long-term debt at December 28, 2003 and December 29, 2002 consisted of (in thousands):



|                                                                                                                                                                                   |  |                  |         |                  |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                   |  | December 28,2003 |         | December 29,2002
|12% Senior Notes, due 2007                                                                                                                                                         |  | $                | 82,500  |                  | $ | 87,000 
|15% Senior Secured PIK Debentures (now retired)                                                                                                                                    |  |                  |        |                  |   | 11,995 
|8% Subordinated Convertible Notes, due 2009                                                                                                                                        |  |                  | 7,420   |                  |   | 8,784  
|Revolving line of credit, now retired (formerly due August 31, 2004), with interest payable monthly at LIBOR plus 3.00% with a weighted
average rate of 4.64% at December 29, 2002 |  |                  |        |                  |   | 35,000 
|Revolving line of credit, due June 24, 2007, with interest payable monthly at LIBOR plus 2.75% with a weighted average rate of 3.93% at
December 28, 2003                          |  |                  | 38,040  |                  |   |       
|                                                                                                                                                                                   |  |                  |         |                  |   |        
|Total long-term debt                                                                                                                                                               |  | $                | 127,960 |                  | $ | 142,779
|                                                                                                                                                                                   |  |                  |         |                  |   |        



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



|           |  |   |        
|---------- |  | - | -------
|2007       |  | $ | 120,540
|Thereafter |  |   | 7,420  
|           |  |   |        
|Total      |  | $ | 127,960
|           |  |   |        



PNC Credit
Facility: In June 2003, COMFORCE, COI and various of their operating subsidiaries entered



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



into a 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 $75.0 million revolving credit facility with available borrowings based, generally, on 85.0% of
the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions. At closing, the Company borrowed $32.7 million and repaid the Companys then existing revolving credit facility agented by Whitehall
Business Credit Corporation (the Whitehall Credit Facility), which was thereupon terminated. The Whitehall Credit Facility, which the Company entered into in December 2000, as subsequently amended, provided for borrowings of up to $85.0
million. The Company wrote-off approximately $431,000 of deferred financing costs in the second quarter of 2003 for the early retirement of the Whitehall Credit Facility.



Borrowings under the PNC Credit Facility bear interest, at the Companys option, at a per annum rate equal to either
(1) the greater of the base commercial lending rate of PNC as announced from time to time or the federal funds rate plus 0.5%, or (2) LIBOR plus a margin ranging from 2.5% if the Companys fixed charged coverage ratio is greater than 1.30:1 to
3.0% if this ratio is 1.05:1 (with the initial fixed and first calculated margins having been 2.75% from funding in June 2003 through the end of fiscal 2003). The obligations evidenced by 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 agreements evidencing the PNC Credit Facility contain various financial and other covenants and
conditions, including, but not limited to, limitations on paying dividends, engaging in affiliate transactions, making acquisitions and incurring additional indebtedness. The scheduled maturity date of the PNC Credit Facility is June 24, 2007. The
PNC Credit Facility affords the Company greater borrowing flexibility and has a maturity date close to three years beyond the maturity date of the Whitehall Credit Facility. The Company was in compliance with all financial covenants under the PNC
Credit Facility at the end of fiscal 2003 and expects to remain in compliance throughout fiscal 2004.



PIK Debentures: In February 2003, the Company issued $6.1 million face amount of its new Series 2003A Preferred Stock having a fair market value of
$4.3 million in exchange for $12.3 million of its outstanding PIK Debentures (including accrued interest) from a related party (the Fanning Partnership) and repurchased additional PIK Debentures ($59,000 including interest) from unrelated parties
for a cash payment of $21,000. As a result of this transaction, the Company recognized a gain on debt extinguishment of $7.8 million, which includes the reduction of approximately $240,000 of deferred financing costs, in the third quarter of 2003.
In May 2003, principally in order to eliminate the costs associated with the administration of the PIK Debentures, the Company redeemed the remaining $42,000 of PIK Debentures in accordance with the procedures set forth in the indenture. The related
party transactions were treated as gains on the extinguishment of debt and not as contributions to capital since the related party purchased the PIK Debentures (it exchanged for Series 2003A Preferred Stock) from unrelated parties at a discount and
the Company received the benefits of this pricing in its transactions with the related party. In May 2003, principally in order to eliminate the costs associated with the administration of the PIK Debentures, the Company redeemed the remaining
$42,000 of PIK Debentures in accordance with the procedures set forth in the indenture.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Senior Notes: In June 2003, the Company repurchased $2.0 million principal amount of Senior
Notes for $980,000, resulting in a gain on debt extinguishment of $983,000, which includes the reduction of approximately $37,000 of deferred financing costs. In December 2003, the Company repurchased $2.5 million principal amount of Senior Notes
for $1.6 million, resulting in a gain on debt extinguishment of $808,000, which includes the reduction of approximately $42,000 of deferred financing costs. In February and March 2004, the Company repurchased an additional $13.5 million principal
amount of its 12% Senior Notes for $11.3 million in transactions with unrelated parties. As a result of these repurchases, the Company will recognize a gain on debt extinguishment of $2.0 million in the first quarter of 2004, including a reduction
of approximately $219,000 of deferred financing costs.



Convertible Notes: In September 2003, the Company issued 513 shares of its Series 2003B Preferred Stock having an aggregate face amount and fair market value of $513,000 in exchange for $2.0 million principal amount of Convertible
Notes, plus accrued interest, in a transaction with a related party (the Fanning Partnership). The consideration paid to the related party in September 2003 for the principal amount of the Convertible Notes exchanged in this transaction was
substantially less than the consideration paid by it for the securities it had previously exchanged for the Convertible Notes. As a result of this transaction, the Company recorded a contribution to capital of $913,000, net of taxes, in lieu of
recognizing a gain on the extinguishment of debt.



The debt
service costs associated with the Convertible Notes may be satisfied through issuance of new Convertible Notes through December 1, 2004 (representing a one-year extension from the original date of December 1, 2003). Beginning with the interest
payment due June 1, 2005, COMFORCE will be required to pay interest on the Convertible Notes in cash. Its ability to do so is expected to be dependent on its availability of funds for this purpose, whether through borrowings by COI under its new
revolving credit facility agented by PNC Bank, National Association, funds from COIs operations or otherwise, and on COIs ability to upstream funds in accordance with the restricted payments test under the indenture for the Senior Notes.
COMFORCEs ability to repay Convertible Notes at their maturity on December 2, 2009, or on any earlier required repayment or repurchase dates, will also be dependent on any restrictions under its loan agreements as then in effect and
availability of funds.



