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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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

For the fiscal year ended December 31, 2006

OR



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

For the transition period from  to

Commission file number 1-6081



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COMFORCE Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 36-2262248                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                                           |  |           
|---------------------------------------------------------- |  | ----------
|415 Crossways Park Drive, P.O. Box 9006, Woodbury, NewYork |  | 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 Registered
|Common stock, $0.01 par value |  | American Stock Exchange                  



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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes ̈No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  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: $27,967,457.

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. At March 19, 2007, there were 17,385,546 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 30, 2007 are
incorporated herein by reference in Items 10, 11, 12, 13 and 14.

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PART I



|ITEM 1. | BUSINESS
|------- | --------

Overview

COMFORCE Corporation (COMFORCE) is a leading provider of 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 35 offices (26 company-owned and 9 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 UnlimitedSMsubsidiary. 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 relationships with multiple staffing vendors efficiently



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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 headquartered in the United States. 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, on behalf of these United States-based employers. 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. PrO helps its clients to avoid liabilities while properly monitoring the services these firms provide.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 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 intends to expand 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 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 and analysts, software engineers, technical writers and architects and project managers for a
wide range of technical assignments, including client server, mainframe, desktop and help desk services, and Internet/Intranet projects. The Company hires the workers it makes available to its customers, in most cases through its recruitment
process, and performs all of the obligations of an employer, including processing payrolls, withholding taxes and offering benefits. Additionally, the Company provides and manages bundled teams of technical personnel to clients as a hybrid answer to
IT project outsourcing. Using the bundled staffing approach, the Company delivers the managed 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.



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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 providing professional and skilled telecom personnel to plan, design, engineer, furnish, install and
maintain wireless, wire line and microwave equipment (known as EF&I services). Its customer base includes major carriers and wireless companies. COMFORCE Telecom is TL 9000-registered and ISO-certified. Some of the Companys niche telecom
operations were sold in 2004. See Discontinued Operations in this Item 1, below.

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.

Discontinued Operations

Effective as of
March 1, 2004, COMFORCE sold an 80% interest in two telecom subsidiaries in the Staff Augmentation segment and sold its remaining 20% minority interest in these companies by June 29, 2004. These subsidiaries operated in the customer
premise equipment services niche of the telecom sector, a niche that was outside of the Companys core competency in telecom. 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. As consideration, the Company received cash of $2.4 million, (received from March through June 2004), and five-year notes. These long term notes in the total principal amount of
$3.7 million were valued at $1.4 million by an independent valuation firm. All cash proceeds received by the Company from this sale were used to pay down bank debt. The Company did not recognize a gain on this transaction until the cash payments
(including payments under the notes) it received exceeded its investment in the business sold. Spears defaulted on its obligations to us beginning in the third quarter of 2005, and we filed a lawsuit against Spears in January 2006 after the
expiration of the 180-day standstill period under an agreement we had entered into with Spears senior lender. The parties have been engaged in a court-ordered mediation process that has not resulted in a resolution of the matter. See note 19
of our consolidated financial statements.



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In accordance with the Financial Accounting Standards Board (FASB) issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the results of operations from the sale of the Companys niche telecom operations have been recorded as discontinued operations. For the
purposes of the consolidated statements of cash flows, as permitted by the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards 95, Statement of Cash Flows (SFAS
No. 95), cash flows related to these discontinued operations have not been separately disclosed.

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

The Company generally
invoices its customers weekly, bi-weekly or monthly. 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 31, 2006, 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 25.3% of the Companys 2006 revenues.

Sales and Marketing

The Company services its customers through a network of 26 company-owned and 9 licensed offices located in 15 states across the United
States and its corporate headquarters located in Woodbury, New York. In addition, in many instances, the Companys non-billable (staff) employees work on-site at its customers facilities. 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



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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, places advertisements in local newspapers, job boards,
referrals, trade magazines, its website and otherwise actively recruits through the Internet. The Company continuously updates its proprietary database to reflect changes in personnel skill levels and availability. Upon receipt of assignment
specifications, the Company searches the database to identify suitable personnel. Once an individuals skills are matched to the specifications, the Company considers other selection criteria such as interpersonal skills, availability and
geographic preferences to ensure there is a proper fit between the employee and the assignment being staffed. The Company can search its resume database by a number of different criteria, including specific skills or qualifications, to match the
appropriate employee with the assignment.

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, improve efficiency and productivity and enhance customer relationships.

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 is in the process of upgrading its WAND system to incorporate recent advances in technology and to enhance the
functionality of the system to enable PrO to continue to be a



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leader in contingent workforce management. The WAND application upgrade is being 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 will also take 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.

Employees

The Company currently employs approximately 560 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 2006, 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 seven licensees the right to operate a total of nine licensed offices. The most recent license for a new office was granted in July 1992, and the Company does not presently expect to grant more licenses. Licensees recruit
contingent personnel and promote their services to both existing and new clients obtained through the licensees marketing efforts. However, the Company is involved in the determination of the terms under which services are to be offered to its
customers, and, with the exception of a single licensee, the Company is the employer of all of the workers placed through these arrangements. As the primary obligor, the Company is fully responsible for the payment of the employees. The Company
submits all bills directly to the customers and they are required to remit their payments for services performed directly to the Company. The Company has the ability to refuse to perform services solicited by the licensee that it does not believe
are within the normal scope of its capabilities, or for other reasons if it does not believe the services to be performed comport with the Companys objectives. The Company and the licensee office bear joint responsibility for collecting the
receivables from the customers and jointly bear the risk of loss for uncollected receivables. The licensee earns a variable percentage of the ultimate gross profit based upon the type of services rendered.



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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 or 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 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, 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. We expect that the level of competition will
be greater in the future and that this competition may require us to reduce our prices and our margins, which could substantially reduce our profitability.



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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 for the 2008 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.

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 such risks. 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.

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 expose 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.



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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.

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.



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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 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.



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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.

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



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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;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | 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 4, 2007, there was $22.9 million principal amount of Senior Notes
outstanding. Moreover, the PNC Credit Facility, under which we had $66.4 million in borrowings outstanding at March 4, 2007, 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.

