SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
  
  [X]           Annual
Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of
1934
 For the fiscal year ended December 30,
2007
 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
 
 COMFORCE
Corporation
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              36-2262248(State
      or other jurisdiction of incorporation or organization)
              (IRS
      Employer Identification No.)415
      Crossways Park Drive, P.O. Box 9006, Woodbury, New York
              11797(Address
      of principal executive offices)
              (Zip
      Code)
 Registrant’s
telephone number, including area code:   (516) 437-3300
 
 Securities
registered pursuant to Section 12(b) of the Act:
 Title
      of Each Class
              Name
      of Each Exchange on Which RegisteredCommon
      stock, $0.01 par value
              American
      Stock Exchange
 
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.  Yes [   ]       No [x]
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes [   ]       No [x]
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.  Yes [x]       No [   ]
  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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.   See definition of “accelerated filer,” large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):  Large accelerated
filer  [   ]  Accelerated
filer  [   ] Non-accelerated
filer [   ]  Smaller reporting
company [x]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes [   ]       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:  $31,786,925.
  Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.   At March 14, 2008,
there were 17,387,554 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 28, 2008 are incorporated herein by reference in Items 10, 11,
12, 13 and 14.
   
  PART
I
  ITEM 1.   BUSINESS
  Overview
  COMFORCE
Corporation (“COMFORCE”) is a leading provider of outsourced staffing management
services that enable Fortune 1000 companies and other large employers to
consolidate, automate and manage staffing, compliance and oversight processes
for their contingent workforces.  We also provide specialty staffing,
consulting and other outsourcing services to Fortune 1000 companies and other
large employers for their healthcare support, technical and engineering,
information technology, telecommunications and other staffing
needs.  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 30 offices (22 company-owned and 8 licensed), the Company
provides human capital management and outsourcing services, and recruits and
places highly skilled contingent personnel and financing services for a broad
customer base.  The Company’s labor force consists primarily of
computer programmers, systems consultants, analysts, engineers, technicians,
scientists, researchers, healthcare professionals and skilled office support
personnel.
  Services
  We
provide outsourcing services, including web-enabled solutions, for the effective
procurement, tracking and engagement of contingent or non-employee labor, as
well as a wide range of staffing, consulting and financial
services.  The extensive proprietary database used by the Company
coupled with its national reach enable it to draw from a wealth of resources to
link highly trained healthcare professionals, computer technicians, engineers
and other professionals, as well as clerical personnel, with businesses that
need highly skilled labor. Management has designed the Company’s services to
give its customers maximum flexibility and maximum choice, including by making
its professionals available for engagement on a short-term or long-term basis.
The Company’s services permit businesses to increase the volume of their work
without increasing fixed overhead costs.
  Results
are reported by the Company through three operating segments -- Human Capital
Management Services, Staff Augmentation and Financial Outsourcing Services. The
Human Capital Management Services segment provides consulting services for
managing the contingent workforce through its PrO UnlimitedSM
subsidiary.  The Staff Augmentation segment provides healthcare
support, including RightSourcing® Vendor Management Services, technical,
information technology (IT), telecommunications and other staffing
services.  The Financial Outsourcing Services segment provides funding
and back office support services to independent consulting and staffing
companies.  A description of the types of services provided by each
segment follows.  See note 16 to the Company’s consolidated financial
statements for a presentation of segment results.
  Human
Capital Management Services Segment
  We
provide Human Capital Management Services through our PrO Unlimited
subsidiary.  PrO is a leading provider of outsourced staffing
management services that enable Fortune 1000 companies and other large employers
to consolidate, automate and manage staffing, compliance and oversight processes
for their contingent workforces, including independent contractors, temporary
workers, consultants, freelancers and, in some cases, returning retirees. PrO’s
vendor-neutral business strategy provides comprehensive services for the
selection, procurement, management and tracking of the contingent workforce,
much of which is provided through its web-enabled proprietary software
system.
  Rather
than competing with traditional staffing firms, PrO acts as a vendor-neutral
facilitator, enabling clients to draw on a larger pool of vendors to fill job
orders and allowing them to negotiate with multiple staffing suppliers to
quickly find qualified personnel at favorable price levels.  In
contrast to traditional staffing services providers, which recruit and recommend
candidates for contingent positions, PrO’s focus is on helping clients manage
their diverse
   2
  relationships
with multiple staffing vendors efficiently and cost-effectively by consolidating
billing, monitoring vendor performance, coordinating staffing programs and
generating a broad range of customized management reports and proprietary Total
Quality Management reviews.  In addition, PrO offers payrolling
services and compliance advisory services.
  As many
companies continue to face pressure to contain labor costs and manage headcount
numbers, the use of contingent staffing as an alternative to more costly
long-term employment has expanded substantially. At the same time, large
organizations have increasingly come to rely on outsourced human capital
management services as they seek to improve the efficiency of their staffing
procurement and management processes and enhance the quality and productivity of
their contingent workforces.  Management believes that the number of
companies utilizing contingent labor will continue to grow as companies work to
more effectively manage their cost structures, better position themselves to
weather business downturns, and maintain streamlined “just-in-time” labor
pools.
  While PrO
focuses on selling its services primarily to Fortune 1000 companies, management
believes PrO’s contingent workforce management services are designed for a
cross-section of large employers.  In most cases PrO Unlimited
provides services on-site at their client’s premises.  The Company
currently provides these services throughout North America as well as in certain
locations in Europe and Asia.  PrO’s typical client is a Fortune 1000
or other large company that relies upon highly skilled contingent labor to meet
important elements of its staffing needs.  PrO currently provides the
following primary service offerings for its clients:
  ·
              Professional Payrolling
      Services – provides employer-of-record payrolling services for
      contingent workers sourced internally by its clients.  For these
      companies, PrO employs the workers, pays unemployment taxes and workers
      compensation insurance premiums, and provides other benefits including
      health insurance to its eligible employees.  These workers may
      include former independent contractors, returning retirees or other
      mission-critical workers internally sourced for contingent
      work.  The Company’s extensive compliance expertise helps
      clients avoid potential litigation and other co-employment issues
      associated with this workforce.
  ·
              Contingent Staffing
      Management – a vendor-neutral service for procuring contingent
      employees. This service allows hiring managers to utilize and negotiate
      with multiple staffing vendors to help identify and hire qualified
      candidates in a short time frame at favorable prices.  PrO
      offers its clients consolidated invoicing, electronic time card functions
      and total quality management of their supplier base.  In
      addition, clients receive access to numerous standard reports that enhance
      visibility and overall management of their contingent worker
      population.
  ·
              The 1099 Management
      Service – helps clients manage the tax and benefit risks associated
      with the use of independent contractors to ensure compliance with
      applicable government regulations. This service assists its clients in
      avoiding potential liabilities associated with failing to withhold or pay
      social security taxes, income taxes, unemployment taxes and workers
      compensation insurance premiums, or with excluding workers from
      participation in their pension, profit sharing, health insurance and stock
      option plans.
  ·
              Consultant Consolidation
      Services – consolidates and manages invoicing for its clients’
      multiple service providers, including small consulting firms and
      independent contractors that clients may engage separately from its
      services.
  ·
              Fair Labor Standards
      Act/Co-employment Consulting – PrO offers on-going consulting on
      proper worker classification and co-employment issues.  The
      proper classification of workers for overtime purposes is a critical
      challenge facing all U.S. employers.  Co-employment is a legal
      doctrine that applies when two businesses exert a degree of control over
      an employee’s work, so that both businesses may be held liable for
      complying with wage, hour and benefits
laws.
  ·
              PrO Bid –provides a
      bidding environment for various staffing projects, and provides project
      managers with greater information as to project costs, headcount and
      vendor performance.  In addition, PrO
  Bid
   3
  enables
clients to consolidate project data with other contingent staffing data for
enterprise-wide reporting and controls.
  Staff
Augmentation Segment
  RightSourcing
Vendor Management Services
  The
Company’s RightSourcing Vendor Management Services program offers cost savings
and process improvement to its clients by managing all aspects of their
supplemental staffing services program including management of all staffing
vendors, order process, invoice approval, billing and invoice consolidation,
data capture and analysis along with monitoring certifications and compliance
issues.  Although we were initially focused on the healthcare field in
developing our RightSourcing Vendor Management Services program, the tools it
provides are not limited to the healthcare field, or any other particular
business sector, and the Company has broadened its sales efforts to attract
customers in a wide range of commercial and business endeavors.
  The
RightSourcing Vendor Management Services program allows the Company to place its
own employees with the customers it services.   To date, the
Company has limited itself in large part to placing healthcare support personnel
in the hospitals that it services, as described below under “--Healthcare
Support Services.”  However, the Company has expanded its services
beyond the healthcare sector.
  Healthcare
Support Services
  The
Company has identified the healthcare support services market as a source of
significant growth potential.  The Company’s RightSourcing Vendor
Management Services program, described above, has also been primarily focused in
the healthcare sector.   In this sector, both in conjunction with
the RightSourcing program and independent of it, the Company provides clinical
skills including nurses and other allied health professionals.  In
addition, the Company also provides specialty medical office support personnel
including credentialed coders for the processing of medical reimbursement claims
and other personnel in support of insurance claims processing, billing, medical
record keeping and utilization review/case management
professionals.
  The
Company’s customers in this area include hospitals, medical offices,
multi-physician practices and other healthcare providers, medical billing
companies and insurance companies.
  Information
Technology (IT)
  In the IT
field, the Company provides highly skilled software developers, technical
support personnel, systems consultants, business analysts, software engineers,
technical writers and architects and project managers for a wide range of
technical assignments, including client server, mainframe, desktop and help desk
services, and Internet/Intranet projects.  The Company hires the
workers it makes available to its customers, in most cases through its
recruitment process, and performs all of the obligations of an employer,
including processing payrolls, withholding taxes and offering
benefits.  Additionally, the Company provides and manages bundled
teams of technical personnel to clients as a hybrid answer to IT project
outsourcing.  Using the managed services approach to staffing, the
Company delivers the human capital as needed while the client maintains overall
IT project direction and responsibility.
  The
Company’s IT customers operate in diverse industry sectors which include Fortune
500 companies.
  Technical,
Engineering and Governmental Services
  The
Company provides technical and engineering services through its Technical
Services division to a diverse client base including both governmental and
commercial accounts.  It provides highly skilled technical and
professional personnel specializing in such areas as public health,
environmental safety, avionics and aerospace, national energy laboratories,
petrochemical, civil engineering, electronics, and many other
fields.  The Company’s government services requires the deployment of
both United States employees and foreign national employees to approximately 35
countries worldwide.  The Technical Services division also provides
its clients with draft/design services, technical writers and skilled
technicians, in addition to quality control and assurance personnel in
manufacturing environments.
   4
  The
Company’s technical and engineering customers include major private sector
commercial and military aerospace companies, federal research facilities and
other federal agencies.
  Telecom
  The
Company’s telecom operations consist of traditional supplemental staffing to the
telecommunications industry and providing professional and skilled telecom
personnel to plan, design, engineer, furnish, install and maintain wireless,
wire line, OSP, power and microwave equipment (known as EF&I
services).  Its customer base includes major carriers and wireless
companies.  COMFORCE Telecom is TL 9000 and ISO
registered.  Some of the Company’s niche telecom operations were sold
in 2004 (see note 19 to our consolidated financial statements).
  Other
Staffing
  In
addition to providing contract consulting and other staffing services in the
areas described above, the Company provides a broad range of staffing services
to its customers, including scientific support to research facilities,
accounting support services, general clerical, data entry and billing support,
call center staffing and telemarketing.  In this respect, the Company
is opportunistic in utilizing its many branch offices, sales networks, customer
relationships, computer databases and other resources to obtain engagements that
are outside of its core businesses.  We also fill our customers’
direct hire requirements, including by providing them an option to hire
personnel that are currently on assignment with them.
  Financial
Outsourcing Services Segment
  The
Company provides funding and back office support services to independent
consulting and staffing companies. The Company’s back office services include
payroll processing, billing and funding, preparation of various management
reports and 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 monitors the collection of all receivables related
to its financial outsourcing clients; however, the amount of any accounts
receivable that are not collected within a specified period after billing is
charged back by the Company to its financial outsourcing clients.
  Customers
  The
Company provides staffing, consulting and outsourcing services to a broad range
of customers, including investment banking firms, computer software and hardware
manufacturers, the automotive industry, government agencies, aerospace and
avionics firms, utilities, national laboratories, biotech companies, insurance
companies, pharmaceutical companies, cosmetics companies, healthcare facilities,
educational institutions and accounting firms. Services to Fortune 1000
companies represent a majority of the Company’s revenues.
  The
Company generally contracts directly with its Staff Augmentation customers or
through vendor management services agreements to provide that the Company will
have the first opportunity to supply the personnel required by that
customer.
  The
Company generally invoices its customers weekly, bi-weekly or
monthly.  The Company typically enters into longer term contracts with
its customers.  These contracts customarily allow either party to
terminate upon a 30-day or other short advance written notice.
  During
the fiscal year ended December 30, 2007, no customer accounted for 10% or more
of the Company’s revenues.  The largest four customers of the Company,
in the aggregate, accounted for approximately 24.7% of the Company’s 2007
revenues.
   5
   Sales
and Marketing
  As of
December 30, 2007, the Company serviced its customers through a network of 22
company-owned and 8 licensed offices located in 14 states across the United
States and its corporate headquarters located in Woodbury, New York. In
addition, in many instances, the Company’s non-billable (staff) employees work
on-site at its customers’ facilities.  The Company’s sales and
marketing strategy is focused on expanding its business with existing customers
through cross-selling and by establishing relationships with new customers. The
Company solicits customers through personal sales presentations, telephone
marketing, direct mail solicitation, referrals from customers, and advertising
in a variety of local and national media including magazines, newspapers, trade
publications and through the Company’s website (www.comforce.com or
prounlimited.com).
  In the case of PrO Unlimited, our
marketing efforts are conducted at the national level.  We utilize a
team-oriented approach to the sales process.  In addition to our
dedicated sales force, who focus on generating leads, PrO’s key operating
officers are closely involved in the sales process, from lead generation through
pricing and implementation.  An important component of PrO’s marketing
program is in establishing its profile as an expert on issues related to the
management of the contingent workforce. PrO regularly conducts seminars on
independent contractor compliance, co-employment and the Fair Labor Standards
Act.  Senior management maintains an active public relations effort to
provide added visibility.   We seek to raise PrO’s profile among
potential customers by encouraging its executives to write articles in trade and
other publications. PrO develops additional sales leads through an ongoing
Internet marketing campaign and through its website. Our strong relationships
with our existing customers also provide a source of referrals to new customers
as well as opportunities to cross-sell additional services to existing
customers.
  In the
Staff Augmentation segment, our sales and marketing efforts are generally
conducted on a local or regional basis.  Our Sales and Resource
Managers, Client Service Coordinators and Regional Account Managers are
responsible for maintaining contact with existing clients, maximizing the number
of requisitions that we will have the opportunity to fill, and then working with
the recruiting staff to offer the client the candidates that best fit the
clients’ specifications.  New account targets are 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 1000
client base, it also places a significant marketing focus on faster-growing
middle-market companies, governmental agencies and large not-for-profit
institutions such as hospitals and research facilities.
   Billable
Employees
  In the
Human Capital Management Services segment, PrO provides employer-of-record
payrolling services for contingent workers sourced internally by its
clients.  For these companies, PrO employs the workers, pays
unemployment taxes and workers compensation insurance premiums, and provides
other benefits including health insurance.  These workers may include
former independent contractors, returning retirees or other mission-critical
workers internally sourced for contingent work.  The Company’s
compliance expertise helps clients avoid potential litigation and other
co-employment issues associated with this workforce.
  Within
the Staff Augmentation segment, the Company’s success depends significantly on
its ability to effectively and efficiently match skilled personnel with specific
customer assignments. The Company has established an extensive national resume
database of prospective employees with expertise in the disciplines served by
the Company. To identify qualified personnel for inclusion in this database, the
Company solicits referrals from its existing personnel and customers, actively
recruits through the Internet and job boards, and otherwise places
advertisements in local newspapers, trade magazines, and its website. The
Company continuously updates its proprietary database to reflect changes in
personnel skill levels and availability. Upon receipt of assignment
specifications, the Company searches the database to identify suitable
personnel. Once an individual’s skills are matched to the specifications, the
Company considers other selection criteria such as interpersonal skills,
availability and geographic preferences to ensure there is a proper fit between
the employee and the assignment being staffed. The Company can search its resume
database by a number of different criteria, including specific skills or
qualifications, to match the appropriate employee with the
assignment.
   6
  The
Company provides assignments with high-profile customers that make use of
advanced technology and offers its employees the opportunity to obtain
additional experience that can enhance their skills and overall marketability.
To attract and retain qualified personnel, the Company also offers flexible
schedules and, depending on the contract or assignment, paid holidays, vacation,
and certain benefit plan opportunities.
  Some
customers seek out the Company’s extensive back office and payrolling
capabilities, or elect for strategic reasons to outsource functions, without
utilizing the Company’s recruitment capabilities.  Although these
contingent workers are sourced internally by the Company’s clients, they are
nonetheless employees of the Company.
   Information
Systems
  The
Company uses the Pure Internet Architecture of PeopleSoft® 8.8 for its back
office Human Resource Management System, Financial Reporting and Employee Self
Service application software.  Utilizing the web-enabled PeopleSoft
architecture has enabled the Company to consolidate its back office operations,
improve business processes, enhance customer relationships and improve
efficiency and productivity.
  The
Company uses WebPAS® front-office staffing software, a web-based software
solution designed specifically for the staffing and recruiting
industry.  WebPAS combines candidate resumes and client management
into one fully relational and centralized database.  This software has
enabled us to automate and streamline the workflow of the sales, recruiting,
staffing and placement process.  The Company also uses the software of
third party vendors in its RightSourcing Vendor Management Services
program.  Separately, the Company’s PrO Unlimited subsidiary has
internally 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.    The Company has
upgraded its WAND system in 2007 to incorporate recent advances in technology
and to enhance the functionality of the system enabling PrO to continue as a
leader in contingent workforce management.  The WAND application
upgrade was designed using a multi-tier architecture approach.  This
approach separates the application into presentation, middle, service,
reporting, integration and data layers.  In addition to the flexible
design approach, the new application also takes advantage of a variety of
industry leading edge technologies such as Oracle 10g, Oracle RAC, Informatica,
LogiXML, Java, JavaScript and Hibernate.
  Competition
  The
contingent staffing and consulting industry is very competitive and fragmented.
There are relatively limited barriers to entry and new competitors frequently
enter the market. The Company’s competitors vary depending on geographic region
and the nature of the service(s) being provided. The Company faces competition
from larger firms possessing substantially greater financial, technical and
marketing resources than the Company and smaller, regional 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 the
Human Capital Management Services segment, PrO acts as a vendor-neutral
facilitator, utilizing its proprietary WAND system to coordinate a customer’s
multiple staffing relationships, including billing, monitoring vendor
performance and generating management reports.  PrO faces heightened
competition from other solutions companies purporting to offer similar
advantages utilizing widely-available software programs.  Management
believes that to compete in this segment, the Company must not only regularly
upgrade its WAND system but provide experienced personnel to manage the
process.
  In the
Staff Augmentation segment, as the unemployment rates decline, availability and
quality of candidates 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.
   7
   Employees
  The
Company currently employs approximately 620 full-time staff employees at its
headquarters and company-owned offices.  The Company issued
approximately 19,000 W-2s to its employees who provided services to its
customers during 2007, 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, if
applicable).  Non-billable administrative personnel provide
management, sales and marketing, back office and other services in support of
the Company’s services in all of its segments.
   Licensed
Offices
  The
Company has granted six licensees the right to operate a total of eight licensed
offices.  The most recent license for a new office was granted in
July 1992, and the Company does not expect to grant more licenses.
Licensees recruit contingent personnel and promote their services to both
existing and new clients obtained through the licensees’ marketing
efforts.  However, the Company is involved in the determination of the
terms under which services are to be offered to its customers, and, with the
exception of a single licensee, the Company is the employer of all of the
workers placed through these arrangements.  As the primary obligor,
the Company is fully responsible for the payment of the
employees.  The Company submits all bills directly to the customers
and they are required to remit their payments for services performed directly to
the Company.  The Company has the ability to refuse to perform
services solicited by the licensee that it does not believe are within the
normal scope of its capabilities, or for other reasons if it does not believe
the services to be performed comport with the Company’s
objectives.  The Company and the licensee office bear joint
responsibility for collecting the receivables from the customers and jointly
bear the risk of loss for uncollected receivables.  The licensee earns
a variable percentage of the ultimate gross profit based upon the type of
services rendered.
   Regulations
  Contingent
staffing and consulting services firms are generally subject to one or more of
the following types of government regulations: (1) registration of the
employer/employees; (2) licensing, record keeping and recording
requirements; and (3) substantive limitations on operations.  We
are governed by laws regulating the employer/employee relationship, such as tax
withholding and reporting, social security or retirement, anti-discrimination
and workers compensation in the United States and in the foreign countries in
which we have employment activities, and, in the case of our government
contracts, we are further subject to Federal Acquisition Regulations
(FAR).  In some instances, the Company’s licensees are deemed to be
franchisees, and the arrangements the Company enters into with them are subject
to regulation, both by the Federal Trade Commission and a number of
states.   In addition, in the healthcare support sector, the
Company is subject to extensive federal and state laws and regulations, as well
as the regulations of various public and private healthcare organizations and
authorities.
  ITEM 1A.   RISK FACTORS
  Any
investment in our securities involves a high degree of risk.  You should
consider carefully the following information about these risks, together with
the other information contained in this report, before you decide to buy our
securities.  The risks and uncertainties described below are not the only
ones we face.  Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our operations.  If
any of the following risks actually occur, our business would likely suffer and
our results could differ materially from those expressed in any forward-looking
statements contained in this report including those contained in the
section captioned “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” under Item 7.
 