Under the indenture governing the
Senior Notes, COI is subject to restrictions in upstreaming funds to its parent COMFORCE. The Company does not currently have sufficient availability under the indenture to make a cash payment of semi-annual interest under the Convertible Notes.
Management believes that $2.0 million annually (if COI has funds available for this purpose) will be sufficient to pay COMFORCEs annual public company expenses for the foreseeable future. Principally as a result of losses incurred by COI in
fiscal 2001, 2002 and 2003 and prior distributions made by COI to COMFORCE, COI can make no distributions to COMFORCE based upon the cumulative net income provisions of the indenture. It is anticipated that COI must generate net income of
approximately $6.5 million before it will be able to upstream any funds to COMFORCE under the restrictive payments test of the indenture in order to pay cash interest on the Convertible Notes (which is required beginning on June 1, 2005) or to repay
the Convertible Notes at their maturity on December 2, 2009. In calculating net income for this purpose, under the terms of the indenture, the Company must apply generally accepted accounting principles as in effect at the time the indenture was
entered into in 1997.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



|(9) | Income (Loss) Per Share
|--- | -----------------------



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



|                                                                                                                              |  |      |         |   |      |         |   |      |       
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | ------- | - | ---- | ------
|                                                                                                                              |  | 2003 |         |   | 2002 |         |   | 2001
|Basic (loss) income per common share:                                                                                         |  |      |         |   |      |         |   |      |       
|(Loss) income before a cumulative effect of a change in accounting principle                                                  |  | $    | (23,236 | ) |      | (21,247 | ) |      | 6,040 
|Dividends on preferred stock                                                                                                  |  |      | 672     |   |      |        |   |      |      
|                                                                                                                              |  |      |         |   |      |         |   |      |       
|Income for purposes of computing basic (loss) income before cumulative effect of a change in accounting principle             |  |      | (23,908 | ) |      | (21,247 | ) |      | 6,040 
|                                                                                                                              |  |      |        
|Weighted average common shares outstanding                                                                                    |  |      | 16,659  |   |      | 16,659  |   |      | 16,659
|                                                                                                                              |  |      |        
|Basic (loss) income per common share before a cumulative effect of a change in accounting principle                           |  | $    | (1.44   | ) |      | (1.28   | ) |      | 0.36  
|                                                                                                                              |  |      |         |   |      |         |   |      |       
|Diluted (loss) income per common share:                                                                                       |  |      |         |   |      |         |   |      |       
|(Loss) income before a cumulative effect of a change in accounting principle                                                  |  | $    | (23,236 | ) |      | (21,247 | ) |      | 6,040 
|Dividends on preferred stock                                                                                                  |  |      | 672     |   |      |        |   |      |      
|After tax equivalent of interest expense on 8% Convertible Notes                                                              |  |      |        |   |      |        |   |      | 105   
|                                                                                                                              |  |      |         |   |      |         |   |      |       
|Income for purposes of computing diluted (loss) income before cumulative effect of a change in accounting principle per share |  | $    | (23,908 | ) |      | (21,247 | ) |      | 6,145 
|                                                                                                                              |  |      |        
|Weighted average common shares outstanding                                                                                    |  |      | 16,659  |   |      | 16,659  |   |      | 16,659
|Dilutive stock options                                                                                                        |  |      |        |   |      |        |   |      | 182   
|Weighted average assumed conversion of 8% Subordinated Convertible Notes                                                      |  |      |        |   |      |        |   |      | 1,318 
|                                                                                                                              |  |      |         |   |      |         |   |      |       
|Weighted average common shares outstanding for purposes of computing diluted income per share                                 |  |      | 16,659  |   |      | 16,659  |   |      | 18,159
|Basic (loss) income per common share before a cumulative effect of a change in accounting principle                           |  | $    | (1.44   | ) |      | (1.28   | ) |      | 0.34  
|                                                                                                                              |  |      |         |   |      |         |   |      |       



The following shares
of common stock were excluded from the calculations as their effect would have been anti-dilutive: For 2002: 5,200,000 shares issuable upon conversion of the Convertible Notes. For 2003: 4,400,000 shares issuable upon conversion of the Convertible
Notes; 6,013,000 shares issuable upon conversion of the Series 2003A Preferred Stock; and 950,000 shares issuable upon conversion of the Series 2003B Preferred Stock. In addition, options and warrants to purchase 4,009,000, 4,192,000, 3,059,000
shares of common stock were outstanding for the fiscal years ended 2003, 2002 and 2001, respectively, but were not included in the computation of diluted (loss) income per share because their effect would be anti-dilutive.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



|(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 two series of preferred stock, Series 2003A with 6,500 authorized shares and Series 2003B with 3,500 authorized shares.



In February 2003, the Company issued $6.1 million face amount
(6,100 shares) of its new Series 2003A Preferred Stock having a fair market value of $4.3 million in exchange for $12.3 million of its outstanding PIK Debentures (including accrued interest) from the Fanning CPD Assets, LP, a limited partnership in
which John C. Fanning, the Companys chairman and chief executive officer, holds the principal economic interest (the Fanning Partnership). Rosemary Maniscalco, a director of the Company, is the general partner of the Fanning
Partnership, but has no pecuniary interest therein. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a financial point of
view, and the Companys independent directors approved the terms of the transaction. The consideration paid to the Fanning Partnership in February 2003 for the principal amount of the PIK Debentures exchanged in this transaction approximated in
value the consideration that the Fanning Partnership had previously been paid to the unrelated third party sellers of the PIK Debentures. The Companys offer to exchange PIK Debentures for Series 2003A Preferred Stock was extended to all
holders of the PIK Debentures that remained outstanding.