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 4, 2007, approximately 14.2 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 Convertible Notes (which continue to accrue pay-in-kind



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interest), the 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 31, 2006. 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.

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.

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



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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 six years. The Companys headquarters in Woodbury, New York occupies approximately 38,000 square feet of space in two facilities under separate leases that expire in 2010. In some instances our
full-time staff employees work at the clients site for which we do not incur any rental costs. The Company owns no real estate.

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



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

In November 2003, the Company received a general notice letter from the United States Environmental Protection Agency (the U.S. EPA) that it is a potentially responsible party at Chicagos Lake
Calumet Cluster Site, which for decades beginning in the late 19th/early 20thcenturies 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 is initiating inquiries of the
insurance carriers for Apeco to determine if it has coverage under old insurance policies. Although another company had agreed to indemnify the Company against environmental liabilities, this indemnitor is currently in bankruptcy and the Company
does not expect to pursue its indemnity claims since obtaining any recovery against this indemnitor appears to be unlikely.

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 monetary damages.



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CTS was subsequently named as 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 March 28, 2007, CTS has settled with 15 of the 19 plaintiffs, in each case within the limits of its primary policy, except as described below. With the most recent settlements, the
limits under the primary policy are expected to be 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, other than to estimate that any losses will be less than $2.0 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 of our consolidated financial statements and under Discontinued Operations in Item 1, the Company initiated a
lawsuit against the purchaser of the Companys niche telecom operations, and the parties are participating in a court-ordered mediation process. 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 2006.



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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 ($) |  | Low ($)
|2006        |  | First Quarter  |  | 3.30     |  | 1.95   
|            |  | Second Quarter |  | 3.12     |  | 2.39   
|            |  | Third Quarter  |  | 2.93     |  | 2.17   
|            |  | Fourth Quarter |  | 2.80     |  | 2.00   
|2005        |  | First Quarter  |  | 3.60     |  | 2.16   
|            |  | Second Quarter |  | 2.30     |  | 1.46   
|            |  | Third Quarter  |  | 2.45     |  | 1.45   
|            |  | Fourth Quarter |  | 2.80     |  | 1.70   

The closing price of the Common Stock of the Company on March 19, 2007 was $2.30. As of such
date, there were approximately 3,900 stockholders of record and 11,301,384 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 19, 2007 was $25,993,184.

No dividends were declared or paid on the Common Stock during 2006. 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 ($2.9 million in the aggregate at December 31, 2006) are fully paid, no dividends are permitted to be paid on
Common Stock. Accordingly, the Company does not anticipate that it will pay cash dividends on its Common Stock for the foreseeable future.

Equity
Compensation Plan Information

The following table describes options and warrants issued as part of the Companys equity
compensation plans at the end of fiscal 2006.



|                                                               |  |                                                                                         |  |                                                                          |      |                                                                                                                                          |          
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                                  |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weightedaverageexercise price ofoutstanding options,warrants and rights |      | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected infirst column).
|Equity compensation plans approved by security holders (1)     |  | 2,388,200                                                                               |  | $                                                                        | 2.91 |                                                                                                                                          | 1,130,000
|Equity compensation plans not approved by security holders (2) |  | 169,000                                                                                 |  |                                                                          | 7.55 |                                                                                                                                          |         
|                                                               |  |                                                                                         |  |                                                                          |      |                                                                                                                                          |          
|Total                                                          |  | 2,557,200                                                                               |  | $                                                                        | 3.22 |                                                                                                                                          | 1,130,000
|                                                               |  |                                                                                         |  |                                                                          |      |                                                                                                                                          |          



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---

|(1) | At December 31, 2006, 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 include only the shares of common stock remaining available for
issuance under the 2002 Plan upon exercise of options or other rights that may be granted thereunder in future periods. 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.
|--- | ----------------------------------------------------------------------------------------------

Performance Information

Set forth below in tabular form is a comparison of the total stockholder
return (annual change in share price plus dividends paid, assuming reinvestment of dividends when paid) assuming an investment of $100 on the starting date for the period shown for the Company, the Dow Jones US Total Market Index (formerly known as
the Dow Jones US Equity Market Index, a broad equity market index which includes the stock of companies traded on the American Stock Exchange) and the Dow Jones US Business Support Services Index (formerly known as the Dow Jones US Industrial
Services Index, an industry index which includes providers of staffing services).

No dividends were paid on the Companys common
stock during the period shown. The return shown is based on the percentage change from December 30, 2001 through December 31, 2006.



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LOGO



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following table sets
forth selected historical financial data of the Company as of and for each of the five fiscal years in the period ended December 31, 2006. 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 31, 2006 from its audited historical consolidated financial statements (in thousands, except per share data).