 Economic
uncertainties could reduce our revenues and gross profit.
  Our
results of operations are affected directly by the level of business activity of
our clients, which in turn is affected by the level of economic activity in the
industries and markets that they serve. Global, national and economic
uncertainties, as well as unfavorable local and regional economic conditions in
some markets in the United States and
   8
  abroad,
may cause our clients or prospective clients to defer hiring contingent workers
or reduce spending on the Human Capital Management Services and staffing that we
provide.  As a result, we may experience a reduction in the growth of
new business as well as a reduction in existing business, which may reduce our
revenues and gross profit.  In addition, reduced demand for our
services could increase price competition.  If, as a result of adverse
economic conditions, one or more of our clients enter bankruptcy or liquidate
their operations, our revenues and accounts receivable could be adversely
affected.
  Competition
in our industry could reduce our sales or profitability.
  We face
significant competition in the markets we serve and there are few barriers to
entry for new competitors.  The competition among staffing services
companies is intense.  We compete for potential clients with providers of
outsourcing services, vendor managed services, systems integrators, computer
systems consultants, temporary personnel agencies, search companies and other
providers of staffing services.
  Some of
our competitors may have greater marketing, financial, technology and personnel
resources than we do and could offer increased competition.  Some of
our competitors may offer better pricing or superior features in their products
and services.  In addition, competitors offering different products
and services could merge or form partnerships in order to provide a broader
range of offerings.  Our clients’ own human resources departments may
be competitors to the extent they begin to handle, in house, the operations we
perform.  In addition, the growth in demand for vendor managed
services has put heightened pressure on the margins of staffing services
providers, including us.
  Potential
increase in costs related to being a public company.
  The
Company may incur substantial additional costs related to compliance with the
provisions of the Sarbanes-Oxley Act.  These additional costs relate to
higher documentary and administrative costs and consulting, audit and legal fees
we will incur, as well as for the cost of the audit of our internal controls
that will be required as presently proposed by the SEC for our 2009 fiscal
year.
  Significant
increases in payroll-related costs could adversely affect our
business.
  We are
required to pay a number of federal, state, local and foreign payroll and
related costs, including unemployment taxes, workers compensation benefits,
healthcare benefits, FICA, and Medicare, among others, for our employees and
personnel.  Significant increases in the effective rates of any
payroll-related costs likely would have a material adverse effect upon us.
 Costs could also increase as a result of healthcare reforms or the
possible imposition of additional requirements and restrictions related to the
placement of personnel.  Recent federal and state legislative proposals
have included provisions extending health insurance benefits to personnel who
currently do not receive such benefits.
  We
generally seek to increase fees charged to our clients to cover increases in
healthcare, unemployment and other direct costs of services, but our ability to
pass these costs to our clients has diminished in recent years. There can be no
assurance that we will be able to increase the fees charged to our clients in a
timely manner and in a sufficient amount if these expenses continue to
rise.  Our inability to increase our fees or adapt to future
regulatory changes could have a material adverse effect on our business,
operating results and financial condition.
  The
profitability of our engagements with clients may not meet our
expectations.
  Unexpected
costs or delays in client purchases of our services could make our client
engagements less profitable than anticipated.  When making proposals
for engagements, we estimate the costs and potential revenue associated with
those engagements when determining the pricing.  Any increased or
unexpected costs or unanticipated delays in connection with the performance of
these engagements, including delays caused by factors outside our control, could
reduce our profit margin. For example, our clients may not fully cooperate with
us so as to enable us to implement our services in a cost-effective manner, or
the nature of future engagements may require that we incur significant costs in
preparation of the engagement before we generate revenues under the terms of the
engagement.  Our agreements with our clients, as well as competition
in our target markets, may prevent us from passing these increased costs on to
our clients.
   9
  We
face significant employment liability risk.
 
 We employ
and place people in the workplaces of other businesses.  An inherent risk
of such activity includes possible claims of errors and omissions, misuse of
client proprietary information, misappropriation of funds, discrimination and
harassment, employment of illegal aliens, theft of client property, other
criminal activity, torts or other claims.  Our contracts with our clients
often require that we indemnify them against these kinds of
losses.  We have policies and guidelines in place to reduce our
exposure to risks for these potential losses.  However, failure of any
employee or personnel to follow these policies and guidelines may result in:
negative publicity; injunctive relief; the payment by us of monetary damages or
fines; or other material adverse effects upon our business.  Moreover, we
could be held responsible for the actions at a workplace of persons not under
our immediate control.  For example, our contracts with vendor management
services customers frequently require that we confirm that the suppliers of
personnel or like service providers maintain insurance coverage as required by
the customer, and our failure to require these providers to maintain the
required insurance could result in liability to us for any losses our customers
incur as a result of this failure.
 
 To reduce
our exposure, we maintain general liability insurance, property insurance,
automobile insurance, fidelity insurance, errors and omissions insurance,
professional/medical malpractice insurance, fiduciary insurance, and directors’
and officers’ liability insurance for domestic and foreign operations as
management deems appropriate and prudent.  However, due to the nature
of our assignments, in particular, access to client information systems and
confidential information, and the potential liability with respect thereto, we
may not be able to obtain insurance coverage in amounts adequate to cover any
such liability on acceptable terms.  Our healthcare staffing services
exposes us to potential malpractice claims, a growing area of
litigation.  Furthermore, we are generally self-insured with respect
to workers compensation claims, but maintain excess workers compensation
coverage to limit our exposure for amounts over $4.5 million.  We
maintain reserves for uninsured risks and other potential liabilities, but we
may be unable to accurately estimate our exposure.  In addition, we
face various other employment-related risks not covered by insurance, such as
wage and hour laws and employment tax responsibility.  Any of these
liabilities could have a material adverse effect on our business, operating
results and financial condition.
  We
operate in a complex regulatory environment and failure to comply with
applicable laws and regulations could adversely affect our
business.
  The
services we provide are subject to a number of laws and regulations, including
those applicable to payroll practices, benefits administration, state
unemployment and workers compensation regulations, employment practices and data
privacy both in the United States and abroad.  In particular, we could
also be impacted by changes in reimbursement regulations by states or the
federal government which make it difficult for our healthcare clients to pay us
or require us to lower our rates.
  Because
our services are provided throughout the United States and in foreign countries,
we must perform our services in compliance with the complex legal and regulatory
requirements of multiple jurisdictions.  Some of these laws and
regulations may be difficult to ascertain or interpret and may change over time.
The addition of new services may subject us to additional laws and regulations
from time to time.  Violation of laws and regulations could subject us
to fines and penalties or to legal liability, constitute a breach of our client
contracts and impair our ability to do business in various jurisdictions or
according to our established processes.  If our reputation suffers as
a result of any failure to comply with applicable laws, our ability to maintain
our clients and increase our client base will be weakened.
  We
may be subject to lawsuits and claims, which could have a material adverse
effect on our financial condition and results of operations.
  Litigation
involving employment practices and workplace conditions is prevalent in the
United States, including class actions against employers for allegedly failing
to comply with the many federal and state laws and regulations designed to
protect the health and safety of workers or to properly classify workers for
purposes of their entitlement to overtime or benefits.  We are
currently subject to claims and lawsuits, and we expect to be subject to
additional claims and lawsuits in the future.  Litigation is often
costly, unpredictable and time consuming to resolve, and unfavorable results in
any lawsuit could potentially have a material adverse effect on our financial
condition and results of operations.
   10
  We
may not be able to recruit and retain qualified personnel.
  We
depend upon the abilities of our staff to attract and retain personnel,
particularly technical and professional personnel, who possess the skills and
experience necessary to meet the staffing requirements of our clients. We must
continually evaluate and upgrade our base of available qualified personnel to
keep pace with changing client needs and emerging technologies. We expect
continued competition for individuals with proven technical or professional
skills for the foreseeable future. If qualified personnel are not available to
us in sufficient numbers and upon economic terms acceptable to us, it could have
a material adverse affect on our business.
  If
we cannot obtain new clients or increase sales to our existing clients, our
business will not expand and our revenues will not increase.
  Our
future success not only depends on our ability to maintain our current
relationships with existing clients, but also to acquire new client
relationships and increase sales to our existing clients.  Our
strategies to reach new clients and to expand the range of services purchased by
our existing clients may not succeed.
  In
the event of bankruptcy of any of our clients, we may be unable to collect our
fees, including the recovery of the amount of any wages we have paid to
employees for work performed for these clients.
  Because
the amount of business we do with large clients each month can be substantial,
these clients owe us a significant portion of our total receivables at any one
time.  In the event one of those clients would enter bankruptcy or
becomes unable to pay its obligations, we may be unable to collect from that
client, and our bad debt expense and revenues could be adversely
affected.  In addition, with respect to our professional payrolling
and staffing services, we pay for the services rendered by those personnel prior
to collecting those amounts from our clients.  Therefore, we are at
risk for the entire amount of those wages in addition to our fees.
  If
we fail to develop new services, or enhance our existing services, to meet the
needs of our existing and future clients, our sales may decline.
  To
satisfy increasingly sophisticated client requirements and achieve market
acceptance, we must enhance and improve our existing services, and we must also
continue to introduce new services.  Any new services that we offer
may not be introduced in a timely manner, and they may not achieve sufficient
market acceptance necessary to generate significant revenue.  If we
are unable to successfully develop new services, or enhance our existing
services, our sales may decline, and our profitability will
decrease.
  Our
business will be negatively affected if we are not able to keep pace with rapid
changes in technology or if growth in the use of technology in business is not
as rapid as in the past.
  Our
future success depends, in part, on our ability to develop and implement
technology services that anticipate and keep pace with rapid and continuing
changes in technology, industry standards and client preferences.  We
have developed and must continually improve our proprietary web-enabled WAND
system, which provides an end-to-end solution for the engagement, management and
tracking of the contingent workforce. We are reliant on third party vendors in
updating and improving other technologies on which our business is dependent,
particularly in our RightSourcing Vendor Management Services
program.  We may not be successful in anticipating or responding to
the continuing developments in technology, industry standards and client
preferences on a timely and cost-effective basis, and our ideas, or those of our
software vendors, may not be accepted in the marketplace.  In
addition, technologies developed by our competitors may make our service
offerings noncompetitive or obsolete.  Any one of these circumstances
could significantly reduce our ability to obtain new client engagements or to
retain existing client engagements.
  Our
business is also dependent, in part, upon continued growth in the use of
technology in business by our clients and prospective clients and their
employees, and our ability to deliver the efficiencies and convenience afforded
by technology.  If growth in the use of technology does not continue,
demand for our services may decrease.  Use of new technology for
commerce generally requires understanding and acceptance of a new way of
conducting business and exchanging information.  Companies that have
already invested substantial resources in traditional means of
   11
  conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new approach that would not utilize their existing personnel and
infrastructure.
  The
effort to gain technological expertise and develop new technologies in our
business requires us to incur significant expenses.  If we cannot
offer new technologies as quickly as our competitors, we could lose market
share.  We also could lose market share if our competitors develop
more cost-effective technologies than we offer or develop.
  If
our clients or third parties are not satisfied with our services, we may face
damage to our professional reputation or legal liability.
  We depend
to a large extent on our relationships with our clients and our reputation for
high-quality services.  As a result, if a client is not satisfied with
our services, it may be more damaging in our business than in other
businesses.  Our services may contain defects or errors, which could
hurt our reputation, result in significant costs to us and impair our ability to
sell our services in the future.  The costs incurred in correcting any
defects or errors may be substantial, and would reduce our
profitability.  Moreover, if we fail to meet our contractual
obligations, we could be subject to legal liability or loss of client
relationships.  If the reputation of our services declines, our
ability to maintain our clients and increase our client base will be
weakened.
  Clients
are increasingly filing legal claims against professional service providers,
including those in the human resources outsourcing and consulting
industries.  Clients and third parties who are dissatisfied with our
consulting services or who claim to suffer damages caused by our services may
bring lawsuits against us.
  Defending
lawsuits arising out of any of our services could require substantial amounts of
management attention, which could adversely affect our financial
performance.  In addition to client liability, governmental
authorities may impose penalties with respect to our errors or omissions and may
preclude us from doing business in some jurisdictions.  In addition to
the risks of liability exposure and increased costs of defense and insurance
premiums, claims arising from our professional services may produce publicity
that could hurt our reputation and business.
  Our
financial results could be harmed if we are required to expend significant
financial and other resources to protect our intellectual property from
infringement by third parties.
  Our
proprietary technology is an important part of our success, particularly in the
Human Capital Management Services segment.  We rely on a combination
of copyrights, trademarks and trade secrets, confidentiality provisions and
contractual and licensing provisions to establish and protect our proprietary
rights.  We have registered trademarks for some of our products and
services and will continue to evaluate the registration of additional trademarks
as appropriate.  We also enter into confidentiality and proprietary
rights agreements with our employees, consultants and other third parties and
control access to software, documentation, client data and other proprietary
information.
  Despite
these efforts, it may be possible for unauthorized third parties to copy
portions of our products or to reverse engineer or otherwise obtain and use our
proprietary information.  We do not have any patents or patent pending
with respect to any of our products or services, including our WAND
technology.  Existing copyright laws afford only limited
protection.  In addition, others may design around our technology or
develop substantially equivalent or superior proprietary technology, or
equivalent products may be marketed in competition with our products, which
would substantially reduce the value of our proprietary
rights.  Furthermore, confidentiality agreements between us and our
employees or any license agreements with our clients may not provide meaningful
protection of our proprietary information in the event of any unauthorized use
or disclosure of it.  Accordingly, the steps we have taken to protect
our intellectual property rights may not be adequate and we may not be able to
protect our proprietary software in the United States or abroad against
unauthorized third party copying or use, which could significantly harm our
business.  If we fail to successfully enforce our intellectual
property rights, our competitive position could suffer, which could reduce our
revenues.
   12
  Any
significant failure or disruption in our computing, software and communications
infrastructure could harm our reputation, result in a loss of clients, and
disrupt our business.
  Our
computing, software and communications infrastructure is a critical part of our
business operations.  Many of our clients, particularly those in the
Human Capital Management Services segment, typically access our services through
a standard web browser.   Our clients depend on us for fast and
reliable access to our applications.  We rely on the expertise of our
software development teams for the continued performance of our
applications.  We may experience serious disruptions in our computing,
software and communications infrastructure.  Factors that may cause
these types of disruptions include:
  ·
              human
      error;
  ·
              physical
      or electronic security breaches;
  ·
              telecommunications
      outages from third-party providers;
  ·
              computer
      viruses;
  ·
              acts
      of terrorism or sabotage;
  ·
              fire,
      earthquake, flood and other natural disasters;
  and
  ·
              power
      loss.
  Although
we back up data stored on our systems at least daily, our infrastructure does
not currently include mirroring of data storage and production capacity in more
than one geographically distinct location.  As a result, in the event
of a physical disaster, or a significant failure of our computing
infrastructure, client data from recent transactions may be permanently lost. If
our clients experience service interruptions or the loss or theft of client
data, we may be subject to financial penalties, financial liability or client
losses.  Our insurance policies may not adequately compensate us for
any losses that may occur due to any failures or interruptions in our
systems.
  Security
breaches that result in the release of proprietary data of clients could impair
our reputation and our revenue.
  Our
business involves the use, storage and transmission of clients’ proprietary
information.  Any security breaches could expose us to a risk of loss
of this information, litigation and possible liability. If our security measures
are breached as a result of third-party action, employee error, malfeasance or
otherwise, and as a result, someone obtains unauthorized access to client data,
our reputation will be damaged, our business may suffer and we could incur
significant liability.  Techniques used to obtain unauthorized access
or to sabotage systems change frequently and generally are not recognized until
launched against a target. As a result, we may be unable to anticipate these
techniques or to implement adequate preventative measures. If an actual or
perceived breach of our security occurs, the market perception of our security
measures could be harmed and we could lose sales and clients.
  Restrictions
and covenants in our indenture and other financing agreements limit our ability
to take actions and impose consequences in the event of a compliance
failure.
  The
indenture governing our 12% Senior Notes due December 1, 2010 (the “Senior
Notes”) contains a number of significant restrictions and covenants that
require, among other things, that:
  ·
              we
      do not incur indebtedness or grant a security interest in our assets
      except in accordance with the covenants and conditions in the
      indenture;
  ·
              we
      do not sell or dispose of our assets except in accordance with the
      covenants and conditions in the
indenture;
   13
  ·
              the
      net proceeds from any permitted sale of our assets or our capital stock
      are applied in accordance with the terms of the indenture to retire
      indebtedness or for other permitted purposes;
  and
  ·
              we
      do not enter into transactions with affiliates other than in accordance
      with the indenture.
  These
covenants and conditions will affect our operating flexibility by, among other
things, substantially restricting our ability to incur expenses and
indebtedness, or make acquisitions, that could be used to grow our
business.  Our ability to issue shares of our capital stock will also
be limited.
  Our
inability to repay or refinance our Senior Notes or the PNC Credit Facility,
both of which mature in 2010, would have a material adverse effect on our
financial condition.
  Our
Senior Notes become due and payable on December 1, 2010.  At March 14,
2008, there was $11.7 million principal amount of Senior Notes
outstanding.   Moreover, the PNC Credit Facility, under which we
had $64.6 million in borrowings outstanding at March 2, 2008, matures on July
24, 2010.  Unless we find a source of capital to repay or refinance
these obligations, we will be unable to repay either the Senior Notes or the PNC
Credit Facility at maturity, which would have a material adverse effect on our
financial condition.  The credit markets have tightened significantly
since the beginning of 2008.  We cannot predict whether capital will
be available to us on terms acceptable to us, if at all, when these obligations
mature in 2010.
  Shares
eligible for future sale may cause the market price for our common stock to
decline even if our business is doing well.
  Sales of
substantial amounts of our common stock in the public market, or the perception
that these sales may occur, could cause the market price of our common stock to
decline.  A substantial number of shares of our common stock are held
by persons other than “affiliates.”  In addition, as of March 14,
2008, approximately 15.1 million shares of common stock or equivalent non-voting
preferred shares are issuable to a trust in which John C. Fanning, our chairman
and chief executive officer, holds the principal economic
interest.  Subject to some limitations on the holder’s rights,
the  8.0% Subordinated Convertible Note due December 2, 2009 (the
“Convertible Note”) (which continues to accrue pay-in-kind interest), the
Company’s Series 2003A Preferred Stock, the Series 2003B Preferred Stock and the
Series 2004A Preferred Stock (which continue to cumulate dividends) are
convertible into these common or non-voting shares at conversion prices ranging
from $0.54 to $1.70, which could have a potentially depressing effect on the
market price of the Company’s common stock.
  We
are bound by numerous restrictive financial and other covenants under the terms
of our credit facility.
  The PNC
Credit Facility imposes various restrictions on our activities without the
consent of the lenders, including a prohibition on fundamental changes to us or
our subsidiaries, including certain consolidations, mergers and sales and
transfer of assets, and limitations on our ability or any of our direct or
indirect subsidiaries to grant liens upon our property or assets.  In
addition, under the PNC Credit Facility we must meet certain net worth, debt
service coverage and other requirements.  The PNC Credit Facility includes
events of default and provides that, upon the occurrence of certain events of
default, payment of all amounts payable under the PNC Credit Facility, including
the principal amount of, and accrued interest on, the PNC Credit Facility may be
accelerated.  See “--Liquidity and Capital Resources” in Item
7.
  We
could be required to write-off goodwill in future periods if our future
operating results suffer.
  In
accordance with generally accepted accounting principles, we are required to
review our goodwill for impairment at least annually.  Our goodwill
was $32.1 million at December 30, 2007.  Significant assumptions used
in this analysis include expected future revenue growth rates, operating margins
and working capital levels, which are based on management’s expectation of
future results.  An unfavorable evaluation could cause us to write-off
goodwill in future periods.  We had write-offs of goodwill of $96.1
million, excluding $5.9 million relating to discontinued operations, in 2002 and
2003.   Any future write-offs could have a material adverse
impact on our financial condition and results of operations.
   14
  Adverse
results of tax audits could result in significant cash expenditures or exposure
to unforeseen liabilities.
  We are
subject to periodic federal, state, local and foreign income tax audits for
various tax years.  Although we attempt to comply with all taxing authority
regulations, adverse findings or assessments made by the taxing authorities as
the result of an audit could have a material adverse affect on us.
  Significant
foreign currency fluctuations could affect our operating results.
  We
conduct our operations in a number of foreign countries and the results of our
local operations are reported in the applicable foreign currencies and then
translated into U.S. dollars at the applicable foreign currency exchange rates
for inclusion in our consolidated financial statements.  We are
subject to exposure for devaluations and fluctuations in currency exchange
rates, which, if we are successful in further growing and developing our foreign
operations or these devaluations or fluctuations are significant, could
potentially affect our investment in these foreign countries as well as on our
cash flow and results of operations.  These risks are heightened in
the current volatile economic environment, including the recent decline in the
value of the U.S. dollar and instability in the credit markets.
  Severe
weather, natural disasters, acts of war or terrorism and other external events
could significantly impact our business
  Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on our ability to conduct
business.  For example, during 2005, hurricanes Katrina and Rita
caused extensive flooding and destruction along the coastal areas of the Gulf of
Mexico. While we were not significantly and adversely affected by the impact of
these specific disasters, other severe weather or natural disasters, acts of war
or terrorism or other adverse external events may occur in the future that could
have an effect on our business.
  We
depend on key personnel, and the loss of the services of one or more of our
senior management or a significant portion of our local management personnel
could weaken our management team and our ability to deliver quality services and
could adversely affect our business.
  Our
operations historically have been, and continue to be, dependent on the efforts
of our executive officers and senior management, including John C. Fanning, our
chairman and chief executive officer. In addition, we are dependent on the
performance and productivity of our respective regional operations executives,
local managing directors and field personnel. The loss of one or more of these
employees could have an adverse effect on our operations, including our ability
to maintain existing client relationships and attract new clients in the context
of changing economic or competitive conditions.  Our ability to
attract and retain business is significantly affected by local relationships and
the quality of service rendered by branch managerial personnel. If we are unable
to attract and retain key employees to perform these services, our business,
financial condition and results of operations could be materially adversely
affected.
  ITEM 1B.   UNRESOLVED STAFF
COMMENTS
  Not
applicable.
  ITEM 2.   PROPERTIES
  The
Company leases all of its office space.  Excluding the Company’s
headquarters, these leases are for office space ranging in size from small
shared 1,000-square foot executive suites to facilities exceeding 10,000 square
feet in size.  The remaining terms under the Company’s leases range
from less than six months to 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. In some instances our
full-time staff employees work at the client’s site for which we do not incur
any rental costs.  The Company owns no real estate.
  The
Company believes that its facilities are adequate for its present and reasonably
anticipated future business requirements.  The Company does not
anticipate difficulty locating additional facilities, if needed.
   15
  ITEM 3.   LEGAL PROCEEDINGS
  In
November 2003, the Company received a general notice letter from the United
States Environmental Protection Agency (the “U.S. EPA”) that it is a potentially
responsible party at Chicago’s Lake Calumet Cluster Site, which for decades
beginning in the late 19th/early
20th
centuries had served as a waste disposal site. In December 2004, the U.S. EPA
sent the Company and numerous other companies special notice letters requiring
the recipients to make an offer by a date certain to perform a remedial
investigation and feasibility study (RI/FS) to select a remedy to clean up the
site.  The Company’s predecessor, Apeco Corporation (“Apeco”), a
manufacturer of photocopiers, allegedly sent waste material to this
site.  The State of Illinois and the U.S. EPA have proposed that the
site be designated as a Superfund site.  The Company is one of over
400 potentially responsible parties (many of which may no longer be in operation
or viable) to which notices were sent, and the Company has joined a working
group of more than 100 members representing over 120 potentially responsible
parties for the purpose of responding to the United States and Illinois
environmental protection agencies.
  Until the
United States and Illinois environmental protection and other agencies agree
upon remedies, accurate estimates of clean-up costs cannot be made and site
studies cannot be completed.  Consequently, no assessment can be made
as to any potential liability to the Company.  Furthermore, the
Company has made inquiries of the insurance carriers for Apeco to determine if
it has coverage under old insurance policies.
  In July
2005, the Company’s subsidiary, COMFORCE Technical Services, Inc. (“CTS”) was
served with an amended complaint in the suit titled Reyes V. East Bay Municipal Utility
District, et al, filed in the Superior Court of California, Alameda
County, in connection with a gas pipeline explosion in November 2004 that killed
five workers and injured four others.  As part of a construction
project to lay a water transmission line, a backhoe operator employed by a
construction contractor unaffiliated with CTS allegedly struck and breached a
gas pipeline and an explosion occurred when leaking gas ignited.  The
complaint names various persons involved in the construction project as
defendants, including CTS.  The complaint alleges, among other things,
that CTS was negligent in failing to properly mark the location of the
pipeline.  The complaint did not specify specific monetary
damages.
  CTS was
subsequently named as a defendant in 15 other lawsuits concerning this accident
in the Superior Court of California which have been consolidated with the Reyes case in a single
coordinated action styled as the Gas Pipeline Explosion Cases
in the Superior Court of California, Contra Costa County.  Two
co-defendants brought cross-claims against CTS.  In addition, a
company that provided insurance coverage to a private home and property damaged
by the explosion brought a subrogation action against CTS.  CTS denies
any culpability for this accident.  Following an investigation of the
accident, Cal-OSHA issued citations to four unrelated contractors on the
project, but declined to issue any citations against CTS.  Although
Cal-OSHA did not issue a citation against CTS, it will not be determinative in
the pending civil cases.
  CTS
requested that its insurance carriers defend it in these actions, and the
carrier under the primary policy appointed counsel and has defended CTS in these
actions.  As of June 2007, CTS has settled with 17 of the 19
plaintiffs, in each case within the limits of its primary policy, except as
described below.  With the settlements, the limits under the primary
policy have been reached.  The umbrella insurance carrier for CTS had
previously denied the claims of CTS for coverage, claiming that the matter
was within the policy exclusions.  This carrier also initiated a
declaratory action in Contra Costa County, California in which it asked the
court to determine whether the claims against CTS were within the policy
exclusions.  In March 2007, CTS and this carrier reached a tentative
settlement under which the carrier agreed to dismiss CTS from the declaratory
action and defend and insure CTS in the remaining cases when the primary
coverage limits have been reached, subject to an agreed upon contribution by CTS
and the carrier's reservation of rights to seek recovery against CTS for the
claims of Mountain Cascade, Inc., a co-defendant not related to CTS
that served as a contractor for East Bay Municipal Utility
District.  Management of CTS (and the Company) believes that any
losses in respect of Mountain Cascade should be covered under the umbrella
policy.  However, the carrier has declined to release
its reservation of rights as to this unresolved Mountain Cascade claim, and
the amount that CTS will be required to contribute to any settlement of or
judgment on the remaining plaintiffs’ cases is not
determinable.  Accordingly, management of CTS (and the Company) cannot
estimate the amount of losses that CTS may ultimately incur in connection with
these cases, if any, other than to estimate that any losses will be less than
$1.5 million. No assurance can be given that the costs to CTS to resolve all
remaining claims will be within management’s estimates.
   16
  As
described in note 19 to our consolidated financial statements, the Company
resolved its litigation against the purchaser of the Company’s niche telecom
operations in the fourth quarter of 2007.  The Company is also a party
to routine contract and employment-related litigation matters and routine audits
of state and local tax returns 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 expenses legal
costs associated with contingencies when incurred.  The Company
maintains general liability insurance, property insurance, automobile insurance,
fidelity insurance, errors and omissions insurance, professional/medical
malpractice insurance, fiduciary insurance, and directors’ and officers’
liability insurance for domestic and foreign operations as management deems
appropriate and prudent. The Company is generally self-insured with respect to
workers compensation, but maintains excess workers compensation coverage to
limit its maximum exposure to such claims.
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
  None
during the fourth quarter of fiscal 2007.
  