In
September 2003, the Company issued shares of its Series 2003B Preferred Stock having a face amount and fair market value of $513,000 (513 shares) in exchange for $2.0 million aggregate amount of the Companys 8.0% Subordinated Convertible Notes
due 2009 (the Convertible Notes), plus accrued interest, in a transaction with the Fanning Partnership. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the
Fanning Partnership were fair to the Company from a financial point of view, and the Companys directors approved the terms of the transaction. The consideration paid to the Fanning Partnership in September 2003 for the principal amount of the
Convertible Notes exchanged in this transaction was substantially less than the consideration paid by the Fanning Partnership for the securities it had previously exchanged for the Convertible Notes. As a result of this transaction, the Company
recorded a contribution to capital of $913,000, net of taxes, in lieu of recognizing a gain on the extinguishment of debt. In addition, the conversion price of $0.54 per share for the Series 2003B Preferred Stock, as discussed below, represents the
average closing price of the common stock for the 15 trading days immediately preceding the date of the effective date of the transaction (September 26, 2003), it was lower than the $0.82 per share closing price as of the effective date. As a result
of this beneficial conversion feature, the Company recorded a preferred stock dividend of $266,000 in the third quarter of fiscal 2003.



The rights and preferences of the Series 2003A and Series 2003B Preferred Stock are substantially identical except that conversion price is $1.05 for the
Series 2003A Preferred Stock and $0.54 for the Series 2003B Preferred Stock. The conversion price is the price at which a holder of shares of Series 2003A or 2003B Preferred Stock may convert such shares 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). There are 6,500 authorized shares of Series 2003A Preferred Stock, par value $.01 per share, of which 6,148 are
outstanding, and 3,500 authorized shares of Series 2003B Preferred Stock, par value $.01 per share, of which 513 are outstanding.



Each share of Series 2003A and 2003B Preferred Stock has a face amount of $1,000, and bears annual cumulative dividends of $75 per share (7.5% per annum).
As of December 28, 2003, there were accumulated, unpaid and undeclared dividends of $406,000. Upon liquidation, the holders of the Series 2003A and 2003B Preferred Stock will be entitled to a liquidation preference of $1,000 per share plus the
amount of accumulated, unpaid and undeclared 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 Series 2003A
and 2003B Preferred Stock outstanding shall have otherwise consented, no series or class of preferred stock having rights or preferences that are not junior to the Series 2003A and 2003B Preferred Stock shall be issued by the Company.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



The Company can only pay dividends on the Series 2003A and 2003B 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, (iii) payment of the dividend is permitted under the terms of
the PNC Credit Facility, and (iv) the Company has sufficient funds to upstream in accordance with the restricted payments tests under the indenture governing the Senior Notes.



In the event that the conversion of Series 2003A and 2003B Preferred Stock into common stock of COMFORCE would result in
either (i) the occurrence of a change of control as defined in the indenture governing COIs Senior Notes, or (ii) require stockholder approval in accordance with the rules and regulations of the Securities and Exchange Commission
or the American Stock Exchange (or any other exchange or quotation system on which the Companys shares are then listed), then the Series 2003A and 2003B Preferred Stock held by such holder shall not be convertible into common stock, but rather
shall be 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 2003A and 2003B Preferred Stock had occurred directly) if the conversion will not result in a change of control as defined in the
indenture governing the Senior Notes or require stockholder approval in accordance with the rules and regulations of the Securities and Exchange Commission or the American Stock Exchange (or any other exchange or quotation system on which the
Companys shares are then listed).



|(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 grants made before December 31, 2002. Effective as of December 31, 2002, the Company can no longer make option
grants under the 1993 Plan.



In 2002, the Company adopted with
stockholder approval the 2002 Stock Option Plan (the 2002 Plan) which authorizes 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. 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 grants.



All options under the 1993 Plan and 2002 Plan have been granted at a price
equal to or greater than the fair market value of the Companys common stock at the date of grant except for options issued as part of the settlement with former executives, as described below. Generally, options are granted with a vesting
period of up to 4 years and expire 10 years from the date of grant.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Austin A. Iodice, who served as the Companys chief executive officer, president and vice
chairman from 1993 to 1995 while the Company was engaged in the jewelry business, and Anthony Giglio, who performed the functions of the Companys chief operating officer, settled litigation with the Company in December 2000 relating to their
rights to certain options. Under the terms of settlement, the Company issued options to them on January 2, 2001 to purchase 555,628 shares of common stock in the aggregate at an exercise price of $0.6625 per share. A summary of stock option
transactions for the fiscal years ended December 28, 2003, December 29, 2002 and December 30, 2001 is as follows:



|                                                |  |           |   |      |                              |      |        |           |   |                              |   |        |  |           |                              |  |   |     
|----------------------------------------------- |  | --------- | - | ---- | ---------------------------- | ---- | ------ | --------- | - | ---------------------------- | - | ------ |  | --------- | ---------------------------- |  | - | ----
|                                                |  | 2003      |   | 2002 |                              | 2001
|                                                |  | Shares    |   |      | Averageweightedexerciseprice |      | Shares |           |   | Averageweightedexerciseprice |   | Shares |  |           | Averageweightedexerciseprice
|Outstanding, beginning of fiscal year           |  | 4,022,848 |   |      | $                            | 4.11 |        | 3,464,968 |   |                              | $ | 4.63   |  | 2,945,490 |                              |  | $ | 5.55
|Granted                                         |  | 70,000    |   |      |                              | 0.77 |        | 595,000   |   |                              |   | 1.41   |  | 615,628   |                              |  |   | 0.74
|Exercised                                       |  |          |   |      |                              |     |        |          |   |                              |   |       |  |          |                              |  |   |    
|Forfeited/expired                               |  | (253,220  | ) |      |                              | 4.20 |        | (37,120   | ) |                              |   | 9.54   |  | (96,150   | )                            |  |   | 8.12
|                                                |  |           |   |      |                              |      |        |           |   |                              |   |        |  |           |                              |  |   |     
|Options outstanding, end of fiscal year         |  | 3,839,628 |   |      |                              | 4.04 |        | 4,022,848 |   |                              |   | 4.11   |  | 3,464,968 |                              |  |   | 4.63
|                                                |  |           |   |      |                              |      |        |           |   |                              |   |        |  |           |                              |  |   |     
|Options exercisable, end of fiscal year         |  | 3,601,291 |   |      | $                            | 4.23 |        | 3,430,509 |   |                              | $ | 4.55   |  | 3,194,540 |                              |  | $ | 4.78
|                                                |  |           |   |      |                              |      |        |           |   |                              |   |        |  |           |                              |  |   |     
|Options available for grant, end of fiscal year |  | 940,000   |   |      |                              |      |        | 1,559,636 |   |                              |   |        |  | 1,117,516 |                              |  |   |     
|                                                |  |           |   |      |                              |      |        |           |   |                              |   |        |  |           |                              |  |   |     