|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                       |  | 2006 |         |   | 2005 |   |         | 2004 |  |   | 2003    |   |  | 2002 |        
|Statement of Operations Data:                                                                                          |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net sales of services                                                                                                  |  | $    | 567,821 |   |      | $ | 539,841 |      |  | $ | 480,887 |   |  | $    | 369,982 |   |  | $ | 365,817 |  
|Costs and expenses:                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cost of services                                                                                                       |  |      | 478,927 |   |      |   | 460,581 |      |  |   | 408,850 |   |  |      | 308,840 |   |  |   | 300,333 |  
|Selling, general and administrative expenses                                                                           |  |      | 68,821  |   |      |   | 59,919  |      |  |   | 53,755  |   |  |      | 47,517  |   |  |   | 51,436  |  
|Goodwill impairment (1)                                                                                                |  |      |        |   |      |   |        |      |  |   |        |   |  |      | 24,500  |   |  |   | 16,600  |  
|Depreciation and amortization                                                                                          |  |      | 3,095   |   |      |   | 3,700   |      |  |   | 4,219   |   |  |      | 4,220   |   |  |   | 3,981   |  
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total costs and expenses                                                                                               |  |      | 550,843 |   |      |   | 524,200 |      |  |   | 466,824 |   |  |      | 385,077 |   |  |   | 372,350 |  
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Operating income (loss)                                                                                                |  |      | 16,978  |   |      |   | 15,641  |      |  |   | 14,063  |   |  |      | (15,095 | ) |  |   | (6,533  | )
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Other income (expense):                                                                                                |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest expense                                                                                                       |  |      | (9,369  | ) |      |   | (10,744 | )    |  |   | (12,338 | ) |  |      | (13,931 | ) |  |   | (16,007 | )
|(Loss) gain on debt extinguishment (2)                                                                                 |  |      | (169    | ) |      |   | (336    | )    |  |   | 1,999   |   |  |      | 9,582   |   |  |   |        |  
|Write-off of deferred financing costs                                                                                  |  |      |        |   |      |   |        |      |  |   |        |   |  |      | (431    | ) |  |   |        |  
|Other income, net                                                                                                      |  |      | 11      |   |      |   | 186     |      |  |   | 110     |   |  |      | 637     |   |  |   | 27      |  
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                                                                       |  |      | (9,527  | ) |      |   | (10,894 | )    |  |   | (10,229 | ) |  |      | (4,143  | ) |  |   | (15,980 | )
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle |  |      | 7,451   |   |      |   | 4,747   |      |  |   | 3,834   |   |  |      | (19,238 | ) |  |   | (22,513 | )
|Provision (benefit) for income taxes                                                                                   |  |      | 3,373   |   |      |   | (1,455  | )    |  |   | 2,058   |   |  |      | 571     |   |  |   | (2,796  | )
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income (loss) from continuing operations before a cumulative effect of a change in accounting principle                |  |      | 4,078   |   |      |   | 6,202   |      |  |   | 1,776   |   |  |      | (19,809 | ) |  |   | (19,717 | )
|Income (loss) from discontinued operations, net of income taxes (3)                                                    |  |      |        |   |      |   | 70      |      |  |   | (20     | ) |  |      | (3,427  | ) |  |   | (1,530  | )
|Cumulative effect of a change in accounting principlegoodwill impairment, net of income tax benefit of $2,200 (4)     |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | (52,800 | )
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss)                                                                                                      |  | $    | 4,078   |   |      | $ | 6,272   |      |  | $ | 1,756   |   |  | $    | (23,236 | ) |  | $ | (74,047 | )
|Dividends on preferred stock                                                                                           |  |      | 1,005   |   |      |   | 1,005   |      |  |   | 530     |   |  |      | 672     |   |  |   |        |  
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (loss) available to common stockholders                                                                     |  | $    | 3,073   |   |      | $ | 5,267   |      |  | $ | 1,226   |   |  | $    | (23,908 | ) |  | $ | (74,047 | )
|                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



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|                                                                                                              |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|Diluted income (loss) per share:                                                                              |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) available to common stockholders before a cumulative effect of a change in accounting principle |  | $ | 0.13    |   |  | $ | 0.21    |   |  | $ | 0.07    |   |  | $ | (1.44   | ) |  | $ | (1.28   | )
|Cumulative effect of a change in accounting principle                                                         |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |   |  |   | (3.17   | )
|                                                                                                              |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss) available to common stockholders                                                            |  | $ | 0.13    |   |  | $ | 0.21    |   |  | $ | 0.07    |   |  | $ | (1.44   | ) |  | $ | (4.45   | )
|                                                                                                              |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance Sheet data:                                                                                           |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Working capital                                                                                               |  | $ | 32,345  |   |  | $ | 43,163  |   |  | $ | 46,018  |   |  | $ | 44,577  |   |  | $ | 47,386  |  
|Trade receivables, net                                                                                        |  |   | 127,249 |   |  |   | 118,916 |   |  |   | 92,144  |   |  |   | 76,104  |   |  |   | 73,609  |  
|Goodwill                                                                                                      |  |   | 32,073  |   |  |   | 32,073  |   |  |   | 32,073  |   |  |   | 32,242  |   |  |   | 60,242  |  
|Total assets                                                                                                  |  |   | 175,138 |   |  |   | 173,978 |   |  |   | 154,649 |   |  |   | 134,313 |   |  |   | 162,864 |  
|Total debt, including current maturities                                                                      |  |   | 89,770  |   |  |   | 105,792 |   |  |   | 117,227 |   |  |   | 127,960 |   |  |   | 142,779 |  
|Stockholders deficit                                                                                         |  |   | (18,715 | ) |  |   | (23,031 | ) |  |   | (29,835 | ) |  |   | (38,624 | ) |  |   | (21,241 | )

---

|(1) | The Company recorded a goodwill impairment charge of $16.6 million during the fourth quarter of 2002 and $24.5 million during the third quarter of 2003, in each case 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. 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. In addition, the goodwill impairment charges associated with this telecom operation has also been reclassified as discontinued operations ($2.4 million in
2002 and $3.5 million in 2003).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|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).



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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 4, 2007, the Company had outstanding $66.4 million principal amount under the PNC Credit Facility with remaining availability of $18.3 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 observed improvement in the business environment for staffing companies beginning in the first quarter of 2003. Industry statistics have generally supported managements observations including, since the beginning of 2004,
improvement in the rate of job creation in the United States; however management is unsure how long these trends will continue in the future.

As previously reported, one of the Companys Staff Augmentation customers is auditing the invoices made under the contract with the Company for the years 2003 to 2006. Management does not believe any adjustment to the Companys
fees under this contract is warranted.

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 31, 2006. Fiscal year 2006 contained 53 weeks and fiscal years 2005 and 2004 each contained 52 weeks.

Critical Accounting Policies and Estimates

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

Allowance for Doubtful Accounts

The Company has an allowance for doubtful accounts recorded as an estimate of the accounts receivable balance that may not be collected. This allowance is calculated on the trade receivables with consideration for the Companys
historical write-off experience, the current aging of receivables, general economic climate and the financial condition of 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.



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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) 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.



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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. We use the safe harbor guidance in SAB 107 to estimate the expected life of options granted during fiscal 2006. 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.

Results of Operations

Fiscal Year Ended December 31, 2006 compared to 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 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 Company also expects interest expense reductions in future periods due to the 2006 redemption and repurchase of its Senior Notes. See note 8 to our consolidated financial statements.