  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:
  Fiscal
      Year
              
              Quarter
              
              High
      ($)
              
              
              Low
      ($)2007
              
              First
      Quarter
              
              
              2.60
              
              
              
              2.11Second
      Quarter
              
              
              2.98
              
              
              
              2.22Third
      Quarter
              
              
              2.69
              
              
              
              1.90Fourth
      Quarter
              
              
              2.32
              
              
              
              1.252006
              
              First
      Quarter
              
              
              3.30
              
              
              
              1.95Second
      Quarter
              
              
              3.12
              
              
              
              2.39Third
      Quarter
              
              
              2.93
              
              
              
              2.17Fourth
      Quarter
              
              
              2.80
              
              
              
              2.00
 
  The
closing price of the Common Stock of the Company on March 14, 2008 was
$2.00.   As of such date, there were approximately 3,900
stockholders of record and 11,971,070 shares of Common Stock held by
non-affiliates.  The aggregate market value of the voting stock held
by non-affiliates of the registrant on March 14, 2008 was
$23,942,140.
  No
dividends were declared or paid on the Common Stock during 2007. The terms of
the Company’s debt obligations effectively prohibit its payment of dividends. In
addition, until undeclared, cumulated dividends on its Series 2003A, 2003B and
2004A Preferred Stock (approximately $4.0 million in the aggregate at December
30, 2007) 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.
   17
  Equity
Compensation Plan Information
  The
following table describes options and warrants issued as part of the Company’s
equity compensation plans at the end of fiscal 2007.
  Plan
      Category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              
              Weighted-average
      exercise price of outstanding options, warrants and rights
              
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in first
      column).Equity
      compensation plans approved by security holders (1)
              
              
              2,371,100
              
              
              $
              2.81
              
              
              
              1,080,000Equity
      compensation plans not approved by security holders (2)
              
              
              169,000
              
              
              
              7.55
              
              
              
              -Total
              
              
              2,540,100
              
              
              $
              3.13
              
              
              
              1,080,000
 
 (1)
              At
      December 30, 2007, the Company had two equity compensation plans that had
      been approved by stockholders, the Long-Term Stock Investment Plan (the
      “1993 Plan”) and the 2002 Stock Option Plan (the “2002
      Plan”).  Securities shown as being issuable pursuant to
      outstanding options, warrants and rights in the first column represent
      option grants made under the 1993 Plan and the 2002 Plan.  No
      options or other rights have been issuable under the 1993 Plan since
      December 31, 2002.  Accordingly, the number of securities shown
      in the third column as being available for future issuance includes only
      the shares of common stock remaining available for issuance under the 2002
      Plan upon exercise of options or other rights that may be granted
      thereunder in future periods.  At the Company’s 2006 annual
      meeting of stockholders, the stockholders approved the increase in the
      number of shares issuable under the 2002 Plan from 1,000,000 to
      2,000,000.
 
 (2)
              Warrants
      issued as additional compensation to debtholders for extending credit to
      the Company.
  Convertible
Instruments
  Fanning
CPD Assets, LP (the “Fanning Partnership”), a limited partnership in which John
C. Fanning, the Company’s chairman and chief executive officer, holds the
principal economic interest is the holder of $1.6 million principal amount of
the Company’s 8% Convertible Subordinated Note (the “Convertible Note”). Under
the terms of the Convertible Note, the Company is permitted to pay interest in
cash or kind, at its election.  As permitted, on the two semi-annual
interest payment dates of June 1, 2007 and December 1, 2007, the Company elected
to pay the interest in-kind.  Accordingly, on June 1, 2007 and
December 1, 2007, $61,000 and $63,000, respectively, were added to the principal
of the Convertible Note.
  The
Convertible Note is convertible at the election of the Fanning Partnership into
common stock (or, in certain circumstances, into a participating preferred stock
which in turn will be convertible into common stock at the same effective rate)
at a conversion price of $1.70 per share.   The Company’s
payments of interest in-kind were made in reliance upon the exemptions from
registration afforded by section 4(2) of the Securities Act of 1933 and the
regulations thereunder.  Unless the Company registers the shares
issuable upon conversion of the Convertible Note for resale under the Securities
Act of 1933, any resale of those shares by the Fanning Partnership, as an
affiliate of the Company, will be conducted in compliance with the volume
limitations and other conditions of Rule 144 of the Securities Act of
1933.
  In
addition, in 2007, dividends have cumulated in the amount of $461,000 on the
Company’s Series 2003A Preferred Stock, $38,000 on the Series 2003B Preferred
Stock and $506,000 on the Series 2004A Preferred Stock.  Although
these cumulated dividends have not been declared by the Company’s board of
directors and are not payable, the Fanning Partnership can elect to convert all
or any portion of these shares of Series Preferred Stock, including
the
   18
  cumulated
dividends, into common stock (or, in certain circumstances, into a participating
preferred stock which in turn will be convertible into common stock at the same
effective rate) at a conversion price of $1.05 per share for the Series 2003A
Preferred Stock, $0.54 per share for the Series 2003B Preferred Stock and $1.70
per share for the Series 2004A Preferred Stock. See notes
8 and 18 to our consolidated financial statements.
  
 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 30, 2007.
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 30, 2007 from its
audited historical consolidated financial statements (in thousands, except per
share data).
 
 2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003Statement
      of Operations Data:Net
      sales of services
                
                $
                586,685
                
                
                $
                567,821
                
                
                $
                539,841
                
                
                $
                480,887
                
                
                $
                369,982Costs
      and expenses:Cost
      of services
                
                
                494,104
                
                
                
                478,927
                
                
                
                460,581
                
                
                
                408,850
                
                
                
                308,840Selling, general
      and administrative expenses
                
                
                74,012
                
                
                
                68,821
                
                
                
                59,919
                
                
                
                53,755
                
                
                
                47,517Goodwill impairment
      (1)
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                24,500Depreciation and
      amortization
                
                
                2,803
                
                
                
                3,095
                
                
                
                3,700
                
                
                
                4,219
                
                
                
                4,220Total costs and
      expenses
                
                
                570,919
                
                
                
                550,843
                
                
                
                524,200
                
                
                
                466,824
                
                
                
                385,077Operating
      income (loss)
                
                
                15,766
                
                
                
                16,978
                
                
                
                15,641
                
                
                
                14,063
                
                
                
                (15,095
                )Other
      income (expense):Interest
      expense
                
                
                (7,669
                )
                
                
                (9,369
                )
                
                
                (10,744
                )
                
                
                (12,338
                )
                
                
                (13,931
                )(Loss) gain on debt
      extinguishment (2)
                
                
                (443
                )
                
                
                (169
                )
                
                
                (336
                )
                
                
                1,999
                
                
                
                9,582Write-off of
      deferred financing costs
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (431
                )Other income,
      net
                
                
                644
                
                
                
                11
                
                
                
                186
                
                
                
                110
                
                
                
                637(7,468
                )
                
                
                (9,527
                )
                
                
                (10,894
                )
                
                
                (10,229
                )
                
                
                (4,143
                )Income
      (loss) from continuing operations before income
taxes
                
                
                8,298
                
                
                
                7,451
                
                
                
                4,747
                
                
                
                3,834
                
                
                
                (19,238
                )Provision
      (benefit) for income taxes
                
                
                3,309
                
                
                
                3,373
                
                
                
                (1,455
                )
                
                
                2,058
                
                
                
                571Income
      (loss) from continuing operations
                
                
                4,989
                
                
                
                4,078
                
                
                
                6,202
                
                
                
                1,776
                
                
                
                (19,809
                )Income
      (loss) from discontinued operations, net of income taxes
      (3)
                
                
                1,000
                
                
                
                --
                
                
                
                70
                
                
                
                (20
                )
                
                
                (3,427
                )Net
      income (loss)
                
                $
                5,989
                
                
                $
                4,078
                
                
                $
                6,272
                
                
                $
                1,756
                
                
                $
                (23,236
                )Dividends
      on preferred stock
                
                
                1,005
                
                
                
                1,005
                
                
                
                1,005
                
                
                
                530
                
                
                
                672Net
      income (loss) available to common stockholders
                
                $
                4,984
                
                
                $
                3,073
                
                
                $
                5,267
                
                
                $
                1,226
                
                
                $
                (23,908
                )Diluted
      income (loss) per share:Income
      (loss) from continuing operations
                
                $
                0.16
                
                
                $
                0.13
                
                
                $
                0.21
                
                
                $
                0.07
                
                
                $
                (1.44
                )Income
      (loss) from discontinued operations
                
                
                0.03
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --Net
      income (loss) available to common stockholders
                
                $
                0.19
                
                
                $
                0.13
                
                
                $
                0.21
                
                
                $
                0.07
                
                
                $
                (1.44
                )
  19
 
 Balance
      Sheet data:Working
      capital
              
              $
              34,513
              
              
              $
              32,345
              
              
              $
              43,163
              
              
              $
              46,018
              
              
              $
              44,577Trade
      receivables, net
              
              
              131,264
              
              
              
              127,249
              
              
              
              118,916
              
              
              
              92,144
              
              
              
              76,104Goodwill
              
              
              32,073
              
              
              
              32,073
              
              
              
              32,073
              
              
              
              32,073
              
              
              
              32,242Total
      assets
              
              
              183,384
              
              
              
              175,138
              
              
              
              173,978
              
              
              
              154,649
              
              
              
              134,313Total
      debt, including current maturities
              
              
              83,858
              
              
              
              89,770
              
              
              
              105,792
              
              
              
              117,227
              
              
              
              127,960Stockholders’
      deficit (4)
              
              
              (9,503
              )
              
              
              (18,715
              )
              
              
              (23,031
              )
              
              
              (29,835
              )
              
              
              (38,624
              )
 
 (1)
                The
      Company recorded a goodwill impairment charge of $24.5 million during the
      third quarter of 2003 as a charge against operating income in accordance
      with the provisions of  FASB  Statement No. 142, Goodwill and Other Intangible
      Assets (“SFAS 142”).
 
 (2)
              During
      2003, the Company repurchased Senior Notes and 15% Senior Secured PIK
      Debentures due 2009 (the “PIK Debentures”).  As a result of
      these transactions, the Company recognized a gain on debt extinguishment
      of $9.6 million, net of approximately $319,000 of deferred financing
      costs.  During 2004, the Company repurchased Senior Notes, and,
      as a result of these repurchases, the Company recognized a gain on debt
      extinguishment of $2.0 million, net of $280,000 of deferred financing
      costs.  During 2005, the Company repurchased Senior Notes, and,
      as a result of these repurchases, the Company recognized a loss on debt
      extinguishment of $336,000, net of $178,000 of deferred financing costs.
      During 2006, the Company repurchased and redeemed Senior Notes, and, as a
      result of these repurchases and redemptions, the Company recognized a loss
      on debt extinguishment of $169,000, net of $128,000 of deferred financing
      costs. During 2007, the Company redeemed and repurchased Senior Notes,
      and, as a result of the redemption and repurchase, the Company recognized
      a loss on debt extinguishment of $443,000, net of $137,000 of deferred
      financing costs.  See “Financial Condition, Liquidity and
      Capital Resources” in Item 7.
 
 (3)
                Effective
      March 1, 2004, the Company sold its interest in two telecom subsidiaries
      in the Staff Augmentation segment.  In accordance with SFAS 144,
      the results of operations from the sale of this telecom operation have
      been reclassified as discontinued operations.  The goodwill
      impairment charges associated with this telecom operation has also been
      reclassified as discontinued operations ($3.5 million in
      2003).  In addition, as discussed under “Discontinued
      Operations” in Item 1, the Company initiated a lawsuit against the
      purchaser of this telecom operation.  Following mediation and
      extended negotiations, the parties reached a settlement in September 2007
      under which $1.0 million was received by the Company in the fourth quarter
      of 2007.
  (4)
                In
      June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes – an Interpretation of FASB Statement No. 109 “Accounting for
      Income Taxes” (“FIN 48”).  Under FIN 48, the Company may
      recognize the tax benefit from an uncertain tax position only if it is
      more-likely-than-not that the tax position will be sustained on
      examination by the taxing authorities, based on the technical merits of
      the tax position.  The tax benefits recognized in the financial
      statements from such tax position should be measured based on the largest
      benefit that has a greater than fifty percent likelihood of being realized
      upon ultimate settlement.  The Company adopted the provisions of
      FIN 48 effective January 1, 2007.  The impact upon adoption was
      to increase retained earnings by approximately $3.4 million and to
      decrease accruals for uncertain tax positions and related penalties and
      interest by a corresponding amount.
  20
  ITEM
7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
  The
discussion set forth below supplements the information found in the audited
consolidated financial statements and related notes of COMFORCE Corporation
(“COMFORCE”) and its wholly-owned subsidiaries, including COMFORCE Operating,
Inc. (“COI”) (collectively, the “Company”).
  Overview
and Recent Developments
  Staffing
personnel placed by the Company are employees of the Company. The Company is
responsible for employment related expenses for its employees, including workers
compensation, unemployment compensation insurance, Medicare and Social Security
taxes and general payroll expenses.  The Company offers health,
dental, 401(k), disability and life insurance to its eligible employees.
Staffing and consulting companies, including the Company, typically pay their
billable employees for their services before receiving payment from their
customers, resulting in significant outstanding receivables.  To the
extent the Company grows, these receivables will increase and there will be
greater need for borrowing availability under the PNC Credit
Facility.  At March 2, 2008, the Company had outstanding $64.6 million
principal amount under the PNC Credit Facility with remaining availability of up
to $20.2 million, as defined in the loan agreement, to fund
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 primarily
provides staffing management services that enable Fortune 1000 companies and
other large employers to consolidate, automate and manage staffing, compliance
and oversight processes for their contingent workforces.  The Staff
Augmentation segment provides healthcare support services, technical and
engineering, information technology, telecommunications and other staffing
needs.  The Financial Outsourcing Services segment provides funding
and back office support services to independent consulting and staffing
companies.
  Management
of the Company has recently observed some deterioration in the labor markets and
instability in the credit markets beginning in the first quarter of
2008.  If this uncertainty persists or deteriorates further during
2008, such economic conditions could adversely affect the Company’s
operations.
  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 30, 2007.  Fiscal years 2007 and 2005 each contained 52
weeks and fiscal year 2006 contained 53 weeks.
  