The following table
summarizes information about stock options outstanding at December 28, 2003:



|                         |  |                   |  |                                                  |  |                               |       |                   |           |                                  |   |      
|------------------------ |  | ----------------- |  | ------------------------------------------------ |  | ----------------------------- | ----- | ----------------- | --------- | -------------------------------- | - | -----
|Range of exercise prices |  | Sharesoutstanding |  | Weighted-averageremainingcontractuallife (years) |  | Weighted-averageexerciseprice |       | Sharesexercisable |           | Weighted-averageexercisableprice
|$0.62 - $4.99            |  | 1,962,628         |  | 5.88                                             |  | $                             | 1.44  |                   | 1,724,291 |                                  | $ | 1.46 
|$5.00 - $7.99            |  | 1,741,500         |  | 2.59                                             |  |                               | 6.46  |                   | 1,741,500 |                                  |   | 6.46 
|$8.00 - $13.99           |  | 125,750           |  | 3.90                                             |  |                               | 10.16 |                   | 125,750   |                                  |   | 10.16
|$14.00 - $17.99          |  | 1,750             |  | 2.85                                             |  |                               | 15.11 |                   | 1,750     |                                  |   | 15.11
|$18.00 - $19.00          |  | 8,000             |  | 2.36                                             |  |                               | 18.33 |                   | 8,000     |                                  |   | 18.38
|                         |  |                   |  |                                                  |  |                               |       |                   |           |                                  |   |      
|$0.62 - $19.00           |  | 3,839,628         |  | 4.31                                             |  | $                             | 4.04  |                   | 3,601,291 |                                  | $ | 4.23 
|                         |  |                   |  |                                                  |  |                               |       |                   |           |                                  |   |      



Warrants



At December 28, 2003, December 29, 2002 and December
30, 2001, the Company had outstanding warrants to purchase a total of 169,000 at a price of $7.55 per share. These warrants expire in 2009.



|(12) | Litigation
|---- | ----------



In November 2003, the Company received notice that it is a potentially responsible party at Chicagos Lake Calumet Cluster Site, which for decades
beginning in the late 19thcentury had served as a waste site. The Companys predecessor, Apeco Corporation, a
manufacturer of photocopiers, allegedly sent waste material to this site. The state of Illinois has proposed that the site be designated as a Superfund site. The Company is one of over 400 potentially responsible parties (many of which may no longer
be in operation) to which notice was sent, and the Company has joined a working group of approximately 130 members representing over 170 potentially responsible parties for the purpose of responding to the United States and Illinois environmental
protection agencies. These agencies have not reached agreement as to the appropriate remedies and are expected to ask the potentially responsible parties to perform additional site studies.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



Until these site studies are completed (which could take two or more years) and the responsible
agencies agree upon remedies, meaningful estimates of clean-up costs cannot be made. Consequently, no assessment can be made as to any potential liability to the Company. The Company is initiating inquiries of the insurance carriers for Apeco to
determine if it has coverage under old insurance policies. In addition, a former affiliate of Apeco, ARTRA Group Incorporated, entered into an agreement with the Company in 1996 to indemnify the Company against environmental liabilities. While ARTRA
has been fully cooperative in this process, it is currently in bankruptcy and may not have adequate resources to honor this obligation unless the claims are within the coverage of its old insurance policies, which it is presently seeking to
determine.



The Company is a party to routine contract and
employment-related litigation matters arising in the ordinary course of its business. Except as described above, there are no other pending matters, individually or in the aggregate, if adversely determined, are believed by management to be material
to the business or financial condition of the Company. The Company maintains general liability insurance, property insurance, automobile insurance, fidelity insurance, errors and omissions insurance, professional medical malpractice insurance,
fiduciary insurance and directors and officers liability insurance. 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 participates in a savings incentive and profit sharing plan (the Plan). All eligible employees may make contributions to the Plan
on a pre-tax salary reduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. No contributions were made by the Company in 2003, 2002 or 2001.



Certain employees who work for governmental agencies are required to be covered under a separate defined contribution plan.
During 2003, 2002 and 2001, the Company recorded approximately $2,107,000, $1,769,000 and $1,596,000, 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 2003, 2002 and 2001 approximated $3,597,000, $3,758,000
and $3,719,000, respectively.



As of December 28, 2003, future
minimum rent payments due under the terms of noncancelable operating leases excluding any amount that will be paid for operating costs are (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2004       |  | $ | 3,149 
|2005       |  |   | 2,350 
|2006       |  |   | 1,743 
|2007       |  |   | 1,347 
|2008       |  |   | 1,080 
|Thereafter |  |   | 1,566 
|           |  |   |       
|           |  | $ | 11,235
|           |  |   |       



|(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.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



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



At the end of fiscal 2003 and 2002, the Company did not have
any customers with accounts receivable balances that aggregated 10.0% or more of the Companys total accounts receivable. The largest four customers of the Company accounted for approximately 20.5% of the Companys revenues during fiscal
2003, and the largest four customers of the Company accounted for approximately 22.4% of the Companys revenues during fiscal 2002.



|(16) | Industry Segment Information
|---- | ----------------------------



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



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



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



The table below presents information on the revenues and operating contribution for each segment for the three fiscal years ended December 28, 2003, and
items which reconcile segment operating contribution to COMFORCEs reported pre-tax (loss) income before cumulative effect of a change in accounting principle (in thousands):