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The income tax provision for the year ended December 31, 2006 was $3.4 million (a rate of 45.3%) on
income 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.

Fiscal Year Ended December 25, 2005 compared to Fiscal Year Ended December 26, 2004

Net sales of services for the year ended December 25, 2005 were $539.8 million, which represents a 12.3% increase from the $480.9 million in net
sales of services recorded for the year ended December 26, 2004. Net sales of services in the Human Capital Management Services segment increased by $41.4 million or 15.3%, due to an increase in services provided 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 $20.1 million, or 9.9%, is principally attributable to services provided to information technology, telecom and healthcare support customers. Sales of services were lower by $2.5 million, or 34.9% in the Financial Outsourcing Services
segment, principally due to a reduction in the number of customers we service.

Cost of services for the year ended December 25, 2005
was 85.3% of net sales of services as compared to cost of services of 85.0% of net sales of services for the year ended December 26, 2004. The cost of services as a percentage of net sales for fiscal 2005 increased slightly from fiscal 2004
principally as a result of higher growth in Human Capital Management Services which have a higher cost of services as a percentage of net sales of services and a reduction in the number of clients serviced under the Financial Outsourcing Services
segment, partially offset by favorable workers compensation claims experience.

Selling, general and administrative expenses as a
percentage of net sales of services were 11.1% for the year ended December 25, 2005, compared to 11.2% for the year ended December 26, 2004. The $6.2 million increase in selling, general and administrative expenses is primarily due to an
increase in support personnel costs associated with the increase of net sales discussed above.

Operating income for the year ended
December 25, 2005 was $15.6 million as compared to operating income of $14.1 million for the year ended December 26, 2004. The Companys higher operating income for fiscal 2005 is principally due to an increase in net sales of
services discussed above.

The Companys interest expense for the year ended December 25, 2005 was principally attributable to
interest recorded on the PNC Credit Facility, the Convertible Note and the Senior Notes. The interest expense of $10.7 million for fiscal 2005 was lower as compared to the interest expense of $12.3 million for 2004. This reduction was principally
due to the exchange and repurchase of $6.7 million of Convertible Notes and $18.1 million of Senior Notes during 2004, and the repurchase of $18.1 million of Senior Notes in fiscal 2005. These decreases were partially offset by increased interest
expense on the Companys revolving line of credit due to higher average outstanding balances and interest rates in fiscal 2005. See note 8 to our consolidated financial statements.

As a result of the Companys repurchase of Senior Notes in fiscal 2005, the Company recognized a loss on debt extinguishment of $336,000, net of
$178,000 of deferred financing costs. The Companys repurchase of Senior Notes during fiscal 2004 resulted in a gain on debt extinguishment of $2.0 million, net of $280,000 of deferred financing costs. The purpose of these transactions was to
improve the Companys balance sheet through the elimination of higher interest rate debt.



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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 income tax provision for fiscal 2004 was $2.1 million (a rate of 53.7%) on income from continuing operations before income taxes of $3.8 million. The
difference between income taxes at the federal statutory income tax rate, and the Companys tax provision relates primarily to state income taxes and a disallowance for non-deductible expenses as well as the favorable impact attributable to the
resolution of certain 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, and the net loss from discontinued operations was $20,000 for the year ended December 26, 2004 attributable to operations prior to its sale in fiscal 2004.

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 45 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: During the year ended December 31, 2006, the Company had no off-balance sheet arrangements
other than operating leases entered into in the normal course of business, as indicated in the table below. The following table represents contractual commitments associated with operating lease agreements, employment agreements and principal
repayments on debt obligations (excluding interest):



|                                            |  |                                            |       |      |   |       |  |      |       |            |   |        |  |   |    
|------------------------------------------- |  | ------------------------------------------ | ----- | ---- | - | ----- |  | ---- | ----- | ---------- | - | ------ |  | - | ---
|                                            |  | Payments due by fiscal year (in thousands)
|                                            |  | 2007                                       |       | 2008 |   | 2009  |  | 2010 |       | Thereafter
|Operating Leases                            |  | $                                          | 2,614 |      | $ | 2,189 |  | $    | 1,923 |            | $ | 978    |  | $ | 696
|Employment Agreements                       |  |                                            | 881   |      |   | 946   |  |      |      |            |   |       |  |   |   
|PNC Credit Facility* - principal repayments |  |                                            |      |      |   |      |  |      |      |            |   | 65,360 |  |   |   
|Senior Notes* - principal repayments        |  |                                            |      |      |   |      |  |      |      |            |   | 22,890 |  |   |   
|Convertible Note* - principal repayments    |  |                                            |      |      |   |      |  |      | 1,520 |            |   |       |  |   |   
|                                            |  |                                            |       |      |   |       |  |      |       |            |   |        |  |   |    
|Total                                       |  | $                                          | 3,495 |      | $ | 3,135 |  | $    | 3,443 |            | $ | 89,228 |  | $ | 696
|                                            |  |                                            |       |      |   |       |  |      |       |            |   |        |  |   |    

---

|* | 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 six amendments, most recently in July 2006. See the discussion under Revolving Line of Credit in note 8 to the Companys consolidated financial statements for a discussion
of the July 2006 amendments to the Credit Facility.

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



27



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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 financial covenants under the PNC Credit
Facility at December 31, 2006.

The Company also had standby letters of credit outstanding under the PNC Credit Facility at
December 31, 2006 in the aggregate amount of $5.1 million.

During the year ended December 31, 2006, the Companys primary
sources of funds were $14.8 million of cash provided by operating activities due to the profitability of the Company and changes in working capital primarily related to consultant consolidation services under the Human Capital Management Services
segment. Cash and cash equivalents decreased $4.6 million during 2006.

At December 31, 2006, the Company had outstanding $65.4
million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 7.25% per annum. At such date, the Company had remaining availability of $20.4 million, as defined in the agreement, under the PNC Credit
Facility.

At December 31, 2006, the Company also had outstanding (i) $22.9 million principal amount of Senior Notes bearing
interest at 12% per annum and (ii) $1.5 million principal amount of Convertible Notes bearing interest at 8% per annum.