 Results
of Operations
  Fiscal
Year Ended December 30, 2007 compared to December 31, 2006
 Net sales
of services for the fiscal year ended December 30, 2007 were $586.7 million,
which represents a 3.3% increase from the $567.8 million in net sales of
services recorded for the year ended December 31, 2006.  Net sales of
services in the Human Capital Management Services segment increased by $26.0
million, or 7.7%, due to an increase in services provided to new and existing
clients.  Management believes such increase is reflective of a trend
for companies to rely increasingly on providers of human capital management
services, such as those provided by the Company’s PrO Unlimited
subsidiary.  In the Staff Augmentation segment, the decrease of $6.8
million, or 3.0%, is principally attributable to the decrease of services
provided to telecom, other staffing and technical services customers, partially
offset by an increase in services provided to information technology and
healthcare support customers.  Our revenues were impacted by a
reduction of business days in 2007 as compared to 2006.  In addition,
the reduction in net sales of services in the telecom sector was due to a
reduction in demand from our largest telecom client.
  Cost of
services for the year ended December 30, 2007 was 84.2% of net sales of services
as compared to cost of services of 84.3% of net sales of services for the year
ended December 31, 2006.  The cost of services as a
percentage
   21
  of net
sales for the year ended December 30, 2007 decreased slightly from the prior
year principally due to higher gross margins as a result of increased consultant
consolidation services provided by the Human Capital Management Services segment
and lower state unemployment rates, partially offset by less favorable workers
compensation claims experience during 2007.
  Selling,
general and administrative expenses as a percentage of net sales of services
were 12.6% for the year ended December 30, 2007, compared to 12.1% for the year
ended December 31, 2006.  The $5.2 million increase in selling,
general and administrative expenses is primarily due to higher personnel and
professional costs incurred to support the increase in consultant consolidation
services provided in the Human Capital Management Services segment discussed
above and additional professional fees and personnel costs associated with
Sarbanes-Oxley compliance.
  Operating
income for the year ended December 30, 2007 was $15.8 million, or 2.7% of net
sales, as compared to operating income of $17.0 million, or 3.0% of net sales,
for the year ended December 31, 2006.  The Company’s operating income
for 2007 is slightly lower than 2006 principally due to an increase in selling,
general, and administrative expenses and less favorable workers compensation
experience discussed above partially offset by an increase in net sales of
services and higher gross margins in Human Capital Management
Services.
  The
Company’s interest expense for the year ended December 30, 2007 was principally
attributable to interest recorded on the PNC Credit Facility, the Convertible
Note and the Senior Notes. The interest expense of $7.7 million for 2007 was
lower as compared to the interest expense of $9.4 million for
2006.  This reduction was principally due to the repurchase and
redemption of $11.2 million of Senior Notes during 2007 and $23.4 million during
2006.  These decreases were partially offset by increased interest
expense on the Company’s revolving line of credit due to higher borrowings in
2007 as compared to 2006.
  As a
result of the redemption and repurchase, the Company recognized a loss on debt
extinguishment of $443,000, including a reduction of $137,000 of deferred
financing costs in 2007.  The Company’s repurchase and redemption of
Senior Notes during 2006 resulted in a loss of $169,000 net of $128,000 of
deferred financing costs.
  The
income tax provision for the year ended December 30, 2007 was $3.3 million (a
rate of 39.9%) on income from continuing operations before income taxes of $8.3
million.   The income tax provision for the year ended December
31, 2006 was $3.4 million (a rate of 45.3%) on income from continuing operations
before income taxes of $7.5 million.  The difference between income
taxes at the federal statutory income tax rate and the Company’s tax provision
for the respective periods relates primarily to state income taxes, as well as a
disallowance for non-deductible expenses and adjustments to tax contingencies
during 2006.  See note 7 to our consolidated financial
statements.  In addition, the Company included a tax deduction of
approximately $1.3 million (a tax benefit of $476,000) when determining its
expected annual effective tax rate for the year ended December 30, 2007 due to
tax benefits expected to be realized upon the dissolution of a subsidiary that
represented one closed branch office.
  In
accordance with SFAS 144, the results of operations from the sale of the
Company’s niche telecom operations (as described in note 19 to our consolidated
financial statements) have been recorded as discontinued
operations.   The net income from discontinued operations was
$1.0 million for the year ended December 30, 2007, which represented the
settlement received in November 2007.  As a result of a capital loss
from this settlement, no provision for income taxes was recorded.
  Fiscal Year Ended December 31, 2006
compared to Fiscal Year Ended December 25, 2005
 Net sales
of services for the year ended December 31, 2006 were $567.8 million, which
represents a 5.2% increase from the $539.8 million in net sales of services
recorded for the year ended December 25, 2005.  Net sales of services
in the Human Capital Management Services segment increased by $26.2 million, or
8.4%, due to an increase in services provided principally to existing
clients.  Management believes such increase is reflective of a trend
for companies to rely increasingly on providers of human capital management
services, such as those provided by the Company’s PrO Unlimited
subsidiary.  In the Staff Augmentation segment, the increase of $2.6
million, or 1.2%, is principally attributable to services provided to
information technology and healthcare customers, partially offset by a reduction
in services provided to telecom and technical services customers.  The
reduction in technical services provided by the Company was principally
attributable to a significant reduction in domestic services provided under
government-related subcontracts and a reduction in the services provided to
other technical service customers.  In
   22
  addition,
net sales of services in the telecom sector were lower due to a reduction in
demand from our largest telecom client.  Sales of services were lower
by $896,000, or 19.2%, in the Financial Outsourcing Services segment,
principally due to a reduction in the number of customers we
service.  Our revenues were favorably impacted by additional business
days during fiscal 2006.
  Cost of
services for the year ended December 31, 2006 was 84.3% of net sales of services
as compared to cost of services of 85.3% of net sales of services for the year
ended December 25, 2005.  The cost of services as a percentage of net
sales for fiscal 2006 decreased from the year ago period principally due to
higher gross margins as a result of increased consultant consolidation services
provided by the Human Capital Management Services segment, higher margins for
healthcare support services in the Staff Augmentation segment and favorable
workers compensation claims experience, partially offset by lower gross margins
for telecom and information technology services.
  Selling,
general and administrative expenses as a percentage of net sales of services
were 12.1% for the year ended December 31, 2006, compared to 11.1% for the year
ended December 25, 2005.  The $8.9 million increase in selling,
general and administrative expenses is primarily due to higher personnel costs
incurred to support the increase in consultant consolidation services provided
in the Human Capital Management Services segment discussed above and an increase
of corporate expenses associated with personnel costs and professional
fees.
  Operating
income for the year ended December 31, 2006 was $17.0 million, or 3.0% of net
sales, as compared to operating income of $15.6 million, or 2.9% of net sales,
for the year ended December 25, 2005.  The Company’s higher operating
income for fiscal 2006 is principally due to an increase in net sales of
services and gross margins in the Human Capital Management Services segment,
partially offset by an increase in selling, general, and administrative expenses
discussed above.
  The
Company’s interest expense for the year ended December 31, 2006 was principally
attributable to interest recorded on the PNC Credit Facility, the Convertible
Note and the Senior Notes. The interest expense of $9.4 million for fiscal 2006
was lower as compared to the interest expense of $10.7 million for fiscal
2005.  This reduction was principally due to the repurchase of $18.1
million of Senior Notes in fiscal 2005 and the repurchase and redemption of
$23.4 million of Senior Notes in fiscal 2006.  These decreases were
partially offset by increased interest expense on the Company’s revolving line
of credit due to higher average interest rates and borrowings in fiscal
2006.
  The
income tax provision for the year ended December 31, 2006 was $3.4 million (a
rate of 45.3%) on income from continuing operations before income taxes of $7.5
million.   For the year ended December 25, 2005, the income tax
benefit of $1.5 million included a tax benefit of $4.3 million from the
resolution of certain federal and state income tax contingencies.  The
difference between income taxes at the federal statutory income tax rate and the
Company’s tax provision for the respective periods relates primarily to state
income taxes and a disallowance for non-deductible expenses and adjustments to
tax contingencies.  See note 7 to our consolidated financial
statements.
  In
accordance with SFAS 144, the results of operations from the sale of the
Company’s niche telecom operations (as described in note 19 to our consolidated
financial statements) have been recorded as discontinued
operations.   The net income from discontinued operations was
$70,000 for the year ended December 25, 2005, which represented the gain from
the sale of discontinued operations for the excess of the cash received from the
sale through December 25, 2005 over the carrying value of the net assets sold,
offset by legal fees.
  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 invoices are typically paid within
40 days.  Increases in the Company’s net sales of services, resulting
from expansion of existing offices or establishment of new offices, will require
additional cash resources.
  Off-Balance Sheet and Contractual
Obligations: As of December 30, 2007, we had no off-balance sheet
arrangements other than operating leases entered into in the normal course of
business, as indicated in the table below.  The following table
represents contractual commitments associated with operating lease agreements,
employment agreements and principal repayments on debt obligations (excluding
interest):
   23
   Payments
      due by fiscal year (in thousands)2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              ThereafterOperating
      Leases
              
              $
              3,029
              
              
              $
              2,734
              
              
              $
              1,737
              
              
              $
              1,054
              
              
              $
              708Employment
      Agreements
              
              
              966
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -PNC
      Credit Facility*- principal repayments
              
              
              -
              
              
              
              -
              
              
              
              70,500
              
              
              
              -
              
              
              
              -Senior
      Notes* - principal repayments
              
              
              -
              
              
              
              -
              
              
              
              11,714
              
              
              
              -
              
              
              
              -Convertible
      Note* - principal repayments
              
              
              -
              
              
              
              1,644
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              3,995
              
              
              $
              4,378
              
              
              $
              83,951
              
              
              $
              1,054
              
              
              $
              708
  *  See
note 8 to our consolidated financial statements.
  COMFORCE,
COI and various of their operating subsidiaries, as co-borrowers and guarantors,
are parties to the $110.0 million PNC Credit Facility with PNC, as a lender and
administrative agent, and other financial institutions participating as lenders
to provide for a revolving line of credit with available borrowings based,
generally, on 87.0% of the Company’s accounts receivable aged 90 days or less,
subject to specified limitations and exceptions.  The Company entered
into the PNC Credit Facility in June 2003 and it has been subject to seven
amendments.
  The
obligations under the PNC Credit Facility are collateralized by a pledge of the
capital stock of certain key operating subsidiaries of the Company and by
security interests in substantially all of the assets of the Company. The PNC
Credit Facility contains various financial and other covenants and conditions,
including, but not limited to, a prohibition on paying cash dividends and
limitations on engaging in affiliate transactions, making acquisitions and
incurring additional indebtedness.  The maturity date of the PNC
Credit Facility is July 24, 2010.  The Company was in compliance with
all covenants under the PNC Credit Facility at December 30, 2007.
  The
Company also had standby letters of credit outstanding under the PNC Credit
Facility at December 30, 2007 in the aggregate amount of $4.5
million.
  During
2007, the Company’s primary sources of funds were $12.8 million provided by its
operating activities due to the profitability of the Company and changes in
working capital.  The Company also used cash of $4.4 million in
investing activities due to the purchases of property and equipment, partially
offset by cash proceeds of $1.0 million from the settlement relating to sale of
its niche telecom operations (see note 19 to our consolidated financial
statements).  In addition, the cash used in financing activities of
$6.5 million is primarily a result of increased borrowings of $5.1 million under
the PNC Credit Facility, more than offset by $11.5 million used for the
redemption and repurchase of Senior Notes.
  At
December 30, 2007, the Company also had outstanding (i) $11.7 million principal
amount of Senior Notes bearing interest at 12% per annum and (ii) $1.6 million
principal amount of Convertible Notes bearing interest at 8% per
annum.  As described in note 8 to the
Company’s  consolidated financial statements, on June 28, 2007, COI
redeemed $10.0 million principal amount of Senior Notes at a redemption price of
$10.4 million (including accrued interest), and on December 13, 2007, COI
repurchased $1.2 million principal amount of Senior Notes for $1.2 million
(including accrued interest).  The Company used loan proceeds under
the PNC Credit Facility to pay the entire redemption and repurchase prices of
these Senior Notes.  At December 30, 2007, the Company had outstanding
$70.5 million principal amount under the PNC Credit Facility bearing interest at
a weighted average rate of 6.9% per annum.  At such date, the Company
had remaining availability of up to $10.0 million, as defined in the agreement,
under the PNC Credit Facility.
  The
Company has made significant progress in improving its capital structure through
the elimination of long-term debt through the repurchase, redemption or exchange
of Senior Notes, Convertible Notes and other instruments.  Since June
2000, the Company has reduced its public debt from $138.8 million to $11.7
million and its total long-term debt from $195.3 million to $83.9 million during
the same period.  The Company has reduced its annualized interest
expense by borrowing at the lower rates available under the PNC Credit Facility
to effectuate the repurchase or
   24
  redemption
of long-term debt and by exchanging preferred stock and lower interest rate
Convertible Notes for public debt.
  Substantially
all of the consolidated net assets of the Company are assets of COI and all of
the net income that had been generated by the Company was attributable to the
operations of COI.  Except for permitted distributions, these assets
and any cumulated net income are restricted as to their use by
COMFORCE.  The Indenture 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 to upstream $2.0 million annually to pay
public company expenses, and to upstream funds to the extent COI meets the
restricted payments test under the Indenture, the most significant component of
which is based upon 50% of net income generated by COI since January 1, 1998 on
a cumulative basis, less prior distributions made in reliance on this
provision.   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.  Principally as a result of distributions made, and losses
incurred by COI in prior years, COI can make no distributions to COMFORCE based
upon the cumulative net income provisions of the Indenture until COI generates
additional net income of approximately $5.4 million.  However,
COMFORCE has approximately $1.9 million available at December 30, 2007 from
proceeds it has generated from the sale of stock, principally upon the exercise
of options and warrants. This $1.9 million may be used by COMFORCE to pay
interest and principal on the Convertible Notes or for other business
purposes.
  The
Company’s Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of
7.5% per annum and, at December 30, 2007 there were cumulated, unpaid and
undeclared dividends of $2.2 million on the Series 2003A Preferred Stock,
$163,000 on the Series 2003B Preferred Stock and $1.6 million on the Series
2004A Preferred Stock.  If such dividends and underlying instruments
were converted to voting or non-voting common stock, the aggregate amount would
equal 14.1 million shares at December 30, 2007 (as compared to 13.3 million
shares at December 31, 2006).
  Management
of the Company believes that cash flow from operations and funds anticipated to
be available under the PNC Credit Facility will be sufficient to service the
Company’s indebtedness and to meet currently anticipated working capital
requirements for the next 12 months.  The Company was in compliance
with all covenants under the PNC Credit Facility at December 30, 2007 and
expects to remain in compliance for the next 12 months.
  The
Company is currently undergoing audits for certain state and local tax
returns.  The results of these audits are not expected to have a
material effect upon the results of operations.
  In 2006,
COMFORCE Technical Services, Inc. (“CTS”) entered into a contract with a United
States government agency (the “Agency”) to provide technical, operational and
professional services in foreign countries throughout the world for humanitarian
purposes.  Persons employed by CTS in the host countries include US
nationals, nationals of the host countries (local nationals) and nationals of
other countries (third country nationals). The contract provides, generally,
that the U.S. government will reimburse the Company for all direct labor
properly chargeable to the contract plus fringe benefits, in some cases at
specified rates and profit.  Although not anticipated, the amount of
foreign payroll taxes and other taxes related to these employees could
potentially exceed the amount available to us from our own resources or under
the PNC Credit Facility.  See note 12 of our consolidated financial
statements.
  Critical Accounting Policies and
Estimates
 
 Management’s
discussion in this Item 7 addresses the Company’s consolidated financial
statements which have been prepared in conformity with accounting principles
generally accepted in the United States.  The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses reported in
those financial statements.  These judgments can be subjective and
complex, and consequently actual results could differ from those estimates. A
discussion of the more significant estimates follows.  Management has
discussed the development, selection and disclosure of these estimates and
assumptions with the Audit Committee of the Board of Directors.
   25
  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 customers.  After
giving due consideration to these factors, the Company establishes specific
allowances for uncollectible accounts.  The allowance for the funding
and service fee receivables is calculated with consideration for the ability of
the Company’s clients to absorb chargebacks due to the uncollectibility of the
funded receivables. Bad debt expense, which increases the allowance for doubtful
accounts, is recorded as an operating expense in our consolidated statements of
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.
  Accrued
Workers Compensation Liability
  The
Company records its estimate of the ultimate cost of, and liabilities for,
workers compensation based on actuarial computations using the Company's loss
history as well as industry statistics.  Furthermore, in determining
its liabilities, the Company includes amounts for estimated claims incurred but
not reported.  The ultimate cost of workers compensation will depend
on actual costs incurred to settle the claims and may differ from the
liabilities recorded for those claims.
  Accruals
for workers compensation claims are included in accrued expenses in our
consolidated balance sheets.  A significant increase in claims or
changes in laws may require the Company to record additional expenses related to
workers compensation.  On the other hand, significantly improved claim
experience may result in lower annual expense levels.
  Income
Taxes
  Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and net
operating loss and tax credit carryforwards.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  The Company records a valuation allowance
against deferred tax assets for which realization of the asset is not considered
more-likely-than-not.
  Management’s
judgment is required in determining the realizability of the deferred tax assets
and liabilities, and any valuation allowances recorded.  The net
deferred tax assets may need to be adjusted in the event that tax rates are
modified, or management’s estimates of future taxable income change, such that
deferred tax assets or liabilities are expected to be recovered or settled at a
different tax rate than currently estimated. In addition, valuation allowances
may need to be adjusted in the event that management’s estimate of future
taxable income changes from the amounts currently estimated.
  The
Company provides for income taxes on a quarterly basis based upon an estimated
annual effective tax rate.  In determining this rate, management
estimates taxable income for each of the jurisdictions where the Company
operates, as well as the tax rate that will be in effect for each state and
foreign country.  To the extent these estimates change during the
year, or that actual results differ from these estimates, the estimated annual
tax rate may change between quarterly periods and may differ from the actual
effective tax rate for the year.
  Goodwill
Impairment
  The
Company is required to test goodwill for impairment in accordance with the
provisions of SFAS 142 as of the end of each fiscal year or earlier during each
fiscal year as circumstances require.  In connection with these
goodwill tests, the Company engages an independent valuation firm to assist
management in the determination of the fair values of its reporting units (as
defined by SFAS 142).  In its determination of the fair values, the
firm engaged by the Company primarily utilizes a discounted cash flow analysis
as well as various other valuation approaches, including (i)
   26
  capitalization
multiples of companies with investment characteristics resembling those of the
reporting units, (ii) the enterprise value of the Company, and (iii) asset and
liability structure.
  Significant
assumptions used in this analysis include (i) expected future revenue growth
rates, operating unit profit margins, and working capital levels, (ii) a
discount rate, and (iii) a terminal value multiple.  The revenue
growth rates, working capital levels and operating unit profit margins are based
on management’s expectation of future results.  If management’s
expectations of future operating results change, or if there are changes to
other assumptions, the estimate of the fair value of the Company’s reporting
units could change significantly.  Such a change could result in
additional goodwill impairment charges in future periods, which could have a
significant impact on the Company’s consolidated financial
statements.
  Share-based
Payment
  With our
adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment(“SFAS No. 123(R)”), effective December 26,
2005, we are required to record the fair value of share-based payment awards as
an expense.  In order to determine the fair value of stock options on
the date of grant, the Company utilizes the Black-Scholes option-pricing
model.  Inherent in this model are assumptions related to expected
stock price volatility, option life, risk-free interest rate and dividend
yield.  Expected volatilities are based on historical volatility of
our shares using daily price observations over a period consistent with the
expected life.  For options granted in fiscal 2006 and later, we use
the safe harbor guidance in SAB 107 to estimate the expected life of
options.  The risk-free rate is based on the U.S. Treasury yield curve
in effect at the time of grant for periods similar to the expected
life.  While the risk-free interest rate and dividend yield are less
subjective assumptions that, typically, are based on factual data derived from
public sources, the expected stock price volatility and option life assumptions
require a greater level of judgment which makes them critical accounting
estimates.
  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 and IT services has historically been
lower during the second half of the fourth quarter through the following second
quarter, and, generally shows gradual improvement until the second half of the
fourth quarter.
  Forward
Looking Statements
  We have
made statements under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under this Item 2, as well as in
other sections of this report that are forward-looking statements.  In
some cases, you can identify these statements by forward-looking words such as
“may,” “might,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “forecasts,” “projects,” “predicts,” “intends,”
“potential,” “continue,” the negative of these terms and other comparable
terminology.  These forward-looking statements, which are subject to
risks, uncertainties and assumptions about us, may include projections of our
future financial performance, our anticipated growth strategies and anticipated
trends in our business and industry. These statements are only predictions based
on our current expectations and projections about future events.
  Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee our future results, level of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of any of these forward-looking
statements. We undertake no obligation to update any of these forward-looking
statements after the date of this report to conform our prior statements to
actual results or revised expectations.
  Factors
which may cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements include the following:
  ·
              unfavorable
      global, national or local economic conditions that cause our customers to
      defer hiring contingent workers or reduce spending on the human capital
      management services and staffing that we
  provide;
   27
  ·
              significant
      increases in the effective rates of any payroll-related costs that we are
      unable to pass on to our customers;
  ·
              increases
      in the costs of complying with the complex federal, state and foreign laws
      and regulations in which we operate, or our inability to comply with these
      laws and regulations;
  ·
              our
      inability to collect fees due to the bankruptcy of our customers,
      including the amount of any wages we have paid to our employees for work
      performed for these customers;
  ·
              our
      inability to keep pace with rapid changes in technology in our
      industry;
  ·
              potential
      losses relating to the placement of our employees in other workplaces,
      including our employees’ misuse of customer proprietary information,
      misappropriation of funds, discrimination, harassment, theft of property,
      accidents, torts or other claims;
  ·
              increases
      in interest rates, which could significantly increase our interest expense
      under the PNC Credit Facility;
  ·
              our
      inability to successfully develop new services or enhance our existing
      services as the markets in which we compete grow more
      competitive;
  ·
              unfavorable
      developments in our business may result in the necessity of writing off
      goodwill in future periods;
  ·
              as
      a result of covenants and restrictions in the agreements governing the
      Senior Notes, the PNC Credit Facility or any future debt instruments, our
      inability to use available cash in the manner management believes will
      maximize stockholder value;
  ·
              unfavorable
      press or analysts’ reports concerning our industry or our company could
      negatively affect the perception investors have of our company and our
      prospects; or
  ·
              any
      of the other factors described under “Risk Factors” in Item 1A of this
      report.
  ITEM 7A.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
 
 A portion
of the Company’s borrowings are fixed rate obligations, including $11.7 million
principal amount of Senior Notes bearing interest at a fixed rate of 12% per
annum, and $1.6 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 30, 2007 was $11.8 million for the Senior Notes,
and $1.8 million for the Convertible Notes.  Management of the Company
does not believe that a 10% increase in interest rates would have a material
impact on the fair value of these fixed rate obligations.  Borrowings
under the PNC Credit Facility aggregating $70.5 million at December 30, 2007 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 6.9% the impact to the Company in annualized interest
expense would be approximately $487,000.  The Company has not entered
into any swap agreements or other hedging transactions as a means of limiting
exposure to interest rate or foreign currency fluctuations.  The
Company provides its services in several countries; however, based upon the
current level of investments in these countries, it does not believe that a 10%
change in foreign currency rates would have a material impact to its financial
position.
 
  ITEM 8.FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
  Financial
Statements and Schedule as listed on page F-1.
   28
 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  None.
  ITEM
9A(T).   CONTROLS AND PROCEDURES
 
  Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting.  The Company’s internal control over
financial reporting includes policies and procedures pertaining to the Company’s
ability to record, process, and report reliable information.  The
Company’s internal control system is designed to provide reasonable assurance to
the Company’s management and Board of Directors regarding the preparation and
fair presentation of the Company’s published financial statements.
  The
Company’s management assessed the effectiveness of internal control over
financial reporting as of December 30, 2007.  In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated
Framework.  Based on this assessment, the Company’s management
concluded that, as of December 30, 2007, the Company’s internal control over
financial reporting is effective based on those criteria.
  This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
  During
the Company’s fiscal quarter ended December 30, 2007, there were no changes
in the Company’s internal controls over financial reporting that have materially
and adversely affected, or are reasonably likely to materially and adversely
affect the Company’s internal control over financial reporting.
  ITEM
9B.   OTHER INFORMATION
 
 None.
  
 
 
 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 28, 2008 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 28, 2008 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 28, 2008 and is incorporated by reference herein.
 
  29
  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 28, 2008 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 28, 2008 and is incorporated by reference herein.
 
 PART
IV
 
 ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (a)           Financial
Statements
  1.
                Financial
      Statements as listed on page F-1.2.
                Financial
      Statement Schedule listed on page F-1.3.
                Exhibits
      as listed on the Exhibit
Index.
 
 (b)            Exhibits
 
 The exhibits filed
herewith are listed on the Exhibit Index.
 
 (c)           Other
Financial Statement Schedules
 
 None
 
 A
copy of this annual report on Form 10-K will accompany the Company’s proxy
statement and be posted on the Company’s website:
www.comforce.com.   In addition, the Company will provide to
stockholders upon request, without charge, copies of the exhibits to the annual
report.  Requests should be submitted to Linda Annicelli, Vice
President, Administration, at COMFORCE Corporation, 415 Crossways Park Drive,
P.O. Box 9006, Woodbury, New York 11797.
  