|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|---------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | ------- | - | ---------------- | ------- | -
|                                                                                   |  | December 28,2003 |         |   | December 29,2002 |         |   | December 30,2001 |        
|Net sales of services:                                                             |  |                  |         |   |                  |         |   |                  |         |  
|Human Capital Management Services                                                  |  | $                | 189,003 |   |                  | 166,502 |   |                  | 128,715 |  
|Staff Augmentation                                                                 |  |                  | 186,021 |   |                  | 206,064 |   |                  | 305,237 |  
|Financial Outsourcing Services                                                     |  |                  | 6,663   |   |                  | 8,935   |   |                  | 11,936  |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|                                                                                   |  | $                | 381,687 |   |                  | 381,501 |   |                  | 445,888 |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|Operating contribution:                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Human Capital Management Services                                                  |  | $                | 7,412   |   |                  | 5,959   |   |                  | 2,622   |  
|Staff Augmentation (1)                                                             |  |                  | (12,976 | ) |                  | (639    | ) |                  | 31,237  |  
|Financial Outsourcing Services (2)                                                 |  |                  | 6,161   |   |                  | 5,730   |   |                  | 6,437   |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|                                                                                   |  |                  | 597     |   |                  | 11,050  |   |                  | 40,296  |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|Consolidated expenses:                                                             |  |                  |         |   |                  |         |   |                  |         |  
|Interest, net                                                                      |  |                  | 13,294  |   |                  | 15,980  |   |                  | 19,950  |  
|Write-off of deferred financing costs                                              |  |                  | 431     |   |                  |        |   |                  |        |  
|Gain on debt extinguishment                                                        |  |                  | (9,582  | ) |                  |        |   |                  | (15,858 | )
|Depreciation and amortization                                                      |  |                  | 4,247   |   |                  | 4,000   |   |                  | 7,835   |  
|Corporate general and administrative expenses                                      |  |                  | 14,818  |   |                  | 14,466  |   |                  | 15,431  |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|                                                                                   |  |                  | 23,208  |   |                  | 34,446  |   |                  | 27,358  |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|Income (loss) before tax and cumulative effect of a change in accounting principle |  | $                | (22,611 | ) |                  | (23,396 | ) |                  | 12,938  |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|Total assets:                                                                      |  |                  |         |   |                  |         |   |                  |         |  
|Human Capital Management Services                                                  |  | $                | 35,024  |   |                  | 32,104  |   |                  | 25,965  |  
|Staff Augmentation                                                                 |  |                  | 49,596  |   |                  | 73,382  |   |                  | 143,009 |  
|Financial Outsourcing Services                                                     |  |                  | 23,726  |   |                  | 28,365  |   |                  | 45,338  |  
|Corporate                                                                          |  |                  | 25,967  |   |                  | 29,013  |   |                  | 26,819  |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  
|                                                                                   |  | $                | 134,313 |   |                  | 162,864 |   |                  | 241,131 |  
|                                                                                   |  |                  |         |   |                  |         |   |                  |         |  

---

|(1) | The Company recorded goodwill impairment charges of $19.0 million and $28.0 million during the fourth quarter of 2002 and the third quarter of 2003, respectively, as a charge
against operating income in accordance with the provisions of SFAS 142.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes a $1.6 million insurance recovery in the first quarter of 2003 related to uncollectible funding and service fees receivable that were written-off in the fourth quarter of
2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



|(17) | Parent Financial Information
|---- | ----------------------------



Substantially all of the consolidated net assets of the Company are assets of COI and all of the net income that had been generated by the Company was
attributable to the operations of COI. Except for permitted distributions, these assets and any cumulated net income are restricted as to their use by COMFORCE. The indenture governing the Senior Notes imposes restrictions on COI making specified
payments, which are referred to as restricted payments, including making distributions or paying dividends (referred to as upstreaming funds) to COMFORCE. Under the indenture, COI is not permitted to make cash distributions to COMFORCE
other than (1) to upstream $2.0 million annually to pay public company expenses, (2) to upstream up to $10.0 million to pay income tax related to deemed forgiveness of PIK Debentures to facilitate the purchase or exchange by COMFORCE of PIK
Debentures at less than par (all of which PIK Debentures have now been retired), and (3) to upstream funds to the extent COI meets the restricted payments test under the indenture, the most significant component of which is based upon a percentage
of net income generated by COI since January 1, 1998 on a cumulative basis, less prior distributions made in reliance on this provision. Management believes that $2.0 million annually (if COI has funds available for this purpose) will be sufficient
to pay COMFORCEs annual public company expenses for the foreseeable future. Principally as a result of losses incurred by COI in fiscal 2001, 2002 and 2003 and prior distributions made by COI to COMFORCE, COI can make no distributions to
COMFORCE based upon the cumulative net income provisions of the indenture. It is anticipated that COI must generate net income of approximately $6.5 million before it will be able to upstream any funds to COMFORCE under the restrictive payments test
of the indenture.



Through December 1, 2004, interest on the
Convertible Notes is payable, at the option of COMFORCE, in cash or in kind through the issuance of additional Convertible Notes. To date, COMFORCE has paid all interest under the Convertible Notes in kind. Beginning with the interest payment due
June 1, 2005, COMFORCE will be required to pay interest on the Convertible Notes in cash. Its ability to do so is expected to be dependent on its availability of funds for this purpose, whether through borrowings by COI under the PNC Credit
Facility, funds from COIs operations or otherwise, and on COIs ability to upstream funds in accordance with the restricted payments test under the indenture for the Senior Notes discussed above. COMFORCEs ability to repay
Convertible Notes at their maturity on December 2, 2009, or on any earlier required repayment or repurchase dates, will also be dependent on any restrictions under its loan agreements as then in effect and availability of funds.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



In March 2004, the holder of the Convertible Notes, which is a partnership in which John Fanning, the
Companys chairman and chief executive officer, holds the principal economic interest, agreed to extend the payment-in-kind terms under the Convertible Notes from the original termination date on December 1, 2003 for one additional year. The
Companys board has directed management, in consultation with an independent financial advisor, to advise the board as to appropriate consideration to pay to the holder for agreeing to this accommodation. This consideration will be recorded in
fiscal 2004.



|(18) | Related Party Transactions
|---- | --------------------------



Convertible Notes Transaction: In September 2001, the Company completed the exchange of $18.0 million principal amount of its PIK Debentures for
Convertible Notes in the principal amount of $8.0 million, plus $1.0 million in cash. The Fanning Partnership was the holder of the $18.0 million PIK Debentures that were exchanged for the Convertible Notes and cash. The purpose of this transaction
was to improve the Companys balance sheet through the exchange of higher interest rate debt (15% per annum) for lower interest rate debt (8% per annum) and elimination of $9.0 million of debt. The Companys offer to exchange PIK
Debentures for Convertible Notes was extended to all holders of the PIK Debentures, but no other holder of PIK Debentures accepted the Companys offer on these terms. The Company obtained the opinion of an independent investment banking firm
that this transaction was fair to the Company from a financial point of view, and the Companys independent directors approved the terms of the transaction.