As
described in note 8 to our consolidated financial statements, in the third quarter of 2006, the Company amended the Indenture to, among other things, extend the maturity date of the Senior Notes to December 1, 2010 and redeemed $21.4 million of
its Senior Notes. The Company has made significant progress in improving its capital structure through the elimination of long-term debt through the purchase, redemption or exchange of Senior Notes, Convertible Notes and other instruments. During
fiscal 2006, the Company repurchased or redeemed $23.4 million principal amount of Senior Notes in the aggregate, including this redemption of $21.4 million of its Senior Notes. Since June 2000, the Company has reduced its public debt from $138.8
million to $22.9 million and its total long-term debt from $195.3 million to $89.8 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 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 $9.1 million. However, COMFORCE has approximately $2.0 million available at December 31, 2006 from proceeds it has generated from the sale of stock, principally upon the exercise of options and warrants. This $2.0 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 31, 2006 there were cumulated, unpaid and undeclared dividends of $1.8 million on the Series 2003A Preferred Stock, $125,000 on the Series
2003B Preferred Stock and $1.0 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 13.3 million shares.

Management of the Company believes that cash flow from operations and funds anticipated to be available under the PNC



28



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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 financial covenants under the PNC Credit Facility at December 31, 2006 and expects to remain in compliance for the next 12 months. If additional funding is required for capital expenditures in
2007, we intend to make a request for needed funds under the PNC Credit Facility.

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.

Impact of Recently
Issued Accounting Standards

In December 2006, the Company adopted the provisions of 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 qualitative factors. The Company has changed its method of quantifying errors in accordance with SAB 108 and recorded a reduction in retained earnings of $136,000. See note 5 to the
Companys consolidated financial statements for further discussion.

In July 2006, the FASB issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is measurement. For recognition, an enterprise
judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position
meets the more-likely-than-not recognition threshold, it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized. If a tax position does not meet the
more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.

Tax positions that
meet the more-likely-than-not recognition threshold at the effective date of FIN No. 48 may be recognized, or continue to be recognized, upon adoption of FIN No. 48. The cumulative effect of applying the provisions of FIN No. 48 shall
be reported as an adjustment to the opening balance of retained earnings for the year of adoption. FIN No. 48 is effective for the Company beginning in fiscal year 2007. The Company is in the process of assessing the effect FIN No. 48 may
have on its consolidated financial statements.

In June 2006, the Emerging Issues Task Force issued EITF 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3) to clarify diversity in practice on the presentation of different types of taxes in
the financial statements. The Task Force concluded that, for taxes within the scope of this issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within
revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to this issue are significant, a company is
required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15,
2006. The Company is currently assessing the impact, if any, that the adoption of EITF 06-3 will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to
investors requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157
applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact, if any, that the adoption of SFAS 157 will have on its consolidated financial statements.



29



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##### Table of Contents

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits companies to elect, at specified election dates, to measure eligible financial instruments and certain other items at
fair value. A company must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as
incurred. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact, if any, that the adoption of SFAS 159 will have on its
consolidated financial statements.

Seasonality

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

Forward Looking Statements

We have made statements
under the captions Business in Item 1 and Managements Discussion and Analysis of Financial Condition and Results of Operations under this Item 7, as well as in other sections of this report that are
forward-looking statements. In some cases, you can identify these statements by forward-looking words such as may, might, will, should, could, expects, plans,
anticipates, believes, estimates, forecasts, projects, predicts, intends, potential, continue, the negative of these terms and other
comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in
our business and industry. These statements are only predictions based on our current expectations and projections about future events.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievements. 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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##### Table of Contents

| |  |  | our inability to keep pace with rapid changes in technology in our industry;
| | - |  | ----------------------------------------------------------------------------



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



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



| |  |  | unfavorable development 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; 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 $22.9 million principal amount of Senior Notes bearing interest at a fixed rate of 12% per annum, and $1.5 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 31, 2006 was $22.9 million for the Senior Notes, and $2.1 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 $65.4 million at December 31, 2006 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 7.25% the impact to the Company in
annualized interest expense would be approximately $474,000. 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.



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

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

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



31



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##### Table of Contents

|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 30, 2007 and is incorporated by reference herein.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required by
this section will be included in the Companys Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 30, 2007 and is incorporated by reference herein.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------

The information required by this section will be included in the Companys Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 30, 2007 and is incorporated by
reference herein.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

The
information required by this section will be included in the Companys Proxy Statement, which will be filed with the Securities and Exchange Commission on or before April 30, 2007 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 30, 2007 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



32



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##### Table of Contents

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.



33



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##### Table of Contents

SIGNATURES

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



|                     |  |                                      |  | 
|-------------------- |  | ------------------------------------ |  | 
|COMFORCE Corporation |  |                                     
|                     |  |                                     
|By:                  |  | /s/ John C. Fanning                  |  | 
|                     |  | John C. Fanning                      |  | 
|                     |  | Chairman and Chief Executive Officer
|                     |  |                                     
|Date:                |  | March 28, 2007                       |  | 

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. Fanning     |  |                                                                                    |  |               
|John C. Fanning         |  | Chairman, Chief Executive Officer and Director (Principal Executive Officer)       |  | March 28, 2007
|                        |  |                                                                                   
|/s/ Harry V. Maccarrone |  |                                                                                    |  |               
|Harry V. Maccarrone     |  | Executive Vice President and Director (Principal Financial and Accounting Officer) |  | March 28, 2007
|                        |  |                                                                                   
|/s/ Rosemary Maniscalco |  |                                                                                    |  |               
|Rosemary Maniscalco     |  | Vice Chairman and Director                                                         |  | March 28, 2007
|                        |  |                                                                                   
|/s/ Daniel Raynor       |  |                                                                                    |  |               
|Daniel Raynor           |  | Director                                                                           |  | March 28, 2007
|                        |  |                                                                                   
|/s/ Gordon Robinett     |  |                                                                                    |  |               
|Gordon Robinett         |  | Director                                                                           |  | March 28, 2007
|                        |  |                                                                                   
|/s/ Kenneth J. Daley    |  |                                                                                    |  |               
|Kenneth J. Daley        |  | Director                                                                           |  | March 28, 2007
|                        |  |                                                                                   
|/s/ Pierce J. Flynn     |  |                                                                                    |  |               
|Pierce J. Flynn         |  | Director                                                                           |  | March 28, 2007