  30
  
 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
      CorporationBy:
              /s/
      John C. FanningJohn
      C. FanningChairman
      and Chief Executive Officer
 
 Date:  March
20, 2008
 
  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
      20, 2008/s/
              Harry
      V. MaccarroneHarry
      V. Maccarrone
              
              Executive
      Vice President and Director (Principal Financial and Accounting
      Officer)
              
              March
      20, 2008/s/
              Rosemary
      ManiscalcoRosemary
      Maniscalco
              
              Vice
      Chairman and Director
              
              March
      20, 2008/s/
              Daniel
      RaynorDaniel
      Raynor
              
              Director
              
              March
      20, 2008/s/
              Gordon
      RobinettGordon
      Robinett
              
              Director
              
              March
      20, 2008/s/
              Kenneth
      J. DaleyKenneth
      J. Daley
              
              Director
              
              March
      20, 2008/s/
              Pierce
      J. FlynnPierce
      J. Flynn
              
              Director
              
              March
      20, 2008
  31





COMFORCE
CORPORATION AND SUBSIDIARIES









Table
of Contents









Report
      of Independent Registered Public Accounting Firm
            
            F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of December 30, 2007 and December 31,
    2006
            
            F-3Consolidated
      Statements of Income for the fiscal years ended December 30, 2007,
      December 31, 2006 and December 25, 2005
            
            F-4Consolidated
      Statements of Stockholders’ Deficit and Comprehensive Income for the
      fiscal years ended December 30, 2007, December 31, 2006 and December 25,
      2005
            
            F-5Consolidated
      Statements of Cash Flows for the fiscal years ended December 30, 2007,
      December 31, 2006 and December 25, 2005
            
            F-6Notes
      to Consolidated Financial Statements
            
            F-7Schedule:Schedule
      II -- Valuation and Qualifying Accounts
            
            F-28










F-1










Report of Independent
Registered Public Accounting Firm




The Board
of Directors and Stockholders


COMFORCE
Corporation:




We have
audited the accompanying consolidated balance sheets of COMFORCE Corporation and
subsidiaries, as of December 30, 2007 and December 31, 2006, and the related
consolidated statements of income, stockholders’ deficit and comprehensive
income, and cash flows for each of the fiscal years in the three-year period
ended December 30, 2007, and the related financial statement schedule listed in
Item 15 (a)(2).  These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of COMFORCE Corporation and
subsidiaries as of December 30, 2007 and December 31, 2006, and the results of
their operations and their cash flows for each of the fiscal years in the
three-year period ended December 30, 2007.  Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.




As
discussed in Note 2 to the accompanying consolidated financial statements, the
Company (i) adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes- an
Interpretation of FASB Statement No. 109, “Accounting for Income Taxes,”
effective January 1, 2007, (ii) changed its method of quantifying errors in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements, effective December 31, 2006, and (iii) adopted
Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment,
effective December 26, 2005.












/s/ KPMG
LLP


Melville,
New York


March 20,
2008






F-2
  COMFORCE
CORPORATION AND SUBSIDIARIES
 
 Consolidated
Balance Sheets
 December
30, 2007 and December 31, 2006
 (in
thousands, except share and per share amounts)
 
 December
      30,
              
              
              December
      31,Assets
              
              2007
              
              
              2006Current
      assets:Cash
      and cash equivalents
              
              $
              6,654
              
              
              
              3,782Accounts
      receivable, less allowance of $129
      in 2007 and $195 in 2006
              
              
              118,163
              
              
              
              114,079Funding
      and service fees receivable, less allowance of $44
      in 2007 and $81 in 2006
              
              
              13,101
              
              
              
              13,170Prepaid
      expenses and other current assets
              
              
              4,408
              
              
              
              3,863Deferred
      income taxes, net
              
              
              388
              
              
              
              1,500Total
      current assets
              
              
              142,714
              
              
              
              136,394Deferred
      income taxes, net
              
              
              164
              
              
              
              263Property
      and equipment, net
              
              
              7,723
              
              
              
              5,376Deferred
      financing costs, net
              
              
              480
              
              
              
              765Goodwill
              
              
              32,073
              
              
              
              32,073Other
      assets, net
              
              
              230
              
              
              
              267Total
      assets
              
              $
              183,384
              
              
              
              175,138Liabilities
      and Stockholders’ DeficitCurrent
      liabilities:Accounts
      payable
              
              $
              2,376
              
              
              
              3,281Accrued
      expenses
              
              
              105,825
              
              
              
              100,768Total
      current liabilities
              
              
              108,201
              
              
              
              104,049Long-term
      debt (including related party debt of $1,644 in 2007 and $1,520 in
      2006)
              
              
              83,858
              
              
              
              89,770Other
      liabilities
              
              
              828
              
              
              
              34Total
      liabilities
              
              
              192,887
              
              
              
              193,853Commitments
      and contingenciesStockholders’
      deficit:Common
      stock, $.01 par value; 100,000,000 shares authorized, 17,387,553 and
      17,370,551 shares issued and outstanding in 2007 and 2006,
      respectively
              
              
              174
              
              
              
              174Convertible
      preferred stock, $.01 par value:Series
      2003A, 6,500 shares authorized, 6,148 shares issued and outstanding at
      December 30, 2007 and December 31, 2006, with an aggregate liquidation
      preference of $8,389 at December 30, 2007 and $7,928 at December 31,
      2006
              
              
              4,304
              
              
              
              4,304Series
      2003B, 3,500 shares authorized, 513 shares issued and outstanding at
      December 30, 2007 and December 31, 2006, with an aggregate liquidation
      preference of $676 at December 30, 2007 and $638 at December 31,
      2006
              
              
              513
              
              
              
              513Series
      2004A, 15,000 shares authorized, 6,737 shares issued and outstanding at
      December 30, 2007 and December 31, 2006, with an aggregate liquidation
      preference of $8,284 at December 30, 2007 and $7,778 at December 31,
      2006
              
              
              10,264
              
              
              
              10,264Additional
      paid-in capital
              
              
              48,356
              
              
              
              48,190Accumulated
      other comprehensive income
              
              
              (256
              )
              
              
              55Accumulated
      deficit
              
              
              (72,858
              )
              
              
              (82,215
              )Total
      stockholders’ deficit
              
              
              (9,503
              )
              
              
              (18,715
              )Total
      liabilities and stockholders’ deficit
              
              $
              183,384
              
              
              
              175,138
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.


F-3
 COMFORCE
CORPORATION AND SUBSIDIARIES
  Consolidated
Statements of Income
 For the
fiscal years ended December 30, 2007, December 31, 2006 and December 25,
2005
 (in
thousands, except per share amounts)
    December
      30,
                
                
                December
      31,
                
                
                December
      25,2007
                
                
                2006
                
                
                2005Net
      sales of services
                
                $
                586,685
                
                
                
                567,821
                
                
                
                539,841Costs
      and expenses:Cost
      of services
                
                
                494,104
                
                
                
                478,927
                
                
                
                460,581Selling,
      general and administrative expenses
                
                
                74,012
                
                
                
                68,821
                
                
                
                59,919Depreciation
      and amortization
                
                
                2,803
                
                
                
                3,095
                
                
                
                3,700Total
      costs and expenses
                
                
                570,919
                
                
                
                550,843
                
                
                
                524,200Operating
      income
                
                
                15,766
                
                
                
                16,978
                
                
                
                15,641Other
      income (expense):Interest
      expense
                
                
                (7,669
                )
                
                
                (9,369
                )
                
                
                (10,744
                )Loss
      on debt extinguishment
                
                
                (443
                )
                
                
                (169
                )
                
                
                (336
                )Other
      income, net
                
                
                644
                
                
                
                11
                
                
                
                186(7,468
                )
                
                
                (9,527
                )
                
                
                (10,894
                )Income
      from continuing operations before income taxes
                
                
                8,298
                
                
                
                7,451
                
                
                
                4,747Provision
      (benefit) for income taxes
                
                
                3,309
                
                
                
                3,373
                
                
                
                (1,455
                )Income
      from continuing operations
                
                
                4,989
                
                
                
                4,078
                
                
                
                6,202Income
      from discontinued operations, net of tax benefits of
      $0 in 2007 and $19 in 2005, respectively
                
                
                1,000
                
                
                
                -
                
                
                
                70Net
      income
                
                $
                5,989
                
                
                
                4,078
                
                
                
                6,272Dividends
      on preferred stock
                
                
                1,005
                
                
                
                1,005
                
                
                
                1,005Net
      income available to common stockholders
                
                $
                4,984
                
                
                
                3,073
                
                
                
                5,267Basic
      income per common share:Income
      from continuing operations
                
                $
                0.23
                
                
                
                0.18
                
                
                
                0.31Income
      from discontinued operations
                
                
                0.06
                
                
                
                -
                
                
                
                -Net
      income
                
                $
                0.29
                
                
                
                0.18
                
                
                
                0.31Diluted
      income per common share:Income
      from continuing operations
                
                $
                0.16
                
                
                
                0.13
                
                
                
                0.21Income
      from discontinued operations
                
                
                0.03
                
                
                
                -
                
                
                
                -Net
      income
                
                $
                0.19
                
                
                
                0.13
                
                
                
                0.21Weighted
      average common shares outstanding, basic
                
                
                17,385
                
                
                
                17,317
                
                
                
                16,907Weighted
      average common shares outstanding, diluted
                
                
                31,870
                
                
                
                31,012
                
                
                
                29,793The
      accompanying notes are an integral part of these consolidated financial
      statements.
  F-4
  COMFORCE
CORPORATION AND SUBSIDIARIES
 
 Consolidated
Statements of Stockholders' Deficit and Comprehensive Income
 Fiscal
years ended December 30, 2007 , December 31, 2006 and December 25,
2005
 (in
thousands, except share amounts)
 Common
      stock
                
                
                Preferred
      stockShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Additionalpaid-incapital
                
                
                AccumulatedOther ComprehensiveIncome
      (Loss)
                
                
                AccumulatedDeficit
                
                
                Totalstockholders'deficitBalance
      at December 26, 2004
                
                
                16,689,496
                
                
                $
                167
                
                
                
                13,398
                
                
                $
                15,081
                
                
                $
                47,193
                
                
                $
                153
                
                
                $
                (92,429
                )
                
                $
                (29,835
                )Comprehensive
      income :Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,272
                
                
                
                6,272Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6
                )
                
                
                -
                
                
                
                (6
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,266Exercise
      of stock options
                
                
                390,000
                
                
                
                4
                
                
                
                -
                
                
                
                -
                
                
                
                490
                
                
                
                -
                
                
                
                -
                
                
                
                494Issuance
      of common stock
                
                
                36
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Stock
      compensation expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                30
                
                
                
                -
                
                
                
                -
                
                
                
                30Beneficial
      conversion feature attributable to 8% Notes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                14
                
                
                
                -
                
                
                
                -
                
                
                
                14Balance
      at December 25, 2005
                
                
                17,079,532
                
                
                
                171
                
                
                
                13,398
                
                
                
                15,081
                
                
                
                47,727
                
                
                
                147
                
                
                
                (86,157
                )
                
                
                (23,031
                )Cumulative
      effect of adjustments resulting from the adoption of SAB No. 108, net of
      tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (136
                )
                
                
                (136
                )Adjusted
      balance at December 26, 2005
                
                
                17,079,532
                
                
                
                171
                
                
                
                13,398
                
                
                
                15,081
                
                
                
                47,727
                
                
                
                147
                
                
                
                (86,293
                )
                
                
                (23,167
                )Comprehensive
      income :Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,078
                
                
                
                4,078Foreign
      currency translation adjustment, net of tax of $35
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (92
                )
                
                
                -
                
                
                
                (92
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,986Exercise
      of stock options
                
                
                290,628
                
                
                
                3
                
                
                
                -
                
                
                
                -
                
                
                
                341
                
                
                
                -
                
                
                
                -
                
                
                
                344Issuance
      of common stock
                
                
                391
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Share-based
      payment compensation expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                98
                
                
                
                -
                
                
                
                -
                
                
                
                98Beneficial
      conversion feature attributable to 8% Notes, net of tax of
    $36
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24
                
                
                
                -
                
                
                
                -
                
                
                
                24Balance
      at December 31, 2006
                
                
                17,370,551
                
                
                
                174
                
                
                
                13,398
                
                
                
                15,081
                
                
                
                48,190
                
                
                
                55
                
                
                
                (82,215
                )
                
                
                (18,715
                )Comprehensive
      income :Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,989
                
                
                
                5,989Adoption
      of FASB Interpretation No. 48
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,368
                
                
                
                3,368Foreign
      currency translation adjustment, net of tax of $199
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (311
                )
                
                
                
                
                
                
                (311
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                9,046Exercise
      of stock options, including excess tax benefit of $5
                
                
                17,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                30
                
                
                
                -
                
                
                
                -
                
                
                
                30Issuance
      of common stock
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Share-based
      payment compensation expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                90
                
                
                
                -
                
                
                
                -
                
                
                
                90Beneficial
      conversion feature attributable to 8% Notes, net of tax of
    $3
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                46
                
                
                
                -
                
                
                
                -
                
                
                
                46Balance
      at December 30, 2007
                
                
                17,387,553
                
                
                $
                174
                
                
                
                13,398
                
                
                $
                15,081
                
                
                $
                48,356
                
                
                $
                (256
                )
                
                $
                (72,858
                )
                
                $
                (9,503
                )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.


F-5


COMFORCE
CORPORATION AND SUBSIDIARIES




Consolidated
Statements of Cash Flows Fiscal
years ended December 30, 2007, December 31, 2006 and December 25,
2005


(in
thousands)





December
      30,
            
            
            December
      31,
            
            
            December
      25,2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      income
            
            $
            5,989
            
            
            
            4,078
            
            
            
            6,272Adjustments
      to reconcile net income to net
      cash provided by operating activities:Depreciation
      and amortization of property and equipment
            
            
            2,803
            
            
            
            3,055
            
            
            
            3,659Amortization
      of intangible assets
            
            
            –
            
            
            
            40
            
            
            
            41Amortization
      of deferred financing costs
            
            
            204
            
            
            
            386
            
            
            
            525Net recoveries
      of bad debts
            
            
            (103
            )
            
            
            (8
            )
            
            
            (236
            )Deferred
      income taxes
            
            
            1,413
            
            
            
            1,357
            
            
            
            581Interest
      expense paid by the issuance of convertible notes
            
            
            124
            
            
            
            115
            
            
            
            106Gain
      from sale of discontinued niche telecom operations
            
            
            (1,000
            )
            
            
            –
            
            
            
            (101
            )Loss
      on repurchase of Senior Notes
            
            
            443
            
            
            
            169
            
            
            
            336Loss
      on disposal of fixed assets
            
            
            –
            
            
            
            48
            
            
            
            –Equity-based
      consulting expense
            
            
            –
            
            
            
            –
            
            
            
            30Share-based
      payment compensation expense
            
            
            90
            
            
            
            98
            
            
            
            –Excess
      tax benefit from stock option exercises
            
            
            (5
            )
            
            
            (135
            )
            
            
            152Changes
      in assets and liabilities:Accounts,
      funding and service fees receivable
            
            
            (3,606
            )
            
            
            (7,874
            )
            
            
            (26,416
            )Prepaid
      expenses and other assets
            
            
            466
            
            
            
            1,016
            
            
            
            (1,863
            )Income
      taxes receivable
            
            
            (121
            )
            
            
            37
            
            
            
            97Accounts
      payable and accrued expenses
            
            
            6,124
            
            
            
            12,343
            
            
            
            23,912Net
      cash provided by operating activities
            
            
            12,821
            
            
            
            14,725
            
            
            
            7,095Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (4,427
            )
            
            
            (3,219
            )
            
            
            (2,626
            )Net
      cash used in investing activities
            
            
            (4,427
            )
            
            
            (3,219
            )
            
            
            (2,626
            )Net
      cash provided by discontinued investing activities
            
            
            1,000
            
            
            
            –
            
            
            
            225Cash
      flows from financing activities:Net
      borrowings under line of credit agreements
            
            
            5,140
            
            
            
            7,283
            
            
            
            6,559Repurchases
      of Senior Notes
            
            
            (11,482
            )
            
            
            (23,461
            )
            
            
            (18,258
            )Debt
      financing costs
            
            
            (13
            )
            
            
            (368
            )
            
            
            (76
            )Excess
      tax benefit from stock option exercises
            
            
            5
            
            
            
            135
            
            
            
            –Proceeds
      from exercise of stock options
            
            
            25
            
            
            
            209
            
            
            
            342Repayments
      under capital lease obligations
            
            
            (152
            )
            
            
            (6
            )
            
            
            (115
            )Net
      cash used in financing activities
            
            
            (6,477
            )
            
            
            (16,208
            )
            
            
            (11,548
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            2,917
            
            
            
            (4,702
            )
            
            
            (6,854
            )Effect
      of exchange rates on cash
            
            
            (45
            )
            
            
            67
            
            
            
            38Cash
      and cash equivalents, beginning of fiscal year
            
            
            3,782
            
            
            
            8,417
            
            
            
            15,233Cash
      and cash equivalents, end of fiscal year
            
            $
            6,654
            
            
            
            3,782
            
            
            
            8,417Supplemental
      cash flow information:Cash
      paid during the fiscal year for:Interest
            
            $
            7,651
            
            
            
            9,333
            
            
            
            10,367Income
      taxes
            
            
            2,317
            
            
            
            3,650
            
            
            
            1,136Supplemental
      schedule of significant non-cash investing
      and financing activities:Capital
      lease obligations incurred for the purchase
      of new equipment
            
            
            723
            
            
            
            –
            
            
            
            –




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





F-6





(1)
              Basis
      of Presentation
  COMFORCE
Corporation (“COMFORCE”) is a provider of outsourced staffing management
services that enable Fortune 1000 companies and other large employers to
consolidate, automate and manage staffing, compliance and oversight processes
for their contingent workforces.  The Company also provides specialty
staffing, consulting and other outsourcing services to Fortune 1000 companies
and other large employers for their healthcare support services, technical and
engineering, information technology, telecommunications and other staffing
needs.
  COMFORCE
Operating, Inc. (“COI”), a wholly-owned subsidiary of COMFORCE, was formed for
the purpose of facilitating certain of the Company’s financing transactions in
November 1997.  Unless the context otherwise requires, the term the
“Company” refers to COMFORCE, COI and all of their direct and indirect
subsidiaries, all of which are wholly-owned.
  
 (2)
              Summary
      of Significant Accounting Policies
  Fiscal
Year
  The
Company’s fiscal year consists of the 52 or 53 weeks ending on the last Sunday
in December.  The Company’s most recently completed fiscal year ended
on December 30, 2007.  Fiscal years 2007 and 2005 each contained 52
weeks and fiscal year 2006 contained 53 weeks.
  Principles
of Consolidation
  The
consolidated financial statements include the accounts of COMFORCE, COI and
their subsidiaries, all of which are wholly-owned.  All significant
intercompany accounts and transactions have been eliminated in
consolidation.
  Revenue
Recognition
  The
Company provides supplemental staff to its customers under arrangements that
typically require supervision by the customers’ management for a period of
time.  In these arrangements, the Company is solely responsible for
employees engaged to provide services to a customer.  The Company is
the sole employer of record, pays the employees’ wages, pays unemployment taxes
and workers compensation insurance premiums, provides health insurance and other
benefits to eligible employees, and is responsible for paying all related
taxes.  The Company enters into service agreements with its customers,
negotiates the terms of the services, including pricing, and bears the credit
risk relative to customer payments.  The Company bills its customers
for these services with payment generally due upon receipt of the
invoice.  Revenue under these arrangements is recognized upon the
performance of the service by the Company’s employees.  The associated
payroll costs are recorded as cost of sales.  There is no right of
cancellation or refund provisions in these arrangements and the Company has no
further obligations once the services are rendered by the employee.
 
 The
Company’s contingent staffing management services enable customers to manage the
selection, procurement and supervision of contingent staffing suppliers through
its web-enabled proprietary and third party software, and include providing
Company operating and support personnel to assist customers.  The
Company does not sell or license its software to customers, but rather utilizes
it in connection with providing services.  Consultant consolidation
services, provided as a component of contingent staffing management services,
comprise the management of invoicing for a customer’s multiple services
providers that results in the consolidation of invoices for all of a customer’s
individual staffing vendors.  The Company recognizes revenue for the
amount of its fees for these services, which are determined as a percentage of
the gross billings to customers from the contingent staffing suppliers, as the
services are performed.  The Company invoices its customers for its
fees together with the billings from the contingent staffing suppliers, which
are reflected in accounts receivable as there is no right of offset with the
liabilities
  F-7
  for
amounts due the contingent staffing suppliers.  Amounts invoiced
related to contingent staffing supplier billings are included in accrued
expenses and are settled after our collection of the related
receivables.
 
 A portion
of the Company’s revenue is attributable to license agreements.  Under
the terms of such license agreements, the Company is fully responsible for the
payment of the employees.  The Company submits all invoices for
services performed to the customers and they are required to remit their
payments for services performed directly to the Company.  The Company
includes these revenues and related direct costs in its net sales of services
and cost of services on a gross basis.  The net distribution to the
licensee is based on a percentage of gross profit generated.  The net
distributions to licensees included in selling, general and administrative
expenses for the fiscal years ended December 30, 2007, December 31, 2006 and
December 25, 2005 were approximately $2,147,000, $2,519,000 and $2,772,000,
respectively.
 
 The
Company provides back office support to unaffiliated independently owned
staffing companies.  These arrangements typically require the Company
to process the payrolls and invoicing for these unaffiliated staffing companies
through the use of the Company’s information technology system.  In
return, these unaffiliated staffing companies (the Company’s customers) pay the
Company a fixed percentage of the weekly billings it processed for
them.  Payment of the Company’s fees is due upon the completion of the
processing of weekly payrolls and invoicing.  Revenue is recognized
over the period as the Company performs these services for the amount of the
fixed fee the Company receives as stipulated in the applicable
contract.  There is no right of cancellation or refund provisions in
these arrangements and the Company has no further obligations once the services
are rendered.
 
 The
Company also provides funding services to unaffiliated independently owned
staffing companies.   These arrangements typically require the
Company to advance funds to these unaffiliated staffing companies (the Company’s
customers) in exchange for the receivables related to invoices remitted to their
clients for services performed during the prior week.  The advances
are repaid through the remittance of payments of receivables by their clients
directly to the Company.  The Company withholds from these advances an
administrative fee and other charges as well as the amount of receivables
relating to prior advances that remain unpaid after a specified number of
days.  These administrative fees and other charges are recognized as
revenue when earned.  There is no right of cancellation or refund
provisions in these arrangements and the Company has no further obligations once
the services are rendered.
 
 In
accordance with Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of
Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,
reimbursements received by the Company for out-of-pocket expenses are
characterized as revenue.
 