The Fanning Partnership had purchased these PIK Debentures from unaffiliated third parties in arms length
transactions. The consideration paid by the Company to the Fanning Partnership for the principal amount of the PIK Debentures exchanged in this transaction approximated in value the consideration that the Fanning Partnership had previously been paid
to the unaffiliated third party sellers of the PIK Debentures. The Companys exchange transaction with the Fanning Partnership was treated as a gain on the extinguishment of debt and not as a contribution to capital since the Fanning
Partnership purchased the PIK Debentures (it later exchanged for the Convertible Notes) from the unaffiliated parties at a discount and the Company received the benefits of this pricing in its transaction with the Fanning Partnership.



The Convertible Notes currently permit payment of semi-annual interest on an
in-kind basis until December 1, 2004 through the issuance of additional Convertible Notes. To date, the Company has issued additional Convertible Notes to the Fanning Partnership in the aggregate principal amount of $1.4 million as in-kind interest
payments. The Convertible Notes are convertible into the Companys common stock based on a price of $1.70 per share of common stock, provided that if such conversion would result in a change of control occurring under the terms of
the indenture governing the Senior Notes, the Convertible Notes will be convertible into shares of non-voting participating preferred stock having a nominal liquidation preference (but no other preferences), which in turn will be convertible into
common stock at the holders option at any time so long as the conversion would not result in a change of control.



In March 2004, the Fanning Partnership agreed to extend the payment-in-kind terms under the Convertible Notes from the original termination date on
December 1, 2003 for one additional year. The Companys board has directed management, in consultation with an independent financial advisor, to advise the board as to appropriate consideration to pay to the holder for agreeing to this
accommodation. This consideration will be recorded in fiscal 2004.



Series 2003A Preferred Stock Transaction: In February 2003, the Company issued $6.1 million face amount (6,100 shares) of its new Series 2003A Preferred Stock having a fair market value of $4.3 million in exchange for $12.3 million
of its outstanding PIK Debentures (including accrued interest) from the Fanning Partnership. The purpose of this transaction was to improve the Companys balance sheet through the elimination of higher interest rate debt through the issuance of
equity securities. The Companys offer



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



to exchange PIK Debentures for Series 2003A Preferred Stock was extended to all holders of the PIK
Debentures, but no other holder of PIK Debentures accepted the Companys offer on these terms. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership
were fair to the Company from a financial point of view, and the Companys independent directors approved the terms of the transaction.



The Fanning Partnership had purchased these PIK Debentures from unaffiliated third parties in arms length transactions. The consideration paid by
the Company to the Fanning Partnership for the principal amount of the PIK Debentures exchanged in this transaction approximated in value the consideration that the Fanning Partnership had previously been paid to the unaffiliated third party sellers
of the PIK Debentures. The Companys exchange transaction with the Fanning Partnership was treated as a gain on the extinguishment of debt and not as a contribution to capital since the Fanning Partnership purchased the PIK Debentures (it later
exchanged for the Series 2003A Preferred Stock) from the unaffiliated parties at a discount and the Company received the benefits of this pricing in its transaction with the Fanning Partnership.



See note 10 for a discussion of the rights and preferences of the Series
2003A Preferred Stock.



Series 2003B Preferred Stock
Transaction: In September 2003, the Company issued shares of its Series 2003B Preferred Stock having a face amount and fair market value of $513,000 (513 shares) in exchange for $2.0 million aggregate amount of the Convertible Notes. The purpose
of this transaction was to improve the Companys balance sheet through the elimination of higher interest rate debt through the issuance of equity securities. The Company obtained the opinion of an independent investment banking firm that the
terms of the exchange transaction with the Fanning Partnership were fair to the Company from a financial point of view, and the Companys independent directors approved the terms of the transaction.



The consideration paid to the Fanning Partnership in September 2003 for the
principal amount of the Convertible Notes exchanged in this transaction was substantially less than the consideration paid by the Fanning Partnership for the securities it had previously exchanged for the Convertible Notes. As a result of this
transaction, the Company recorded a contribution to capital in lieu of recognizing a gain on the extinguishment of debt.



The conversion price of $0.54 per share for the Series 2003B Preferred Stock represents the average closing price of the common stock for the 15 trading
days immediately preceding the date of the effective date of the transaction (September 26, 2003), it was lower than the $0.82 per share closing price as of the effective date. As a result of this beneficial conversion feature, the Company recorded
a preferred stock dividend of $266,000 in the fiscal 2003.



See note 10 for a discussion of the rights and preferences of the Series 2003B Preferred Stock.



Other Transactions: Rosemary Maniscalco, through a company owned by her, provides consulting services to the Company at the rate of $1,000 per day,
plus expenses. During fiscal 2003, the Company paid $77,040 for such consulting services. Rosemary Maniscalco, the Vice Chairman of the Company, is the general partner of the Fanning Partnership but holds no pecuniary interest in the Fanning
Partnership.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



|(19) | Selected Quarterly Financial Data (unaudited)
|---- | ---------------------------------------------

(in thousands, except per share data and footnotes)



|                         |  |         |        |                             |   |        |       |  |   |         |   |  |   |         |  |   |         |  
|------------------------ |  | ------- | ------ | --------------------------- | - | ------ | ----- |  | - | ------- | - |  | - | ------- |  | - | ------- | -
|Fiscal 2003              |  | Quarter |        | Fiscal yearendedDecember 28 |  
|                         |  | First   |        | Second                      |   |        | Third |  |   | Fourth  |  
|Net sales of services    |  | $       | 87,769 |                             | $ | 91,915 |       |  | $ | 96,343  |   |  | $ | 105,660 |  | $ | 381,687 |  
|Gross profit             |  |         | 15,329 |                             |   | 15,574 |       |  |   | 15,906  |   |  |   | 17,285  |  |   | 64,094  |  
|Net income (loss) (1)(2) |  |         | 4,185  |                             |   | (1,497 | )     |  |   | (26,090 | ) |  |   | 166     |  |   | (23,236 | )
|                         |  |         |        |                             |   |        |       |  |   |         |   |  |   |         |  |   |         |  
|Income (loss) per share  |  |         |        |                             |   |        |       |  |   |         |   |  |   |         |  |   |         |  
|Basic                    |  |         | 0.25   |                             |   | (0.10  | )     |  |   | (1.59   | ) |  |   | 0.00    |  |   | (1.44   | )
|Diluted                  |  |         | 0.25   |                             |   | (0.10  | )     |  |   | (1.59   | ) |  |   | 0.00    |  |   | (1.44   | )