34



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Table of Contents



|                                                                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                                                         |  | F-2 
|                                                                                                                                                                | 
|Consolidated Financial Statements:                                                                                                                              |  |     
|                                                                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2006 and December 25, 2005                                                                                       |  | F-3 
|                                                                                                                                                                | 
|Consolidated Statements of Operations for the fiscal years ended December 31, 2006, December 25, 2005 and December 26, 2004                                     |  | F-4 
|                                                                                                                                                                | 
|Consolidated Statements of Stockholders Deficit and Comprehensive Income for the fiscal years ended December 31, 2006, December 25, 2005 and December 26, 2004 |  | F-5 
|                                                                                                                                                                | 
|Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2006, December 25, 2005 and December 26, 2004                                     |  | F-6 
|                                                                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                                                                      |  | F-8 
|                                                                                                                                                                | 
|Schedule:                                                                                                                                                       |  |     
|                                                                                                                                                                | 
|Schedule II  Valuation and Qualifying Accounts                                                                                                                 |  | F-32



F-1



---

##### Table of Contents

Report of I
ndependent Registered Public Accounting Firm

Board of Directors and Stockholders

COMFORCE Corporation:

We have audited the accompanying consolidated
financial statements of COMFORCE Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.

We conducted our audits in accordance with 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 31, 2006 and December 25, 2005, and the results of their operations and their cash flows for each of the fiscal years in the three-year
period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, 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 changed its method of quantifying errors in fiscal 2006 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 and adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, effective December 26, 2005.

/s/ KPMG LLP

Melville, New York

March 28, 2007



F-2



---

##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2006 and December 25, 2005

(in thousands, except share and per share amounts)



|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | ------- | -
|                                                                                                                                                                                                                                |  | December 31,2006 |         |   | December 25,2005 |        
|Assets                                                                                                                                                                                                                          |  |                  |         |   |                  |         |  
|Current assets:                                                                                                                                                                                                                 |  |                  |         |   |                  |         |  
|Cash and cash equivalents                                                                                                                                                                                                       |  | $                | 3,782   |   |                  | 8,417   |  
|Accounts receivable, less allowance of $195 and $354 in 2006 and 2005, respectively                                                                                                                                             |  |                  | 114,079 |   |                  | 103,201 |  
|Funding and service fees receivable, less allowance of $81 and $351 in 2006 and 2005, respectively                                                                                                                              |  |                  | 13,170  |   |                  | 15,715  |  
|Prepaid expenses and other current assets                                                                                                                                                                                       |  |                  | 3,863   |   |                  | 4,997   |  
|Deferred income taxes, net                                                                                                                                                                                                      |  |                  | 1,500   |   |                  | 2,004   |  
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|Total current assets                                                                                                                                                                                                            |  |                  | 136,394 |   |                  | 134,334 |  
|                                                                                                                                                                                                                                |  |                 
|Deferred income taxes, net                                                                                                                                                                                                      |  |                  | 263     |   |                  | 1,100   |  
|Property and equipment, net                                                                                                                                                                                                     |  |                  | 5,376   |   |                  | 5,260   |  
|Intangible assets, net                                                                                                                                                                                                          |  |                  |        |   |                  | 40      |  
|Goodwill                                                                                                                                                                                                                        |  |                  | 32,073  |   |                  | 32,073  |  
|Deferred financing costs, net                                                                                                                                                                                                   |  |                  | 765     |   |                  | 851     |  
|Other assets                                                                                                                                                                                                                    |  |                  | 267     |   |                  | 320     |  
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|Total assets                                                                                                                                                                                                                    |  | $                | 175,138 |   |                  | 173,978 |  
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|                                                                                                                                                                                                                                |  |                 
|Liabilities and Stockholders Deficit                                                                                                                                                                                           |  |                  |         |   |                  |         |  
|                                                                                                                                                                                                                                |  |                 
|Current liabilities:                                                                                                                                                                                                            |  |                  |         |   |                  |         |  
|Accounts payable                                                                                                                                                                                                                |  | $                | 3,281   |   |                  | 3,864   |  
|Accrued expenses                                                                                                                                                                                                                |  |                  | 100,768 |   |                  | 87,307  |  
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|Total current liabilities                                                                                                                                                                                                       |  |                  | 104,049 |   |                  | 91,171  |  
|                                                                                                                                                                                                                                |  |                 
|Long-term debt (including related party debt of $1,520 in 2006 and $1,405 in 2005)                                                                                                                                              |  |                  | 89,770  |   |                  | 105,792 |  
|Other liabilities                                                                                                                                                                                                               |  |                  | 34      |   |                  | 46      |  
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|Total liabilities                                                                                                                                                                                                               |  |                  | 193,853 |   |                  | 197,009 |  
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|Commitments and contingencies                                                                                                                                                                                                   |  |                  |         |   |                  |         |  
|                                                                                                                                                                                                                                |  |                 
|Stockholdersdeficit:                                                                                                                                                                                                           |  |                  |         |   |                  |         |  
|Common stock, $.01 par value; 100,000,000 shares authorized, 17,370,551 and 17,079,532 shares issued and outstanding in 2006 and 2005,
respectively                                                                             |  |                  | 174     |   |                  | 171     |  
|Convertible preferred stock, $.01 par value:                                                                                                                                                                                    |  |                  |         |   |                  |         |  
|Series 2003A, 6,500 shares authorized, 6,148 shares issued and outstanding at December 31, 2006 and December 25, 2005, with an
aggregate liquidation preference of $7,928 at December 31, 2006 and $7,466 at December 25, 2005  |  |                  | 4,304   |   |                  | 4,304   |  
|Series 2003B, 3,500 shares authorized, 513 shares issued and outstanding at December 31, 2006 and December 25, 2005, with an
aggregate liquidation preference of $638 at December 31, 2006 and $600 at December 25, 2005        |  |                  | 513     |   |                  | 513     |  
|Series 2004A, 15,000 shares authorized, 6,737 shares issued and outstanding at December 31, 2006 and December 25, 2005, with an
aggregate liquidation preference of $7,778 at December 31, 2006 and $7,273 at December 25, 2005 |  |                  | 10,264  |   |                  | 10,264  |  
|Additional paid-in capital                                                                                                                                                                                                      |  |                  | 48,190  |   |                  | 47,727  |  
|Accumulated other comprehensive income                                                                                                                                                                                          |  |                  | 55      |   |                  | 147     |  
|Accumulated deficit                                                                                                                                                                                                             |  |                  | (82,215 | ) |                  | (86,157 | )
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|Total stockholders deficit                                                                                                                                                                                                     |  |                  | (18,715 | ) |                  | (23,031 | )
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  
|Total liabilities and stockholders deficit                                                                                                                                                                                     |  | $                | 175,138 |   |                  | 173,978 |  
|                                                                                                                                                                                                                                |  |                  |         |   |                  |         |  