 Cash
Equivalents
 
 The
Company considers all highly liquid short-term investments with an original
maturity at the time of purchase of three months or less to be cash
equivalents.  Cash equivalents consist of overnight deposits and
certificates of deposit.  The Company reflects book overdraft
positions within operating cash flows, when the bank has not advanced cash to
the Company.
  Property
and Equipment
  Property
and equipment are carried at cost.  Depreciation is provided on a
straight-line basis over the estimated useful lives of the related
assets.  Leasehold improvements are amortized over the shorter of the
life of the lease or of the improvement.  Maintenance and repairs are
charged to expense as incurred and improvements that extend the useful life of
the related asset are capitalized.  The Company capitalizes its
internal costs related to the development of software for internal use under the
provisions of SOP 98-1, which are amortized over the estimated life of the
software of approximately three to five years.
  If events
or changes in circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable, the Company estimates the future cash flows
expected to result from the use of the asset and its eventual disposition in
accordance with Financial Accounting Standards Board (“FASB”) Statement No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets (“SFAS 144”).  If the sum of
the
   F-8
  expected
undiscounted future cash flows is less than the carrying amount of the
long-lived asset, an impairment loss is recognized for the difference between
the fair value and carrying amount of the asset.
  Goodwill
  The
Company applies FASB Statement No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), to evaluate goodwill impairment at least annually by
comparing each reporting unit’s estimated fair value to its carrying amount. The
Company’s reporting units are represented by their reportable operating segments
(see note 16).  If the reporting unit’s estimated fair value is less
than its carrying amount, additional procedures are performed to determine if
any impairment of goodwill exists.  There was no indication of
goodwill impairment for the years ended December 30, 2007, December 31, 2006 and
December 25, 2005.
  Income
Taxes
  Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and net
operating loss and tax credit carryforwards.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those differences are expected to be
recovered or settled. The Company records a valuation allowance against deferred
tax assets for which realization of the asset is not considered
more-likely-than-not.
  In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 “Accounting for Income
Taxes” (“FIN 48”).  Under FIN 48, the Company may recognize the
tax benefit from an uncertain tax position only if it is more-likely-than-not
that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the tax position.  The
tax benefits recognized in the financial statements from such tax position
should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement.  The
Company adopted the provisions of FIN 48 effective January 1,
2007.  The impact upon adoption was to increase retained earnings by
approximately $3.4 million and to decrease accruals for uncertain tax positions
and related penalties and interest by a corresponding amount.
  The
Company recognizes accrued interest and penalties related to income tax matters
within income tax expense.
  Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Some of the significant estimates involved are the
collectibility of receivables, the recoverability of long-lived assets, deferred
tax assets and goodwill, accrued workers compensation liabilities, reserves for
litigation and contingencies and the fair value of share-based payment
compensation.  Actual results could differ from those
estimates.
  Fair
Values of Financial Instruments
  The
carrying amounts of cash equivalents, accounts receivable, funding and service
fees receivable, accounts payable and accrued expenses are believed to
approximate fair value due to the short-term maturity of these financial
instruments.  The carrying amounts of the Company’s revolving line of
credit obligations is believed to approximate its fair value since the interest
rate fluctuates with market changes in interest rates.
  The
Company’s fixed rate debt obligations are traded infrequently, and their fair
value may fluctuate significantly due to changes in the demand for securities of
their type, the overall level of interest rates,
   F-9
  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 30,
2007 were: (i) $11.8 million for COI’s 12% Senior Notes due 2010 in the
outstanding principal amount of $11.7 million, and (ii) $1.8 million for
COMFORCE’s 8% Convertible Subordinated Note in the outstanding principal amount
of $1.6 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 over the life of the related
debt, which ranges from 3 to 13 years, and unamortized costs are fully expensed
upon discharge of indebtedness.  The Company wrote-off deferred
financing costs of $137,000 in fiscal 2007, $128,000 in fiscal 2006 and $178,000
in fiscal 2005 relating to the early extinguishment of debt (see note 8) which
costs are included in loss on debt extinguishment in the consolidated statements
of income.
  Income
Per Share
  Basic
income per common share is computed by dividing net income available for common
stockholders by the weighted average number of shares of common stock
outstanding during each period.  Diluted income per share is computed
assuming the exercise of stock options and warrants with exercise prices less
than the average market value of the common stock during the period, and the
conversion of convertible debt and preferred stock into common stock, if
dilutive.
  Foreign
Currency
  Assets
and liabilities of foreign subsidiaries are translated into U.S. dollars using
the exchange rate in effect at the balance sheet date.  Results of
operations are translated using the average exchange rates during the fiscal
year.  Related translation adjustments are accumulated in a separate
component of stockholders’ deficit and transaction gains and losses are
recognized in the consolidated statement of income when realized.
  Accrued
Workers Compensation Liability
  The
Company is generally self-insured with respect to workers compensation claims,
but maintains excess workers compensation coverage to limit exposure for amounts
over $4.5 million.  The Company records its estimate of the ultimate
cost of, and liabilities for, workers compensation obligations based on
actuarial computations using the Company's loss history as well as industry
statistics.  In determining its liabilities, the Company includes
amounts for estimated claims incurred but not reported.
  The
ultimate cost of workers compensation will depend on actual costs incurred to
settle the claims and may differ from the liabilities established by the Company
for those claims.  Accruals for workers compensation claims are
included in accrued expenses in the consolidated balance sheets.
  Stock
Compensation Plans
  Effective
December 26, 2005, the Company adopted the provisions of the FASB Statement
123(R), Share-Based Payments(“SFAS No. 123(R)”).  Under the provisions of SFAS 123(R),
share-based payments are measured at the grant date, based on the fair value of
the award, and are expensed over the requisite service period.  The
Company adopted SFAS 123(R) using the modified-prospective method and,
accordingly, prior period results have not been restated to reflect the fair
value method of recognizing compensation expense relating to stock
options.  All new awards are subject to the provisions of SFAS
123(R).  Since all outstanding option awards were fully vested on the
date of adoption, no compensation expense was recorded for outstanding
awards.  For the fiscal year ended December 30, 2007, $90,000 of
compensation expense was recorded within selling, general and administrative
expense and the Company recognized an income tax benefit of $35,000 related to
such expense.  For the fiscal year ended December 31,
2006,
   F-10
  $98,000
of compensation expense was recorded within selling, general and administrative
expense and the Company recognized an income tax benefit of $38,000 related to
such expense.
  For
periods prior to December 26, 2005, the Company recorded compensation expense
for employee stock options based upon their intrinsic value on the date of grant
pursuant to Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees. Since the exercise price for such options equaled or exceeded
the market value of the Company’s stock at the date of grant, the stock options
had no intrinsic value upon grant and no expense was recorded in the Company’s
consolidated statements of income.
  Had the
compensation cost of the Company’s employee share-based payments for fiscal year
2005 been based upon the fair value method determined in accordance with SFAS
123(R), the Company’s pro forma net income and net income per share would have
been (in thousands, except per share amounts):
  December
      25, 2005Net
      income available to common stockholders as reported
              
              $
              5,267Deduct:
      Stock-based employee compensation expense determined under fair value
      based method for all awards, net of related tax effects
              
              
              504Pro
      forma income available to common stockholders
              
              $
              4,763Income
      per share:As
      reported:Basic
              
              $
              0.31Diluted
              
              
              0.21Pro
      forma:Basic
              
              
              0.28Diluted
              
              
              0.20
 
 Under the
modified-prospective method, SFAS 123(R) applies to all new awards and to awards
outstanding on the effective date that are subsequently modified or cancelled
since all outstanding awards on the date of adoption were fully
vested.  The Company recognizes compensation expense for the fair
value of all awards on a straight-line basis over the total requisite service
period.  Cumulative compensation expense recognized at any date will
at least equal the grant date fair value of the vested portion of the award at
that time.
  The
Company estimates the fair value of share-based payments using the Black-Scholes
option pricing model.  Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by the employees
who receive equity awards.
  The per
share weighted average fair value of stock options granted was $1.28 during the
year ended December 30, 2007, $1.40 during the year ended December 31, 2006, and
$1.30 during the year ended December 25, 2005.  In addition to the
exercise and grant date prices of the awards, certain weighted average
assumptions that were used to estimate the fair value of stock option grants
during the past three fiscal years are listed in the table below:
   F-11
  
  Fiscal
      YearDecember
      30, 2007
              
              
              December
      31, 2006
              
              
              December
      25, 2005Expected
      dividend yield
              
              
              0.0%
              
              
              
              0.0%
              
              
              
              0.0%Expected
      volatility
              
              
              49.0%
              
              
              
              55.0%
              
              
              
              38.1%Risk-free
      interest rate
              
              
              5.2%
              
              
              
              5.0%
              
              
              
              3.8%Expected
      term (years)
              
              
              5
              
              
              
              5
              
              
              
              5
 
 The
Company estimates expected volatility based primarily on historical daily price
changes of the Company’s stock and other known or expected
trends.  The risk-free interest rate is based on the United States
(“U.S.”) treasury yield curve in effect at the time of grant.  The
expected option term is the number of years that the Company estimates that
options will be outstanding prior to exercise.  The expected term of
the awards issued after December 26, 2005 was determined using the “simplified
method” prescribed in SEC Staff Accounting Bulletin (“SAB”) No.
107.
 
 The
income tax benefit realized relating to the exercise of stock option awards was
$5,000 for the year ended December 30, 2007, all of which is classified as a
financing cash inflow in the Company’s consolidated statement of cash
flows.   The income tax benefit realized relating to the exercise
of stock option awards was $212,000 for the year ended December 31, 2006, of
which $135,000 is classified as a financing cash inflow in the
Company’s  consolidated statement of cash flows.  Prior to
the adoption of SFAS No. 123(R), the Company presented all tax benefits related
to share-based payments as operating cash inflows.  The income tax
benefit realized relating to the exercise of stock option awards was $231,000
for the year ended December 25, 2005.
 
 (3)           Property
and Equipment
  Property
and equipment as of December 30, 2007 and December 31, 2006, consisted of (in
thousands):
  Estimated
      useful lives in years
              
              
              2007
              
              
              2006Computer
      equipment and related software
              
              
              3-7
              
              
              $
              26,948
              
              
              
              22,105Furniture
      and fixtures
              
              
              3-10
              
              
              
              2,431
              
              
              
              2,415Leasehold
      improvements
              
              
              3-7
              
              
              
              657
              
              
              
              60730,036
              
              
              
              25,127Less
      accumulated depreciation and amortization
              
              
              
              
              
              
              (22,313
              )
              
              
              (19,751
              )$
              7,723
              
              
              
              5,376
 
 Depreciation
and amortization expense related to property and equipment was $2,803,000,
$3,055,000 and $3,659,000 for the fiscal years ended December 30, 2007, December
31, 2006 and December 25, 2005, respectively.
 
 (4)           Goodwill
  As of
December 30, 2007 and December 31, 2006, the carrying amount of the Company’s
goodwill was attributable to its Staff Augmentation segment ($22,873) and its
Human Capital Management segment ($9,200).
 
 There
have been no changes in the carrying amount of goodwill during the past three
fiscal years.
 
 (5)           Staff
Accounting Bulletin No. 108
  In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current year Financial
Statements(“SAB 108”).  SAB 108 addresses how the effects of
prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements.  SAB 108 requires
an entity to quantify misstatements using a balance sheet and income-statement
approach and to evaluate whether either approach results in quantifying an error
that is material in light of relevant quantitative and
  F-12
  qualitative
factors.  The Company changed its method of quantifying errors in
accordance with SAB 108, effective December 31, 2006.
 
 The
transition provisions of SAB 108 permit the Company to adjust for the cumulative
effect on retained earnings of previously immaterial adjustments relating to
prior years.  SAB 108 also requires the adjustment of any prior
quarterly financial statements within the fiscal year of adoption for the
effects of such corrections on the quarters when the information is next
presented.  Such adjustments do not require previously filed reports
with the SEC to be amended.
 
 Upon
adoption of SAB 108 in 2006, the Company corrected its consolidated financial
statements to: (i) reduce allowance for doubtful accounts receivable for
$278,000 and reduce accrued expenses for $73,000 for excess amounts established
prior to December 26, 2005, and (ii) increase accrued expenses for $574,000
related to previously unrecorded obligations for rent
escalations.  These adjustments were not considered material to any
prior period when evaluated using the roll-over method.  As these
adjustments were considered to be material under the dual method as of December
25, 2005, the Company recorded this cumulative effect adjustment as a decrease
to retained earnings as of December 26, 2005 of $136,000, net of tax of
$87,000.
 
 (6)           Accrued
Expenses
  Accrued
expenses as of December 30, 2007 and December 31, 2006, consisted of (in
thousands):
  2007
              
              
              2006Payroll,
      payroll taxes and sub-vendor payables
              
              $
              85,043
              
              
              
              88,966Book
      overdrafts
              
              
              11,322
              
              
              
              -Other
              
              
              9,460
              
              
              
              11,802$
              105,825
              
              
              
              100,768
 
 (7)           Income
Taxes
  The
Company’s income tax provision (benefit) for the years ended as of December 30,
2007, December 31, 2006, and December 25, 2005, was allocated as follows (in
thousands):
 
 2007
              
              
              2006
              
              
              2005Income
      from continuing operations
              
              $
              3,309
              
              
              
              3,373
              
              
              
              (1,455
              )Discontinued
      operations
              
              
              -
              
              
              
              -
              
              
              
              (19
              )$
              3,309
              
              
              
              3,373
              
              
              
              (1,474
              )
 
 The
income tax provision (benefit) for the fiscal years ended December 30, 2007,
December 31, 2006, and December 25, 2005, consisted of (in
thousands):
 
 2007
              
              
              2006
              
              
              2005Current:Federal
              
              $
              1,318
              
              
              
              1,734
              
              
              
              (1,870
              )Foreign
              
              
              263
              
              
              
              117
              
              
              
              24State
              
              
              315
              
              
              
              165
              
              
              
              (190
              )Total
      current
              
              
              1,896
              
              
              
              2,016
              
              
              
              (2,036
              )Deferred:Federal
              
              
              1,237
              
              
              
              1,059
              
              
              
              496State
              
              
              176
              
              
              
              298
              
              
              
              85Total
      deferred
              
              
              1,413
              
              
              
              1,357
              
              
              
              581Total
      income tax provision (benefit)
              
              $
              3,309
              
              
              
              3,373
              
              
              
              (1,455
              )
 
  F-13
  Total
income tax provision (benefit) relating to continuing operations differed from
income taxes at the statutory federal income tax rate of 34% as a result of the
following items (in thousands):
 
 2007
              
              
              2006
              
              
              2005Income
      taxes at statutory federal tax rate of 34.0%
              
              $
              2,821
              
              
              
              2,533
              
              
              
              1,614State
      and local taxes, net of federal tax
              
              
              384
              
              
              
              221
              
              
              
              519Change
      in tax rates
              
              
              20
              
              
              
              54
              
              
              
              203Foreign
      tax rates
              
              
              263
              
              
              
              6
              
              
              
              -Tax
      contingency matters
              
              
              -
              
              
              
              247
              
              
              
              (4,317
              )Loss
      on subsidiary stock
              
              
              (476
              )
              
              
              -
              
              
              
              -Non-deductible
      meals
              
              
              245
              
              
              
              354
              
              
              
              389Other
      non-deductible expenses
              
              
              52
              
              
              
              (42
              )
              
              
              137Income
      tax provision (benefit)
              
              $
              3,309
              
              
              
              3,373
              
              
              
              (1,455
              )
 
 The
components of deferred tax assets and liabilities at December 30, 2007 and
December 31, 2006 (in thousands) are as follows:
 
 2007
              
              
              2006Deferred
      tax assets:Receivable
      allowances
              
              $
              68
              
              
              
              107Excess
      book amortization expense
              
              
              339
              
              
              
              1,130Accrued
      liabilities and other
              
              
              2,399
              
              
              
              2,254Foreign
      tax credits
              
              
              263
              
              
              
              -Share-based
      payment compensation
              
              
              86
              
              
              
              50Tax
      benefit of capital loss carryforward
              
              
              2,165
              
              
              
              1,134Tax
      benefit of state NOL carryforwards, net of federal effect
              
              
              734
              
              
              
              6066,054
              
              
              
              5,281Less
      valuation allowance
              
              
              (2,803
              )
              
              
              (1,483
              )Total
      deferred tax assets
              
              
              3,251
              
              
              
              3,798Deferred
      tax liabilities:Prepaids
              
              
              722
              
              
              
              795Excess
      tax depreciation
              
              
              1,797
              
              
              
              1,032Other
              
              
              180
              
              
              
              208Total
      deferred tax liabilities
              
              
              2,699
              
              
              
              2,035Net
      deferred tax asset
              
              $
              552
              
              
              
              1,763
 
 At
December 30, 2007, the Company had approximately $14.0 million of state net
operating losses which expire in the tax years 2008 through 2027, if
unused.  As of December 30, 2007, the Company had approximately $5.5
million of capital loss carry forwards which expire in the tax years 2009
through 2012, if unused.  In addition, the Company had foreign tax
credit carryovers of approximately $263,000 which expires in 2017, if
unused.
  The
increase in the Company’s valuation allowance was primarily related to the
current generation of additional capital loss carry forwards ($1,030,000), state
net operating losses ($114,000) and foreign tax credits ($263,000) for which
management has determined that it may not realize the future tax benefits on a
more likely-than-not basis, net of write-offs of previously deferred tax assets
and a related valuation allowance of $87,000.  In 2007, the settlement
of the Company’s niche telecom operations (see note 19) resulted in a
discontinued operations gain of $1.0 million.  However, as this
settlement resulted in a capital loss for tax purposes (due to the excess tax
basis in the underlying investment), and the realization of such tax benefit is
not more-likely-than-not, no tax benefit has been allocated to discontinued
operations in 2007.
  In
assessing the realizability of deferred tax assets, management considers whether
it is more-likely-than-not that some portion or all of the deferred tax assets
will not be realized.  A valuation allowance is provided when it is
more-likely-than-not that some portion, or all, of the deferred tax assets will
not be realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income, the ability to carryback
future losses to recover income taxes paid and tax planning strategies
that
   F-14
  could be
implemented.  As of December 30, 2007, the Company’s deferred tax
asset valuation allowance related to: capital loss carry forwards ($2,165,000),
net operating loss carry forwards ($375,000), and foreign tax credits
($263,000).
  A
reconciliation of the total amounts of the Company’s unrecognized tax benefits
for the fiscal year ended December 30, 2007 is as follows (in
thousands):
 
 Unrecognized
      tax benefits upon adoption of FIN 48
              
              $
              -Increases
      (decreases) in unrecognized tax benefits – tax positions taken during a
      prior period
              
              
              -Increases
      (decreases) in unrecognized tax benefits – tax positions taken during the
      current period
              
              
              83Increases
      (decreases) in unrecognized tax benefits – settlements with taxing
      authorities
              
              
              -Reductions
      in unrecognized tax benefits – lapses of the statutes of
      limitations
              
              
              -Unrecognized
      tax benefits as of December 30, 2007
              
              $
              83
 
 As of and
for the fiscal year ended December 30, 2007, interest and penalties recognized
in the Company’s consolidated balance sheet or statement of income were
immaterial.  If recognized, the total amount of the Company’s
unrecognized tax benefits as of December 30, 2007 would affect the Company’s
effective tax rate.
 
 The
Company files U.S., state and foreign income tax returns in jurisdictions with
varying statutes of limitations.  The 2004 through 2007 tax years
generally remain subject to examination by federal, most state tax, and foreign
authorities.  In addition to the U.S., the Company’s major taxing
jurisdictions include Hong Kong and Japan.  There has not been any
past examinations nor are there any current tax examinations in progress for the
2004 through 2007 tax years.
  (8)           Debt
  Long-term
debt at December 30, 2007 and December 31, 2006, consisted of (in
thousands):
  2007
              
              
              200612%
      Senior Notes, due December 1, 2010
              
              $
              11,714
              
              
              
              22,8908%
      Subordinated Convertible Note, due December 2, 2009
              
              
              1,644
              
              
              
              1,520Revolving
      line of credit, due July 24, 2010, with interest payable at prime plus
      0.5% and/or LIBOR plus 1.75% with a weighted average rate of 6.9% at
      December 30, 2007 and 7.25% at December 31, 2006
              
              
              70,500
              
              
              
              65,360Total
      long-term debt
              
              $
              83,858
              
              
              
              89,770
 
  Contractual
maturities of long-term debt are as follows (in thousands):
  2009
              
              $
              1,6442010
              
              
              82,214Total
              
              $
              83,858
 
 Senior
Notes:  In November 1997,
COI issued $110 million of 12% Senior Notes due December 1, 2007, subsequently
extended until December 1, 2010 (the “Senior Notes”), principally to fund its
acquisition of Uniforce Services, Inc.  The Senior Notes provide for
semi-annual payments of interest at the rate of 12% per annum.
   F-15
  The
Senior Notes are governed by an indenture (the “Indenture”) under which
Wilmington Trust Company serves as the trustee.  The Indenture
contains a number of significant restrictions and covenants (with which COI
believes it was in compliance at December 30, 2007) that require COI to ensure
among other things that:
  ·
              COI
      does not grant a security interest in its assets or incur indebtedness,
      except indebtedness incurred in accordance with the Indenture, which
      permits indebtedness subordinated to and due later than the Senior Notes
      and that meets other conditions in the Indenture, indebtedness on a parity
      with the Senior Notes meeting specified conditions in the Indenture,
      renewals or replacements of any bank credit facility, capital lease
      obligations, securitization transactions, indebtedness within specified
      dollar limitations and other
exceptions;
  ·
              COI
      does not sell or dispose of its assets except in accordance with the
      covenants and conditions in the Indenture, or issue shares of its capital
      stock except in accordance with the covenants and conditions in the
      Indenture;
  ·
              the
      net proceeds from any permitted sale of COI’s capital stock or its assets
      are applied to repay any bank credit facility, or, if not required by the
      lender or such net proceeds are not reinvested in other assets, to redeem
      Senior Notes or be applied for other specified proper
      purposes;
  ·
              COI
      does not enter into transactions with affiliates other than in accordance
      with the Indenture; and
  ·
              COI
      does not invest in other businesses or engage in other business activities
      unless permitted under the
Indenture.
  In 2005,
the Company repurchased an aggregate of $18.1 million principal amount of its
Senior Notes for $18.3 million, principally utilizing available funds under the
PNC Credit Facility.  The Senior Notes were purchased from unrelated
parties.   As a result of these repurchases, the Company
recognized an aggregate loss on debt extinguishment of $336,000 in fiscal 2005,
net of $178,000 of deferred financing costs.
 