|                                                                            |  |         |         |   |                             |   |        |       |  |   |        |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------- | ------- | - | --------------------------- | - | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|Fiscal 2002                                                                 |  | Quarter |         |   | Fiscal YearEndedDecember 29 |  
|                                                                            |  | First   |         |   | Second                      |   |        | Third |  |   | Fourth |   | 
|Net sales of services (3)                                                   |  | $       | 95,918  |   |                             | $ | 96,662 |       |  | $ | 97,906 |   |  | $ | 91,015  |   |  | $ | 381,501 |  
|Gross profit                                                                |  |         | 17,151  |   |                             |   | 18,032 |       |  |   | 17,545 |   |  |   | 16,952  |   |  |   | 69,680  |  
|Loss before cumulative effect of a change in accounting principle (4)       |  |         | (988    | ) |                             |   | (938   | )     |  |   | (794   | ) |  |   | (18,527 | ) |  |   | (21,247 | )
|Net loss (5)                                                                |  | $       | (53,788 | ) |                             | $ | (938   | )     |  | $ | (794   | ) |  | $ | (18,527 | ) |  | $ | (74,047 | )
|                                                                            |  |         |         |   |                             |   |        |       |  |   |        |   |  |   |         |   |  |   |         |  
|Loss per share before cumulative effect of a change in accounting principle |  |         |         |   |                             |   |        |       |  |   |        |   |  |   |         |   |  |   |         |  
|Basic                                                                       |  |         | (0.06   | ) |                             |   | (0.06  | )     |  |   | (0.05  | ) |  |   | (1.11   | ) |  |   | (1.28   | )
|Diluted                                                                     |  |         | (0.06   | ) |                             |   | (0.06  | )     |  |   | (0.05  | ) |  |   | (1.11   | ) |  |   | (1.28   | )

---

|(1) | The Company recorded a goodwill impairment charge of $28.0 million ($25.3 million, net of tax), during the third quarter of 2003 as a charge against operating income in accordance
with the provisions of SFAS 142 (see note 4).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes $9.6 million ($5.5 million net of tax) or $0.33 per basic and diluted share for the fiscal year ended December 28, 2003; $1.0 million ($555,000 net of tax) or $0.03 per
basic and diluted share during the quarter ended June 29, 2003; $7.8 million ($4.4 million net of tax) or $0.26 per basic and diluted share during the quarter ended September 28, 2003; and $808,000 ($507,000 net of tax) or $0.03 per basic and
diluted share for the quarter ended December 28, 2003, in each case relating to the gain on debt extinguishment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The Company adopted Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred
(EITF 01-14), effective as of December 31, 2001. Accordingly, reimbursements received by the Company for out-of-pocket expenses are now characterized as revenue. Prior to the adoption of EITF 01-14, the Company characterized such amounts
as a reduction of cost of sales.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The Company recorded a goodwill impairment charge of $19.0 million ($18.0 million net of tax) during the fourth quarter of 2002 as a charge against operating income in accordance
with the provisions of SFAS 142 (see note 4).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-30



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 28, 2003, December 29,
2002 and December 30, 2001



|(5) | The Company recorded a goodwill impairment charge of $52.8 million net of tax as a cumulative effect of a change in accounting principle during the first quarter of 2002 in
accordance with the provisions of SFAS 142 (see note 4).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



|(20) | Subsequent Events
|---- | -----------------



Sale of Niche Telecom Operations



In March 2004, COMFORCE sold a controlling interest in two telecom subsidiaries that operated in the customer premise equipment services niche of the
telecom sector and contracted to sell its remaining minority interest in these companies by June 30, 2004. These subsidiaries operated in niche businesses that remained outside of the Companys core competency in telecom, which was and
continues to be primarily but not exclusively in the engineer, furnish and install (EF&I) area. The buyer, Spears Holding Company, Inc., is controlled by an individual who was one of the principals of these companies when they were sold to
COMFORCE in 1998.



The total consideration to which the
Company is entitled (including the deferred sale of the minority interest) is cash of $2.4 million payable through June 30, 2004 and five-year notes in the face amount of $3.7 million valued at $1.4 million by an independent valuation firm. The
Company plans to pay down its bank debt with available net cash proceeds from this sale. The Company will recognize no gain on this transaction until cash payments (including payments under the notes) received are in excess of its investment in the
business sold. Revenues for the subsidiaries that were sold represented less than 3.5% of the Companys consolidated revenues in fiscal 2003.



Retirement of Senior Notes



In February and March 2004, the Company repurchased $13.5 million principal amount of its 12% Senior Notes for $11.3 million in separate transactions with
unrelated parties. As a result of these repurchases, the Company will recognize a gain on debt extinguishment of $2.0 million in the first quarter of 2004, including a reduction of approximately $219,000 of deferred financing costs. The purpose of
these transactions was to improve the Companys balance sheet through the elimination of high interest rate debt.



F-31



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##### Table of Contents

Schedule



COMFORCE CORPORATION AND SUBSIDIARIES



Schedule II Valuation and Qualifying Accounts



Fiscal
years ended December 28, 2003, December 29, 2002 and December 30, 2001



(in thousands)



|                                             |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|-------------------------------------------- |  | ---------------------------- | ----- | --------------------------- | ----- | ----------------------- | - | ---------- | ------ | - | ---------------------- | -----
|                                             |  | Balance atbeginningof period |       | Charged tocosts andexpenses |       | Chargedto otheraccounts |   | Deductions |        |   | Balanceat end ofperiod
|For the fiscal year ended December 28, 2003: |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|Deducted from assets to which they apply:    |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|Allowance for doubtful accounts              |  | $                            | 1,219 |                             | 36    |                         |  |            | (363   | ) |                        | 892  
|                                             |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|For the fiscal year ended December 29, 2002: |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|Deducted from assets to which they apply:    |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|Allowance for doubtful accounts              |  | $                            | 1,419 |                             | 556   |                         |  |            | (756   | ) |                        | 1,219
|                                             |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|For the fiscal year ended December 30, 2001: |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|Deducted from assets to which they apply:    |  |                              |       |                             |       |                         |   |            |        |   |                        |      
|Allowance for doubtful accounts              |  | $                            | 1,025 |                             | 3,013 |                         |  |            | (2,619 | ) |                        | 1,419
|                                             |  |                              |       |                             |       |                         |   |            |        |   |                        |      



F-32



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##### Table of Contents

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.