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



F-3



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

C
onsolidated Statements of Operations

For the fiscal years ended December 31, 2006, December 25, 2005
and December 26, 2004

(in thousands, except per share amounts)



|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|----------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | ------- | - | ---------------- | ------- | -
|                                                                                                            |  | December 31,2006 |         |   | December 25,2005 |         |   | December 26,2004 |        
|Net sales of services                                                                                       |  | $                | 567,821 |   |                  | 539,841 |   |                  | 480,887 |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Costs and expenses:                                                                                         |  |                  |         |   |                  |         |   |                  |         |  
|Cost of services                                                                                            |  |                  | 478,927 |   |                  | 460,581 |   |                  | 408,850 |  
|Selling, general and administrative expenses                                                                |  |                  | 68,821  |   |                  | 59,919  |   |                  | 53,755  |  
|Depreciation and amortization                                                                               |  |                  | 3,095   |   |                  | 3,700   |   |                  | 4,219   |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Total costs and expenses                                                                                    |  |                  | 550,843 |   |                  | 524,200 |   |                  | 466,824 |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Operating income                                                                                            |  |                  | 16,978  |   |                  | 15,641  |   |                  | 14,063  |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Other income (expense):                                                                                     |  |                  |         |   |                  |         |   |                  |         |  
|Interest expense                                                                                            |  |                  | (9,369  | ) |                  | (10,744 | ) |                  | (12,338 | )
|(Loss) gain on debt extinguishment                                                                          |  |                  | (169    | ) |                  | (336    | ) |                  | 1,999   |  
|Other income, net                                                                                           |  |                  | 11      |   |                  | 186     |   |                  | 110     |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|                                                                                                            |  |                  | (9,527  | ) |                  | (10,894 | ) |                  | (10,229 | )
|                                                                                                            |  |                  |        
|Income from continuing operations before income taxes                                                       |  |                  | 7,451   |   |                  | 4,747   |   |                  | 3,834   |  
|Provision (benefit) for income taxes                                                                        |  |                  | 3,373   |   |                  | (1,455  | ) |                  | 2,058   |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Income from continuing operations                                                                           |  |                  | 4,078   |   |                  | 6,202   |   |                  | 1,776   |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Income (loss) from discontinued operations, net of tax benefit of $19 in 2005 and $13 in 2004, respectively |  |                  |        |   |                  | 70      |   |                  | (20     | )
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Net income                                                                                                  |  | $                | 4,078   |   |                  | 6,272   |   |                  | 1,756   |  
|                                                                                                            |  |                  |        
|Dividends on preferred stock                                                                                |  |                  | 1,005   |   |                  | 1,005   |   |                  | 530     |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Net income available to common stockholders                                                                 |  | $                | 3,073   |   |                  | 5,267   |   |                  | 1,226   |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Basic income per common share:                                                                              |  |                  |         |   |                  |         |   |                  |         |  
|Income from continuing operations                                                                           |  | $                | 0.18    |   |                  | 0.31    |   |                  | 0.07    |  
|Income (loss) from discontinued operations                                                                  |  |                  |        |   |                  |        |   |                  |        |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Net income                                                                                                  |  | $                | 0.18    |   |                  | 0.31    |   |                  | 0.07    |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Diluted income per common share:                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Income from continuing operations                                                                           |  | $                | 0.13    |   |                  | 0.21    |   |                  | 0.07    |  
|Income (loss) from discontinued operations                                                                  |  |                  |        |   |                  |        |   |                  |        |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Net income                                                                                                  |  | $                | 0.13    |   |                  | 0.21    |   |                  | 0.07    |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Weighted average common shares outstanding, basic                                                           |  |                  | 17,317  |   |                  | 16,907  |   |                  | 16,675  |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  
|Weighted average common shares outstanding, diluted                                                         |  |                  | 31,012  |   |                  | 29,793  |   |                  | 18,122  |  
|                                                                                                            |  |                  |         |   |                  |         |   |                  |         |  

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



F-4



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Consolidated
Statements of Stockholders' Deficit and Comprehensive Income

Fiscal years ended December 31, 2006,
December 25, 2005 and December 26, 2004

(in thousands, except share amounts)