 In May
2006, COI repurchased $2.0 million principal amount of its Senior Notes from an
unrelated party, principally utilizing available funds under the PNC Credit
Facility. As a result of this repurchase, COI recognized a loss on debt
extinguishment of $18,000 in the second quarter of 2006, including the write-off
of $13,000 of deferred financing costs.
  In June
and July 2006, COI solicited the consents of the holders of its Senior Notes to
(i) permit consents and waivers granted under the Indenture to be irrevocable
for up to 60 days, and (ii) extend the maturity date of the Senior Notes from
December 1, 2007 to December 1, 2010 with call protections, as described
below.   Under the terms of the Indenture, the first proposal
required the approval of the holders of a majority in principal amount of the
Senior Notes and the second proposal required approval of all of the
holders.  The requisite consents to adopt the first proposal were
obtained by June 30, 2006, at which time COI and Wilmington Trust Company, as
trustee, entered into the Third Supplemental Indenture to provide for the
irrevocability of consents and waivers.
  The
holders of $22.9 million aggregate principal amount of Senior Notes consented to
the second proposal to extend the maturity of the Senior Notes.  The
holders of $21.4 million aggregate principal amount of Senior Notes declined to
consent to this proposal.   At the request of COI, on July 17,
2006, Wilmington Trust Company, as trustee, sent a notice of redemption to the
non-consenting holders and, in accordance with the notice, on August 16, 2006,
COI redeemed all $21.4 million of Senior Notes held by the non-consenting
holders at par, plus interest accrued from the last interest payment date of
June 1, 2006 to the date of redemption.
   F-16
  As a
result of this redemption, COI recognized a loss on debt extinguishment of
$151,000 in the third quarter of 2006, including the write-off of $115,000 of
deferred financial costs.  COI utilized loan proceeds under its
revolving credit facility to pay the redemption price (see “Revolving Line of
Credit” below in this note 8). Upon completion of this redemption, COI held
irrevocable consents to the second proposal from the holders of 100% of the
aggregate principal amount of Senior Notes then
outstanding.  Accordingly, on August 17, 2006, COI and Wilmington
Trust Company, as trustee, entered into a Fourth Supplemental
Indenture.  The Fourth Supplemental Indenture amended the Indenture
and Senior Notes by:
  ·
              extending
      the maturity date of the Senior Notes from December 1, 2007 to December 1,
      2010; and
 ·
              providing
      call protection to holders of the Senior Notes under which COI will have
      the option to redeem the Senior Notes upon payment of a redemption price
      as follows:
 
 Redemption
      price*
              
              If
      redemption at COI’s election occurs:102%
              
              from
      December 1, 2007 through November 30, 2008101%
              
              from
      December 1, 2008 through November 30, 2009100%
              
              on
      December 1, 2009 or thereafter*
      As a percentage of the principal outstanding at the redemption date, plus
      accrued interest to the redemption date.
 
 On June
28, 2007, COI redeemed $10.0 million principal amount of Senior Notes at a
redemption price equal to 103% of the principal amount, plus accrued
interest.   The total redemption price, including accrued
interest from June 1, 2007 to the redemption date, was $10.4
million.  As a result of this redemption, the Company recognized a
loss on debt extinguishment of $424,000, including the write-off of $124,000 of
deferred financing costs.  See also the discussion in this note 8
under “Revolving Line of Credit.”
  On
December 13, 2007, COI repurchased $1.2 million principal amount of Senior Notes
for $1.2 million principally utilizing available funds under the PNC Credit
Facility.  As a result of this repurchase, COI recognized a loss on
debt extinguishment of $19,000 in the fourth quarter of 2007, including the
write-off of $13,000 of deferred financing costs.
 
 Convertible
Note:  The Company’s
8.0% Subordinated Convertible Note due December 2, 2009 (the “Convertible Note”)
is convertible into common stock at $1.70 per share (or, in certain
circumstances, into a participating preferred stock which in turn would be
convertible into common stock at the same effective rate).
 
 Under the
terms of the Convertible Note, interest is payable either in cash or in kind at
the Company’s election.  Debt service costs associated with the
Convertible Note have been satisfied through additions to principal through
December 1, 2007 (the most recent semi-annual interest payment
date).  Additional principal is convertible into common stock on the
same basis as other amounts outstanding under the Convertible Note, which
provides for conversion into common stock at the rate of $1.70 per
share.  As a result of its election to pay interest in kind under the
Convertible Note, the Company recognized beneficial conversion features of
$43,000 during 2007 which resulted in an increase in deferred financing costs
and paid-in capital.  The Convertible Note may be prepaid in whole or
in part, provided that the market value of the Company’s common stock exceeds
$2.13 for a specified period of time.  The holder has 10 days to
convert the Convertible Note following notice of prepayment.  The
holder of the Convertible Note is a related party. See note 18.
  Revolving Line of
Credit:  At December 30,
2007, COMFORCE, COI and various of their operating subsidiaries, as co-borrowers
and guarantors, were parties to a $110.0 million Revolving Credit and Security
Agreement (the “PNC Credit Facility”) with PNC Bank, National Association, as a
lender and administrative agent (“PNC”), and other financial institutions
participating as lenders to provide for a
   F-17
  revolving
line of credit with available borrowings based, generally, on 87.0% of the
Company’s accounts receivable aged 90 days or less, subject to specified
limitations and exceptions.
  Borrowings
under the PNC Credit Facility bear interest, at the Company’s option, at a per
annum rate equal to either (i) the greater of the federal funds rate plus 0.5%
or the base commercial lending rate of PNC as announced from time to time, or
(ii) LIBOR plus a specified margin, determined as follows:
  Fixed
      charge coverage ratio*
              
              Margin
      (%)greater
      than 1.75:1.00
              
              
              1.50greater
      than 1.50:1.00 to 1.75:1.00
              
              
              1.75greater
      than 1.30:1.00 to 1.50:1.00
              
              
              2.00greater
      than 1.05:1.00 to 1.30:1.00
              
              
              2.25equal
      to or less than 1.05:1.00
              
              
              2.50*as
      defined in the PNC Credit Facility loan documents
  The PNC
Credit Facility also provides for a commitment fee of 0.25% of the unused
portion of the facility. The obligations under the PNC Credit Facility are
collateralized by a pledge of the capital stock of certain operating
subsidiaries of the Company and by security interests in substantially all of
the assets of the Company.  The PNC Credit Facility contains various
financial and other covenants and conditions, including, but not limited to, a
prohibition on paying cash dividends and limitations on engaging in affiliate
transactions, making acquisitions and incurring additional
indebtedness.
  The PNC
Credit Facility generally permits the Company to use up to $15.0 million in loan
proceeds annually to repurchase its Senior Notes so long as the remaining
availability under the facility, as defined in the agreement, is at least $7.5
million for the specified measurement period.  To enable the Company
to effect the redemption of its Senior Notes in 2006, PNC permitted the Company
to use (and it did use) $25.0 million of loan proceeds to pay the redemption
price of the Senior Notes, which resulted in a reduction of the maximum funds
available to repurchase or redeem Senior Notes in 2007.   The PNC
Credit Facility permits the Company to carryover from any prior calendar year
any unused portion of this amount, so long as the other criteria for borrowing
are then satisfied.
  At
December 30, 2007, the Company had remaining availability, as defined in the
agreement, under the PNC Credit Facility of up to $10.0 million.  As
of December 30, 2007, the Company had outstanding $4.5 million of standby
letters of credit under this facility. The Company was in compliance with all
financial covenants under the PNC Credit Facility at December 30,
2007.
 
 (9)         Income
Per Share
 
 Basic
income per common share is computed by dividing net income available to common
stockholders by the weighted average number of shares of common stock
outstanding during each period.  Diluted income per share is computed
assuming the exercise of stock options and warrants with exercise prices less
than the average market value of the common stock during the period and the
conversion of convertible debt and preferred stock into common stock to the
extent such conversion assumption is dilutive.  The following
represents a reconciliation of the numerators and denominators for the basic and
diluted income per share computations (in thousands, except per share
amounts):
   F-18
  2007
              
              
              2006
              
              
              2005Basic
      income per common share:Income
      from continuing operations
              
              $
              4,989
              
              
              
              4,078
              
              
              
              6,202Dividends
      on preferred stock:Series
      2003A
              
              
              461
              
              
              
              461
              
              
              
              461Series
      2003B
              
              
              38
              
              
              
              38
              
              
              
              38Series
      2004A
              
              
              506
              
              
              
              506
              
              
              
              5061,005
              
              
              
              1,005
              
              
              
              1,005Income
      from continuing operations available to common
stockholders
              
              $
              3,984
              
              
              
              3,073
              
              
              
              5,197Weighted
      average common shares outstanding
              
              
              17,385
              
              
              
              17,317
              
              
              
              16,907Basic
      income per common share from continuing operations
              
              $
              0.23
              
              
              
              0.18
              
              
              
              0.31
 
 Diluted
      income per common share:Income
      from continuing operations available to common
stockholders
              
              $
              3,984
              
              
              
              3,073
              
              
              
              5,197Dividends
      on preferred stock:Series
      2003A
              
              
              461
              
              
              
              461
              
              
              
              461Series
      2003B
              
              
              38
              
              
              
              38
              
              
              
              38Series
      2004A
              
              
              506
              
              
              
              506
              
              
              
              5061,005
              
              
              
              1,005
              
              
              
              1,005After
      tax equivalent of interest expense on 8% Subordinated Convertible
      Note
              
              
              76
              
              
              
              70
              
              
              
              65Income
      for purposes of computing diluted income per common share from continuing
      operations
              
              $
              5,065
              
              
              
              4,148
              
              
              
              6,267Weighted
      average common shares outstanding
              
              
              17,385
              
              
              
              17,317
              
              
              
              16,907Dilutive
      stock options
              
              
              278
              
              
              
              363
              
              
              
              424Assumed
      conversion of 8% Subordinated Convertible Note
              
              
              900
              
              
              
              832
              
              
              
              769Assumed
      conversion of Preferred Stock:Series
      2003A
              
              
              7,549
              
              
              
              7,111
              
              
              
              6,672Series
      2003B
              
              
              1,182
              
              
              
              1,111
              
              
              
              1,039Series
      2004A
              
              
              4,576
              
              
              
              4,278
              
              
              
              3,982Weighted
      average common shares outstanding for purposes of computing diluted income
      per share
              
              
              31,870
              
              
              
              31,012
              
              
              
              29,793Diluted
      income per common share from continuing operations
              
              $
              0.16
              
              
              
              0.13
              
              
              
              0.21
 
 In
addition, options and warrants to purchase 1,295,000, 1,295,000 and 1,755,000
shares of common stock were outstanding as of the end of the fiscal years 2007,
2006 and 2005, respectively, but were not included in the computation of diluted
income per share because their effect would be anti-dilutive.
  (10)
              Preferred
      Stock
  The
Company’s certificate of incorporation authorizes the Company to issue up to
10,000,000 shares, par value $.01 per share, of preferred stock in such series
and having such rights and preferences as determined by the Company’s board of
directors.  The board has created three series of preferred stock,
Series 2003A
  F-19
  with
6,500 authorized shares, Series 2003B with 3,500 authorized shares and Series
2004A with 15,000 authorized shares.
 
 The
rights and preferences of the Company’s Series 2003A, 2003B and 2004A
Convertible Preferred Stock  (collectively, the “Series Preferred
Stock”) are substantially identical except that the conversion price is $1.05
per share for the Series 2003A Preferred Stock, $0.54 per share for the Series
2003B Preferred Stock and $1.70 per share for the Series 2004A Preferred
Stock.  The conversion price is the price at which a holder of shares
of Series Preferred Stock may convert such instruments into common stock (or, in
certain circumstances, into a participating preferred stock which in turn will
be convertible into common stock at the same effective rate).  The
Company is permitted to require conversion of the Series Preferred Stock if the
average market price of its common stock for any six month period is at least
$3.25 per share for the Series 2003A and 2003B Preferred Stock or $4.50 per
share for the Series 2004A Preferred Stock, but only if the shares of Series
Preferred Stock can be converted into freely tradable common stock.
 
 Each
share of Series Preferred Stock has a face amount of $1,000, has no voting
rights and bears annual cumulative dividends of $75 per share (7.5% per
annum).  Upon liquidation, the holders of the Series Preferred Stock
will be entitled to a liquidation preference of $1,000 per share plus the amount
of cumulated, unpaid dividends before any distributions shall be made to the
holders of common stock or any other junior series or class of stock of the
Company.  Unless the holders of two-thirds of the shares of the Series
Preferred Stock outstanding shall have otherwise consented, no series or class
of preferred stock having rights or preferences that are not junior to the
Series Preferred Stock shall be issued by the Company.  The holders of
the Series Preferred Stock have no redemption rights.
 
 The
Company can only pay dividends on the Series Preferred Stock if (i) dividends
can legally be paid in accordance with Delaware law, (ii) the Company’s board of
directors, in its discretion upon the exercise of its fiduciary duties, declares
that a dividend be paid, (iii) payment of the dividend is permitted under the
terms of the PNC Credit Facility, and (iv) the Company’s wholly-owned operating
subsidiary, COI, has sufficient funds to upstream in accordance with the
restricted payments tests under the indenture governing the Senior
Notes.  At December 30, 2007, there were cumulative, unpaid and
undeclared dividends of $2.2 million on the Series 2003A Preferred Stock,
$163,000 on the Series 2003B Preferred Stock and $1.6 million on the Series
2004A Preferred Stock.
 
 In the
event that the conversion of Series 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 the 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
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 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 option grants made
before December 31, 2002.  Effective as of December 31, 2002, no
additional options were issuable under the 1993 Plan.
   F-20
  In 2002,
the Company adopted with stockholder approval the 2002 Stock Option Plan (the
“2002 Plan”), which originally authorized the grant of options to purchase up to
1,000,000 shares of the Company’s common stock to executives, key employees and
agents of the Company and its subsidiaries.  In 2006, the stockholders
approved an amendment to the 2002 Plan to permit the issuance of an additional
1,000,000 shares under the plan.  All executive officers and other
officers, directors and employees, as well as independent agents and
consultants, of the Company and its subsidiaries are eligible to participate in
the 2002 Plan and to receive option grants.
  The
following table summarizes stock option activity during the year ended December
30, 2007:
  
 Number
      of Shares
              
              
              Weighted
      Average Exercise Price
              
              Weighted
      Average Remaining Contractual Term (Years)
              
              Aggregate
      Intrinsic Value
              
              
              Weighted
      Average Grant Date Option Fair ValueOutstanding
      at December 31, 2006
              
              
              2,388,200
              
              
              $
              2.91Granted
              
              
              70,000
              
              
              
              2.60
              
              
              
              
              
              
              $
              1.28Forfeitures
              
              
              (37,100
              )
              
              
              5.63
              
              
              
              
              
              
              
              2.20Expired
              
              
              (33,000
              )
              
              
              7.14Exercised
              
              
              (17,000
              )
              
              
              1.51
              
              
              
              $
              12,472Outstanding
      and exercisable at December 30, 2007
              
              
              2,371,100
              
              
              $
              2.81
              
              4.35
              
              $
              301,450
 
 The total
cash received from stock option exercises for the years ended December 30, 2007,
December 31, 2006 and December 25, 2005 was $26,000, $209,000 and $342,000,
respectively.  The aggregate intrinsic value of exercised options for
December 30, 2007, December 31, 2006 and December 25, 2005 was $12,472, $539,906
and $742,752, respectively.  The Company expects to settle future
employee stock option exercises with the issuance of new shares.
  Warrants:
  At
December 30, 2007 and December 31, 2006, the Company had outstanding warrants to
purchase a total of 169,000 shares of common stock at a price of $7.55 per
share.  These warrants are fully vested and expire in
2009.
  (12)           Litigation
and Contingencies
  In
November 2003, the Company received a general notice letter from the United
States Environmental Protection Agency (the “U.S. EPA”) that it is a potentially
responsible party at Chicago’s Lake Calumet Cluster Site, which for decades
beginning in the late 19th/early
20th
centuries had served as a waste disposal site. In December 2004, the U.S. EPA
sent the Company and numerous other companies special notice letters requiring
the recipients to make an offer by a date certain to perform a remedial
investigation and feasibility study (RI/FS) to select a remedy to clean up the
site.  The Company’s predecessor, Apeco Corporation (“Apeco”), a
manufacturer of photocopiers, allegedly sent waste material to this
site.  The State of Illinois and the U.S. EPA have proposed that the
site be designated as a Superfund site.  The Company is one of over
400 potentially responsible parties (many of which may no longer be in operation
or viable) to which notices were sent, and the Company has joined a working
group of more than 100
   F-21
  members
representing over 120 potentially responsible parties for the purpose of
responding to the United States and Illinois environmental protection
agencies.
  Until the
United States and Illinois environmental protection and other agencies agree
upon remedies, accurate estimates of clean-up costs cannot be made and site
studies cannot be completed.  Consequently, no assessment can be made
as to any potential liability to the Company.  Furthermore, the
Company has made inquiries of the insurance carriers for Apeco to determine if
it has coverage under old insurance policies.
  In July
2005, the Company’s subsidiary, COMFORCE Technical Services, Inc. (“CTS”) was
served with an amended complaint in the suit titled Reyes V. East Bay Municipal Utility
District, et al, filed in the Superior Court of California, Alameda
County, in connection with a gas pipeline explosion in November 2004 that killed
five workers and injured four others.  As part of a construction
project to lay a water transmission line, a backhoe operator employed by a
construction contractor unaffiliated with CTS allegedly struck and breached a
gas pipeline and an explosion occurred when leaking gas ignited.  The
complaint names various persons involved in the construction project as
defendants, including CTS.  The complaint alleges, among other things,
that CTS was negligent in failing to properly mark the location of the
pipeline.  The complaint did not specify specific monetary
damages.
  CTS was
subsequently named as a defendant in 15 other lawsuits concerning this accident
in the Superior Court of California which have been consolidated with the Reyes case in a single
coordinated action styled as the Gas Pipeline Explosion Cases
in the Superior Court of California, Contra Costa County.  Two
co-defendants brought cross-claims against CTS.  In addition, a
company that provided insurance coverage to a private home and property damaged
by the explosion brought a subrogation action against CTS.  CTS denies
any culpability for this accident.  Following an investigation of the
accident, Cal-OSHA issued citations to four unrelated contractors on the
project, but declined to issue any citations against CTS.  Although
Cal-OSHA did not issue a citation against CTS, it will not be determinative in
the pending civil cases.
  CTS
requested that its insurance carriers defend it in these actions, and the
carrier under the primary policy appointed counsel and has defended CTS in these
actions.  As of June 2007, CTS has settled with 17 of the 19
plaintiffs, in each case within the limits of its primary policy, except as
described below.  With the settlements, the limits under the primary
policy have been reached.  The umbrella insurance carrier for CTS had
previously denied the claims of CTS for coverage, claiming that the matter
was within the policy exclusions.  This carrier also initiated a
declaratory action in Contra Costa County, California in which it asked the
court to determine whether the claims against CTS were within the policy
exclusions.  In March 2007, CTS and this carrier reached a tentative
settlement under which the carrier agreed to dismiss CTS from the declaratory
action and defend and insure CTS in the remaining cases when the primary
coverage limits have been reached, subject to an agreed upon contribution by CTS
and the carrier's reservation of rights to seek recovery against CTS for the
claims of Mountain Cascade, Inc., a co-defendant not related to CTS
that served as a contractor for East Bay Municipal Utility
District.  Management of CTS (and the Company) believes that any
losses in respect of Mountain Cascade should be covered under the umbrella
policy.  However, the carrier has declined to release
its reservation of rights as to this unresolved Mountain Cascade claim, and
the amount that CTS will be required to contribute to any settlement of or
judgment on the remaining plaintiffs’ cases is not
determinable.  Accordingly, management of CTS (and the Company) cannot
estimate the amount of losses that CTS may ultimately incur in connection with
these cases, if any, other than to estimate that any losses will be less than
$1.5 million. No assurance can be given that the costs to CTS to resolve all
remaining claims will be within management’s estimates.
  As
described in note 19, the Company resolved its litigation against the purchaser
of the Company’s niche telecom operations in the fourth quarter of
2007.
  In 2006,
CTS entered into a contract with a United States government agency (the
“Agency”) to provide technical, operational and professional services in foreign
countries throughout the world for humanitarian purposes.  Persons
employed by CTS in the host countries include U.S. nationals, nationals of the
host countries (local nationals) and nationals of other countries (third country
nationals). The contract provides,
   F-22
  generally,
that the U.S. government will reimburse the Company for all direct labor
properly chargeable to the contract plus fringe benefits, in some cases at
specified rates and profit.
  The
contract does not directly address taxes payable to foreign jurisdictions, but
the contracting officer advised CTS by letter that it should not make tax
payments or withholdings in the host countries because the Agency had negotiated
or would negotiate with the host countries and expected these discussions to
lead to bilateral agreements exempting contractors and contractor personnel from
all tax liability.  New Agreements will not be
retroactive.  The contract provides that CTS will be reimbursed for
“all fines, penalties, and reasonable litigation expenses incurred as a result
of compliance with specific contract terms and conditions or written
instructions from the Contracting Officer.”  The contracting officer’s
letter states that any fines, penalties, interest or costs of legal proceedings
incurred in honoring these instructions will be reimbursable.
  Management
believes that the Agency has substantial interest in completing the negotiations
of bilateral agreements with the host countries in order to minimize costs and
thus avoid becoming responsible for reimbursing contractors such as CTS for
fines and penalties. The Agency has advised CTS that bilateral agreements are in
place with some host countries, and, further, that the Agency believes the
Vienna Convention, in providing for the exclusion of host country tax
liabilities for humanitarian workers, would apply to the work being performed
under this contract.  Accordingly, management has concluded that it is
not probable that host country tax assessments, if any, against CTS would
ultimately be enforced. If any host country makes and seeks to enforce an
assessment against it, CTS intends to request the Agency to intervene to
overturn the host country’s decision to assess, and, if not successful, intends
to pay any assessment and related fines and seek prompt reimbursement from the
Agency.  Although not anticipated, amounts assessed could potentially
exceed the amount available to us from our own resources or under the PNC Credit
Facility. In such event, it is anticipated that the Company would request PNC to
make a special advance or request the Agency to pre-fund these
liabilities.
  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 expenses legal
costs associated with contingencies when incurred.  The Company
maintains general liability insurance, property insurance, automobile insurance,
fidelity insurance, errors and omissions insurance, professional/medical
malpractice insurance, fiduciary insurance, and directors’ and officers’
liability insurance for domestic and foreign operations as management deems
appropriate and prudent. The Company is generally self-insured with respect to
workers compensation, but maintains excess workers compensation coverage to
limit its maximum exposure to such claims.
 