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



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



|2.3 | Registration Rights Agreement dated as of August 13, 1997, by and among COMFORCE Corporation, John Fanning and Fanning Asset Partners, L.P., a Georgia limited partnership (included
as an exhibit to Amendment No. 2 to the Registration Statement on Form S-4 of COMFORCE Corporation filed with the Commission on October 24, 1997 (Registration No. 333-35451) and incorporated herein by reference).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 and 2003B Convertible Preferred Stock of COMFORCE Corporation filed with
the Secretary of State of Delaware on October 6, 2003 (included as an exhibit to COMFORCE Corporations Quarterly Report on Form 10-Q for the quarter ended September 28, 2003 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).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|4.2 | First Supplemental Indenture dated as of November 29, 2000 between COMFORCE Corporation and Wilmington Trust Company, as trustee, to Indenture dated as of November 26, 1997
(included as an exhibit to COMFORCE Corporations Current Report on Form 8-K dated December 19, 2000 and incorporated herein by reference).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.3 | Second Supplemental Indenture dated as of December 4, 2000 between COMFORCE Corporation and Wilmington Trust Company, as trustee, to Indenture dated as of November 26, 1997
(included as an exhibit to COMFORCE Corporations Current Report on Form 8-K dated December 19, 2000 and incorporated herein by reference).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|4.4 | 8% Subordinated Convertible Note due December 2, 2009 of COMFORCE Corporation (included as an exhibit to COMFORCE Corporations Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.1 | Purchase Agreement, dated as of November 19, 1997, by and between COMFORCE Operating, Inc. and NatWest Capital Markets Limited, as Initial Purchaser (included as an exhibit to the
Registration Statement on Form S-4 of COMFORCE Corporation filed with the Commission on December 24, 1997 (Registration No. 333-43327) and incorporated herein by reference).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.2 | Purchase Agreement, dated as of November 19, 1997, dated as of November 26, 1997, by and between COMFORCE Corporation and NatWest Capital Markets Limited, as Initial Purchaser
(included as an exhibit to the Registration Statement on Form S-4 of COMFORCE Corporation filed with the Commission on December 24, 1997 (Registration No. 333-43327) and incorporated herein by reference).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.3 | Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc. and John C. Fanning (included as an exhibit to COMFORCE Corporations
Annual Report on Form 10-K for the fiscal year December 31, 1998 and incorporated herein by reference).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.4 | Amendment to Employment Agreement dated as of March 28, 2000 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc. and
John C. Fanning (included as an exhibit to COMFORCE Corporations Annual Report on Form 10-K for the fiscal year December 31, 1999 and incorporated herein by reference).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.5 | Second Amendment to Employment Agreement dated as of January 23, 2001 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating,
Inc. and John C. Fanning, as previously amended by Amendment dated as of March 28, 2000 (included as an exhibit to COMFORCE Corporations Annual Report on Form 10-K for the fiscal year December 31, 2000 and incorporated herein by reference).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.6 | Third Amendment to Employment Agreement dated as of September 27, 2001 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating,
Inc. and John C. Fanning, as previously amended by Amendments dated as of March 28, 2000 and January 23, 2001 (included as an exhibit to COMFORCE Corporations Annual Report on Form 10-K for the fiscal year December 30, 2001 and incorporated
herein by reference).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.7 | Fourth Amendment to Employment Agreement dated as of July 1, 2002 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc.
and John C. Fanning, as previously amended by Amendments dated as of March 28, 2000, January 23, 2001 and September 27, 2001 (included as an exhibit to COMFORCE Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and
incorporated herein by reference).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.8 | Fifth Amendment to Employment Agreement dated as of January 1, 2003 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc.
and John C. Fanning, as previously amended by Amendments dated as of March 28, 2000, January 23, 2001, September 27, 2001 and July 1, 2002 (included as an exhibit to COMFORCE Corporations Annual Report on Form 10-K for the fiscal year December
29, 2003 and incorporated herein by reference).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.9* | Sixth Amendment to Employment Agreement dated as of January 15, 2004 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc.
and John C. Fanning, as previously amended by Amendments dated as of March 28, 2000, January 23, 2001, September 27, 2001, July 1, 2002 and January 1, 2003.
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.10 | Employment Agreement dated as of January 1, 1999 among COMFORCE Corporation, COMFORCE Operating, Inc. and Harry Maccarrone (included as an exhibit to COMFORCE Corporations
Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|10.11 | Amendment to Employment Agreement dated as of January 23, 2001 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc. and
Harry Maccarrone (included as an exhibit to COMFORCE Corporations Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.12 | Second Amendment to Employment Agreement dated as of September 27, 2001 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating,
Inc. and Harry Maccarrone, as previously amended by Amendment dated as of January 23, 2001 (included as an exhibit to COMFORCE Corporations Annual Report on Form 10-K for the fiscal year December 30, 2001 and incorporated herein by reference).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.13 | Third Amendment to Employment Agreement dated as of July 1, 2002 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc. and
Harry Maccarrone, as previously amended by Amendment dated as of January 23, 2001 and September 27, 2001 (included as an exhibit to COMFORCE Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and incorporated herein
by reference).
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.14 | Fourth Amendment to Employment Agreement dated as of August 1, 2003 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc.
and Harry Maccarrone, as previously amended by Amendment dated as of January 23, 2001, September 27, 2001 and July 1, 2002 (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).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.15* | Fifth Amendment to Employment Agreement dated as of January 15, 2004 amending Employment Agreement dated as of January 1, 1999 between COMFORCE Corporation, COMFORCE Operating, Inc.
and Harry Maccarrone, as previously amended by Amendment dated as of January 23, 2001, September 27, 2001, July 1, 2002 and August 1, 2003.
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.16 | 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).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|21.1* | List of Subsidiaries.
|----- | ---------------------





|23.1* | Consent of KPMG LLP.
|----- | --------------------



|31.1* | Certification of chief executive officer under section 302 of the Sarbanes-Oxley Act of 2002.
|----- | ---------------------------------------------------------------------------------------------



|31.2* | Certification of chief financial officer under section 302 of the Sarbanes-Oxley Act of 2002.
|----- | ---------------------------------------------------------------------------------------------



|32.1* | Certification of chief executive officer under section 906 of the Sarbanes-Oxley Act of 2002.
|----- | ---------------------------------------------------------------------------------------------



|32.2* | Certification of chief financial officer under section 906 of the Sarbanes-Oxley Act of 2002.
|----- | ---------------------------------------------------------------------------------------------

---

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