 (13)           Savings
Incentive and Profit Sharing Plan
 
 The
Company provides a savings incentive and profit sharing plan (the
“Plan”).  All eligible employees may make contributions to the Plan on
a pre-tax salary deduction basis in accordance with the provisions of Section
401(k) of the Internal Revenue Code.  No contributions to the Plan
were made by the Company in 2007, 2006 and 2005.
  Certain
employees who perform work for governmental agencies are required to be covered
under a separate defined contribution plan.  During 2007, 2006 and
2005, the Company recorded approximately $858,000, $1,325,000 and $1,797,000,
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 2007, 2006 and 2005 approximated $3,177,000, $3,183,000
and $3,204,000, respectively.
  As of
December 30, 2007, future minimum rent payments due under the terms of
noncancelable operating leases excluding amounts that will be paid for operating
costs are (in thousands):
   F-23
  2008
              
              $
              3,0292009
              
              
              2,7342010
              
              
              1,7372011
              
              
              1,054Thereafter
              
              
              708$
              9,262
 
 (15)           Concentration
of Credit Risk
  Financial
instruments which potentially subject the Company to credit risk consist
primarily of cash and cash equivalents and trade receivables.
  The
Company maintains cash in bank accounts which may exceed federally insured
limits.  The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on its cash
balances.  The Company believes it mitigates such risk by investing
its cash through major financial institutions.
  At the
end of fiscal 2007, the Company had 5 customers that accounted for 42.5% of the
Company’s total accounts receivable, one of which had accounts receivable
balances in excess of 10% of the Company’s total accounts
receivable.  For fiscal 2006, the Company had four customers that
accounted for 38.5% of the Company’s total accounts receivable, two of which had
accounts receivable balances in excess of 10% of the Company’s total accounts
receivable.  For fiscal 2005, the Company had two customers which
accounted for 23.6% of the Company’s total accounts receivable.  The
largest four customers of the Company accounted for an aggregate of
approximately 24.7%, 25.3% and 21.6% of the Company’s revenues for the fiscal
years 2007, 2006 and 2005, respectively.
  (16)           Segment
Information
  The
Company’s reportable segments are distinguished principally by the types of
services offered to the Company’s clients.  The Company manages its
operations and reports its results through three operating segments -- Human
Capital Management Services, Staff Augmentation and Financial Outsourcing
Services.  The Human Capital Management Services segment primarily
provides contingent workforce management services.  The Staff
Augmentation segment provides healthcare support, technical and engineering,
information technology (IT), telecommunications and other staffing services. The
Financial Outsourcing Services segment provides funding and back office support
services to independent consulting and staffing companies.
  COMFORCE
evaluates the performance of its segments and allocates resources to them based
on operating contribution, which represents segment revenues less direct costs
of operations, excluding the allocation of corporate general and administrative
expenses.  Assets of the operating segments reflect primarily accounts
receivable and goodwill associated with segment activities; all other assets are
included as corporate assets.  The Company does not evaluate or
account for expenditures for long-lived assets on a segment basis.
  The table
below presents information on revenues and operating contribution for each
segment for the years ended December 30, 2007, December 31, 2006 and December
25, 2005, and items which reconcile segment operating contribution to COMFORCE’s
reported income from continuing operations before income taxes (in
thousands):
   F-24
  December
      30, 2007
              
              
              December
      31, 2006
              
              
              December
      25, 2005Net
      sales of services:Human
      Capital Management Services
              
              $
              363,696
              
              
              
              337,741
              
              
              
              311,497Staff
      Augmentation
              
              
              219,471
              
              
              
              226,304
              
              
              
              223,672Financial
      Outsourcing Services
              
              
              3,518
              
              
              
              3,776
              
              
              
              4,672$
              586,685
              
              
              
              567,821
              
              
              
              539,841Operating
      contribution:Human
      Capital Management Services
              
              $
              16,140
              
              
              
              14,878
              
              
              
              12,228Staff
      Augmentation
              
              
              18,207
              
              
              
              20,085
              
              
              
              19,753Financial
      Outsourcing Services
              
              
              3,078
              
              
              
              2,854
              
              
              
              3,70637,425
              
              
              
              37,817
              
              
              
              35,687Consolidated
      expenses:Corporate
      general and administrative expenses
              
              
              18,856
              
              
              
              17,744
              
              
              
              16,346Depreciation
      and amortization
              
              
              2,803
              
              
              
              3,095
              
              
              
              3,700Interest
      and other, net
              
              
              7,025
              
              
              
              9,358
              
              
              
              10,558Loss
      on debt extinguishment
              
              
              443
              
              
              
              169
              
              
              
              33629,127
              
              
              
              30,366
              
              
              
              30,940Income
      from continuing operations before income taxes
              
              $
              8,298
              
              
              
              7,451
              
              
              
              4,747Total
      assets:Human
      Capital Management Services
              
              $
              96,120
              
              
              
              91,836Staff
      Augmentation
              
              
              54,116
              
              
              
              54,316Financial
      Outsourcing Services
              
              
              13,101
              
              
              
              13,170Corporate
              
              
              20,047
              
              
              
              15,816$
              183,384
              
              
              
              175,138
 
 (17)           Limitations
on Use of Cash
 
 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 to
upstream $2.0 million annually to pay public company expenses, and to upstream
funds to the extent COI meets the restricted payments test under the indenture,
the most significant component of which is based upon 50% of net income
generated by COI since January 1, 1998 on a cumulative basis, less prior
distributions made in reliance on this provision.   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.  Principally as a result
of losses incurred by COI in fiscal 2001, 2002, 2003 and 2004, 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 until COI
generates net income of approximately $5.4 million.  However, COMFORCE
has approximately $1.9 million available to it at December 30, 2007 from
proceeds it has generated from the sale of stock, principally upon the exercise
of options and warrants.  This $1.9 million may be used by COMFORCE to
pay interest on the Convertible Note or for other business
purposes.
  Interest
on the Convertible Note is payable, at the option of COMFORCE, in cash or
in-kind (by adding the interest then due to principal).  Through
December 30, 2007, COMFORCE has paid all interest under the
   F-25
  Convertible
Note in-kind.  COMFORCE’s ability to repay the Convertible Note at its
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 in
effect and availability of funds.
  (18)
              Related
      Party Transactions
 
 Convertible Note
and Preferred Stock:  Fanning CPD Assets, LP (the “Fanning
Partnership”) is the holder of the following instruments issued by the Company:
the Convertible Note, of which $1.6 million in principal was outstanding at
December 30, 2007, 6,148 shares of Series 2003A Preferred Stock, 513 shares of
Series 2003B Preferred Stock and 6,737 shares of Series 2004A Preferred Stock,
the terms of which are described under notes 8 and 10.  The Fanning
Partnership is a limited partnership in which John C. Fanning, the Company’s
chairman and chief executive officer, holds an 82.4% economic interest. Rosemary
Maniscalco, a director of the Company, is the general partner of the Fanning
Partnership, but has no pecuniary interest in the partnership.  Harry
V. Maccarrone, a director and the executive vice president and chief financial
officer of the Company, is the trustee of a trust and the general partner of a
partnership that are limited partners in the Fanning Partnership, but he has
only a nominal pecuniary interest.
 
 In 2007,
the Fanning Partnership received $124,000 in in-kind interest payments under the
Convertible Note at the annual rate of 8.0%.  In addition, each of the
Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per
annum.  Dividends have cumulated in the amount of $2.2 million on the
Series 2003A Preferred Stock, $163,000 on the Series 2003B Preferred Stock and
$1.6 million on the Series 2004A Preferred Stock.  Although these
cumulated dividends have not been declared by the Company’s board of directors
and are not payable, the Fanning Partnership can elect to convert all or any
portion of these shares of Series Preferred Stock, including the cumulated
dividends, into common stock (or, in certain circumstances, into a participating
preferred stock which in turn will be convertible into common stock at the same
effective rate) at a conversion price of $1.05 per share for the Series 2003A
Preferred Stock, $0.54 per share for the Series 2003B Preferred Stock and $1.70
per share for the Series 2004A Preferred Stock.  The Convertible Note
is also convertible on substantially the same basis as the Series Preferred
Stock at a conversion price of $1.70 per share.  The conversion price
is the price at which the Fanning Partnership may convert the Series Preferred
Stock or Convertible Note into common stock (or the equivalent preferred
stock).
 
 Other
Transactions:  Rosemary Maniscalco, through a company owned by
her, provides consulting services to the Company, at the rate of up to $1,400
per day, plus expenses.  During 2007, 2006 and 2005, the Company paid
$124,420, $71,220 and $74,258, respectively, for such consulting
services.  In addition, in 2005, the Company granted an option to
purchase 25,000 shares of common stock at an exercise price of $3.02 per share
to Ms. Maniscalco, for which a compensation expense of $30,000 was recorded.
Rosemary Maniscalco is the Vice Chairman of the Company.
 
 (19)
              Sale of Niche Telecom
      Operations
 
 In 2004,
COMFORCE sold its interest in two telecom subsidiaries in the Staff Augmentation
segment.  The buyer, Spears Holding Company, Inc. (“Spears”), is
controlled by an individual who was one of the principals of these companies
when they were sold to COMFORCE in 1998.  The consideration included
cash of $1,448,000 and short-term promissory notes of $1,150,000 which were paid
during fiscal 2004.  Consideration also included three long-term
promissory notes totaling $3.7 million which were valued at $1.4 million by an
independent valuation firm. The sale resulted in a gain of $1,102,000, which
represented the excess of the net proceeds (cash and short-term notes of
$2,598,000 plus the fair value of the long-term notes of $1,400,000, less
transaction costs of $144,000), over the net book value of the net assets of the
business sold of $2,752,000.  The Company did not recognize any gain
on this transaction until the cash payments it received exceeded its investment
($2,896,000) in the business sold.  The cash received under the sale
agreement, including principal and interest on the notes, was recorded as a
reduction of, and, during the second quarter of 2005, had eliminated the balance
in net assets held for sale.  Cash received during 2005 in excess of
net assets held for sale of $101,000 has been recorded as a gain from the sale
of discontinued operations.  This was partially offset by $31,000, net
of tax, of legal fees which resulted in income from discontinued operations for
fiscal 2005 of $70,000.
  F-26
  
 Following
mediation and extended negotiations, the parties reached settlement in
September, 2007 under which $1.0 million was received in the fourth quarter of
2007 in full satisfaction of all amounts due to the Company.  The $1.0
million was recorded as a gain from the sale of discontinued operations in
2007.  The settlement resulted in a capital loss for income tax
purposes.  Accordingly, no provision for income taxes was
recorded.
 
 (20)           Selected
Quarterly Financial Data (unaudited)
 (In
thousands, except per share data and footnotes)
 
 Fiscal
      2007
              
              QuarterFirst
              
              
              Second
              
              
              Third
              
              
              Fourth
              
              
              Year
      ended
                December
      30, 2007Net
      sales of services
              
              $
              141,603
              
              
              $
              149,696
              
              
              $
              150,667
              
              
              $
              144,719
              
              
              $
              586,685Gross
      profit
              
              
              22,149
              
              
              
              23,254
              
              
              
              23,164
              
              
              
              24,014
              
              
              
              92,581Net
      income
              
              
              914
              
              
              
              1,074
              
              
              
              1,789
              
              
              
              2,212
              
              
              
              5,989Income
      per share:Basic
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.09
              
              
              $
              0.11
              
              
              $
              0.29Diluted
              
              $
              0.03
              
              
              $
              0.03
              
              
              $
              0.06
              
              
              $
              0.07
              
              
              $
              0.19
 
 Fiscal
      2006 (1)
              
              QuarterFirst
              
              
              Second
              
              
              Third
              
              
              Fourth
              
              
              Year
      ended
                December
      31, 2006Net
      sales of services
              
              $
              135,001
              
              
              $
              143,577
              
              
              $
              140,158
              
              
              $
              149,085
              
              
              $
              567,821Gross
      profit
              
              
              20,161
              
              
              
              22,153
              
              
              
              21,951
              
              
              
              24,629
              
              
              
              88,894Net
      income
              
              
              245
              
              
              
              1,007
              
              
              
              935
              
              
              
              1,891
              
              
              
              4,078Income
      per share:Basic
              
              $
              0.00
              
              
              $
              0.04
              
              
              $
              0.04
              
              
              $
              0.09
              
              
              $
              0.18Diluted
              
              $
              0.00
              
              
              $
              0.03
              
              
              $
              0.03
              
              
              $
              0.06
              
              
              $
              0.13
 
 
 (1) Revised
for the adoption of SAB 108 (see note 5).
 Since per
share information is computed independently for each quarter and the full year,
based on the respective average number of common shares outstanding, the sum of
the quarterly per share amounts does not necessarily equal the per share amounts
for the fiscal year.
   F-27
  COMFORCE
CORPORATION AND SUBSIDIARIES
  Schedule
II Valuation and Qualifying Accounts
 Fiscal
years ended December 30, 2007, December 31, 2006 and December 25,
2005
 (in
thousands)
  Balance
      at beginning of period
              
              
              Impact
      ofAdopting SAB 108
              
              
              Charged
      tocosts and expenses
              
              
              Chargedto other accounts
              
              
              Deductions(Net (write-offs) recoveries)
              
              
              Balanceat end of periodFor
      the fiscal year ended December 30, 2007:Allowance
      for doubtful accounts
              
              $
              276
              
              
              
              –
              
              
              
              89
              
              
              
              –
              
              
              
              (192
              )
              
              
              173For
      the fiscal year ended December 31, 2006:Allowance
      for doubtful accounts
              
              $
              705
              
              
              
              (421
              )
              
              
              85
              
              
              
              –
              
              
              
              (93
              )
              
              
              276For
      the fiscal year ended December 25, 2005:Allowance
      for doubtful accounts
              
              $
              1,042
              
              
              
              –
              
              
              
              (236
              )
              
              
              –
              
              
              
              (101
              )
              
              
              705










F-28









EXHIBIT
INDEX
 
 Unless
otherwise indicated, for documents incorporated herein by reference to exhibits
included in SEC filings of COMFORCE Corporation, the registration number for
COMFORCE Corporation is 001-06801.
 
 3.1
                Restated
      Certificate of Incorporation of COMFORCE Corporation, as amended by
      Certificates of Amendment filed with the Delaware Secretary of State on
      June 14, 1987 and February 12, 1991 (included as an exhibit to Amendment
      No. 1 to the Registration Statement on Form S-1 of COMFORCE Corporation
      filed with the Commission on May 10, 1996 (Registration No. 033-6043) and
      incorporated herein by
reference).
 
 3.2
                Certificate
      of Ownership (Merger) of COMFORCE Corporation into Lori Corporation
      (included as an exhibit to COMFORCE Corporation’s Annual Report on Form
      10-K for the fiscal year December 31, 1995 and incorporated herein by
      reference).
 
 3.3
                Certificate
      of Amendment of Certificate of Incorporation of COMFORCE Corporation filed
      with the Secretary of State of Delaware on October 28, 1996 (included as
      an exhibit to COMFORCE Corporation’s Registration Statement on Form S-8 of
      COMFORCE Operating, Inc. filed with the Commission on March 13, 2000
      (Registration No. 333-56962) and incorporated herein by
      reference).
 
 3.4
                Certificate
      of Ownership (Merger) of AZATAR into COMFORCE Corporation (included as an
      exhibit to COMFORCE Corporation's Current Report on Form 8-K dated
      November 8, 1996 and incorporated herein by
  reference).
 
 3.5
                Amended
      and Restated Certificate of Designation and Determination of Rights and
      Preferences of Series 2003A, 2003B and 2004A Convertible Preferred Stock
      of COMFORCE Corporation filed with the Secretary of State of Delaware on
      December 8, 2004 (included as an exhibit to COMFORCE Corporation's Current
      Report on Form 8-K dated December 13, 2004 and incorporated herein by
      reference).
 
 3.6
                Bylaws
      of COMFORCE Corporation, as amended and restated effective as of February
      26, 1997 (included as an exhibit to COMFORCE Corporation’s Annual Report
      on Form 10-K for the fiscal year December 31, 1996 and incorporated herein
      by reference).
 
 3.7
                Amendment
      to Amended and Restated Bylaws of COMFORCE Corporation, as adopted and
      effective as of May 3, 2006 (included as an exhibit to COMFORCE
      Corporation’s Current Report on Form 8-K filed May 4, 2006 and
      incorporated herein by reference).
 
 3.8
                Amendment
      to Amended and Restated Bylaws of COMFORCE Corporation, as adopted on
      December 20, 2007 and effective as of January 1, 2008 (included as an
      exhibit to COMFORCE Corporation’s Current Report on Form 8-K filed
      December 20, 2007 and incorporated herein by
  reference).
 
 4.1
                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).
   
 
 4.4
              Third
      Supplemental Indenture dated as of June 30, 2006 between COMFORCE
      Corporation and Wilmington Trust Company, as trustee, to Indenture dated
      as of November 26, 1997, as amended (included as an exhibit to COMFORCE
      Corporation’s Current Report on Form 8-K filed August 18, 2006 and
      incorporated herein by reference).
 
 4.5
              Fourth
      Supplemental Indenture dated as of August 16, 2006 between COMFORCE
      Operating, Inc. and Wilmington Trust Company, as trustee, to Indenture
      dated as of November 26, 1997, as supplemented (included as an exhibit to
      COMFORCE Corporation’s Current Report on Form 8-K filed August 18, 2006
      and incorporated herein by
reference).
 
 4.6
                Second
      Amended and Restated 8% Subordinated Convertible Note due December 2, 2009
      of COMFORCE Corporation (included as an exhibit to COMFORCE Corporation's
      Current Report on Form 8-K dated December 13, 2004 and incorporated herein
      by reference).
 
 10.1
                Amended
      and Restated Employment Agreement dated as of August 7, 2006 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, 2006 and incorporated herein by
      reference).
 10.2
                Amended
      and Restated Employment Agreement dated as of August 7, 2006 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 fiscal year December 31, 2006 and incorporated herein by
      reference).
 
 10.3
                Amendment
      to Amended and Restated Employment Agreement dated as of March 27, 2007
      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 fiscal year December 31, 2006 and incorporated herein by
      reference).
 
 10.4
                Company’s
      2002 Stock Option Plan adopted at the Company’s 2002 annual meeting of
      stockholders held June 13, 2002 (included as Annex A to the definitive
      proxy statement of COMFORCE Corporation filed April 29, 2002 and
      incorporated herein by reference).
 
 10.5
                Amendment
      to the Company’s 2002 Stock Option Plan adopted at the Company’s 2006
      annual meeting of stockholders held June 7, 2006 (included as an exhibit
      to COMFORCE Corporation’s Quarterly Report on Form 10-Q for the quarter
      ended June 25, 2006 and incorporated herein by
  reference).
 
 10.6
                Restated
      Deferred Compensation Plan approved as of October 30, 2006 (included as an
      exhibit to COMFORCE Corporation’s Quarterly Report on Form 10-Q for the
      quarter ended September 24, 2006 and incorporated herein by
      reference).
 
 10.7
                Restated
      Deferred Vacation Plan approved as of October 30, 2006 (included as an
      exhibit to COMFORCE Corporation’s Quarterly Report on Form 10-Q for the
      quarter ended September 24, 2006 and incorporated herein by
      reference).
 10.8
              Revolving
      Credit and Security Agreement dated as of June 25, 2003 among the Company,
      PNC Bank, National Association, as lender and administrative agent, and
      other named lenders (included as an exhibit to COMFORCE Corporation's
      Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and
      incorporated herein by reference).
 
 10.9
              Waiver
      and Amendment No. 1 dated as of March 17, 2004 to Revolving Credit and
      Security Agreement dated as of June 25, 2003 among the Company, PNC Bank,
      National Association, as lender and administrative agent, and other named
      lenders (included as an exhibit to COMFORCE Corporation's Quarterly Report
      on Form 10-Q for the quarter ended March 28, 2004 and incorporated herein
      by reference).
   
 
 10.10
              Amendment
      No. 2 to Revolving Credit and Security Agreement dated as of September 29,
      2004 among the Company and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (included as an exhibit to COMFORCE
      Corporation's Quarterly Report on Form 10-Q for the quarter ended
      September 26, 2004 and incorporated herein by
  reference).
 
 10.11
                Amendment
      No. 3 to Revolving Credit and Security Agreement dated as of February 3,
      2005 among the Company and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (filed as an exhibit to the Company’s Current
      Report on Form 8-K filed February 9, 2005 and incorporated herein by
      reference).
 
 10.12
              Amendment
      No. 4 to Revolving Credit and Security Agreement dated as of May 13, 2005
      among the Registrant and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (included as an exhibit to COMFORCE
      Corporation’s Current Report on Form 8-K filed May 18,
    2005).
 
 10.13
              Amendment
      No. 5 to Revolving Credit and Security Agreement dated as of December 22,
      2005 among the Company and certain of its operating subsidiaries, as
      borrowers, and PNC Bank, National Association, as agent and lender, and
      other participating lenders (included as an exhibit to COMFORCE
      Corporation’s Current Report on Form 8-K filed July 18, 2006 and
      incorporated herein by reference).
 
 10.14
              Amendment
      No. 6 to Revolving Credit and Security Agreement dated as of July 12, 2006
      among the Company and certain of its operating subsidiaries, as borrowers,
      and PNC Bank, National Association, as agent and lender, and other
      participating lenders (included as an exhibit to COMFORCE Corporation’s
      Current Report on Form 8-K filed July 18, 2006 and incorporated herein by
      reference).
 
 10.15
                Amendment
      No. 7 to Revolving Credit and Security Agreement dated as of May 24, 2007
      among the Company and certain of its operating subsidiaries, as borrowers,
      and PNC Bank, National Association, as agent and lender, and other
      participating lenders (included as an exhibit to COMFORCE Corporation’s
      Quarterly Report on Form 10-Q for the quarter ended July 1, 2007 and
      incorporated herein by reference).
 
 21.1*
                List
      of Subsidiaries.
  23.1*
                  Consent
      of KPMG LLP.
 31.1*
              Rule
      13a-14(a) certification of chief executive officer in accordance with
      section 302 of the Sarbanes-Oxley Act of
2002.
  31.2*
              Rule
      13a-14(a) certification of chief financial officer in accordance with
      section 302 of the Sarbanes-Oxley Act of
2002
  32.1*
              Section
      1350 certification of chief executive officer in accordance with section
      906 of the Sarbanes-Oxley Act of
2002.
  32.2*
              Section
      1350 certification of chief financial officer in accordance with section
      906 of the Sarbanes-Oxley Act of
2002.
  
  * Filed
herewith.