|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------ |  | --------------- | --- | ------------------------ | ------ | ------ | ------------------------------------------- | ------ |  | ------------------ | ------ | - | ------------------------- | - | --- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                        |  | Common stock |  | Preferred stock |     | Additionalpaid-incapital |        |        | AccumulatedOther ComprehensiveIncome (Loss) |        |  | AccumulatedDeficit |        |   | Totalstockholders'deficit |  
|                                                                                        |  | Shares       |  | Amount          |     | Shares                   |        | Amount |                                             |        |  |                   
|Balance at December 28, 2003                                                            |  | 16,659,397   |  | $               | 167 |                          | 6,661  |        | $                                           | 4,817  |  | $                  | 50,501 |   |                           | $ | 76  |   |  | $ | (94,185 | ) |  | $ | (38,624 | )
|                                                                                        |  |              |  |                 |     |                          |        |       
|Comprehensive income:                                                                   |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|Net income                                                                              |  |             |  |                 |    |                          |       |        |                                             |       |  |                    |       |   |                           |   |    |   |  |   | 1,756   |   |  |   | 1,756   |  
|Foreign currency translation adjustment                                                 |  |             |  |                 |    |                          |       |        |                                             |       |  |                    |       |   |                           |   | 77  |   |  |   |        |   |  |   | 77      |  
|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                                              |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   | 1,833   |  
|Exercise of stock options                                                               |  | 30,000       |  |                 |    |                          |       |        |                                             |       |  |                    | 37     |   |                           |   |    |   |  |   |        |   |  |   | 37      |  
|Issuance of common stock                                                                |  | 99           |  |                 |    |                          |       |        |                                             |       |  |                    | 1      |   |                           |   |    |   |  |   |        |   |  |   | 1       |  
|Issuance of Series 2004A preferred stock                                                |  |             |  |                 |    |                          | 6,737  |        |                                             | 10,264 |  |                    | (3,527 | ) |                           |   |    |   |  |   |        |   |  |   | 6,737   |  
|Beneficial conversion feature attibutable to 8% Notes                                   |  |             |  |                 |    |                          |       |        |                                             |       |  |                    | 181    |   |                           |   |    |   |  |   |        |   |  |   | 181     |  
|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|Balance 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   |   |  |   | 6,272   |  
|Foreign currency translation adjustment                                                 |  |             |  |                 |    |                          |       |        |                                             |       |  |                    |       |   |                           |   | (6  | ) |  |   |        |   |  |   | (6      | )
|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                                              |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   | 6,266   |  
|Exercise of stock options                                                               |  | 390,000      |  |                 | 4   |                          |       |        |                                             |       |  |                    | 490    |   |                           |   |    |   |  |   |        |   |  |   | 494     |  
|Issuance of common stock                                                                |  | 36           |  |                 |    |                          |       |        |                                             |       |  |                    |       |   |                           |   |    |   |  |   |        |   |  |   |        |  
|Stock compensation expense                                                              |  |             |  |                 |    |                          |       |        |                                             |       |  |                    | 30     |   |                           |   |    |   |  |   |        |   |  |   | 30      |  
|Beneficial conversion feature attibutable to 8% Notes                                   |  |             |  |                 |    |                          |       |        |                                             |       |  |                    | 14     |   |                           |   |    |   |  |   |        |   |  |   | 14      |  
|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|Balance 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   |   |  |   | 4,078   |  
|Foreign currency translation adjustment, net of tax of $35                              |  |             |  |                 |    |                          |       |        |                                             |       |  |                    |       |   |                           |   | (92 | ) |  |   |        |   |  |   | (92     | )
|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                                              |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   | 3,986   |  
|Exercise of stock options                                                               |  | 290,628      |  |                 | 3   |                          |       |        |                                             |       |  |                    | 341    |   |                           |   |    |   |  |   |        |   |  |   | 344     |  
|Issuance of common stock                                                                |  | 391          |  |                 |    |                          |       |        |                                             |       |  |                    |       |   |                           |   |    |   |  |   |        |   |  |   |        |  
|Share-based payment compensation expense                                                |  |             |  |                 |    |                          |       |        |                                             |       |  |                    | 98     |   |                           |   |    |   |  |   |        |   |  |   | 98      |  
|Beneficial conversion feature attibutable to 8% Notes, net of tax of $36                |  |             |  |                 |    |                          |       |        |                                             |       |  |                    | 24     |   |                           |   |    |   |  |   |        |   |  |   | 24      |  
|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2006                                                            |  | 17,370,551   |  | $               | 174 |                          | 13,398 |        | $                                           | 15,081 |  | $                  | 48,190 |   |                           | $ | 55  |   |  | $ | (82,215 | ) |  | $ | (18,715 | )
|                                                                                        |  |              |  |                 |     |                          |        |        |                                             |        |  |                    |        |   |                           |   |     |   |  |   |         |   |  |   |         |  

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



F-5



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Consolid
ated Statements of Cash Flows

Fiscal years ended December 31, 2006, December 25, 2005 and
December 26, 2004

(in thousands)



|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|--------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | ------- | - | ---------------- | ------- | -
|                                                                                  |  | December 31,2006 |         |   | December 25,2005 |         |   | December 26,2004 |        
|Cash flows from operating activities:                                             |  |                  |         |   |                  |         |   |                  |         |  
|Net income                                                                        |  | $                | 4,078   |   |                  | 6,272   |   |                  | 1,756   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                  |         |   |                  |         |   |                  |         |  
|Depreciation and amortization of property and equipment                           |  |                  | 3,055   |   |                  | 3,659   |   |                  | 4,168   |  
|Amortization of intangible assets                                                 |  |                  | 40      |   |                  | 41      |   |                  | 51      |  
|Amortization of deferred financing costs                                          |  |                  | 386     |   |                  | 525     |   |                  | 747     |  
|Net (recoveries) provision of bad debts                                           |  |                  | (8      | ) |                  | (236    | ) |                  | 38      |  
|Deferred income taxes                                                             |  |                  | 1,357   |   |                  | 581     |   |                  | (221    | )
|Interest expense paid by the issuance of convertible notes                        |  |                  | 115     |   |                  | 106     |   |                  | 605     |  
|Gain from sale of discontinued niche telecom operations                           |  |                  |        |   |                  | (101    | ) |                  |        |  
|Loss (gain) on repurchase of Senior Notes                                         |  |                  | 169     |   |                  | 336     |   |                  | (1,999  | )
|Loss on disposal of fixed assets                                                  |  |                  | 48      |   |                  |        |   |                  |        |  
|Equity-based consulting expense                                                   |  |                  |        |   |                  | 30      |   |                  |        |  
|Share-based payment compensation expense                                          |  |                  | 98      |   |                  |        |   |                  |        |  
|Tax benefit from stock option exercises                                           |  |                  | (135    | ) |                  | 152     |   |                  |        |  
|Changes in assets and liabilities:                                                |  |                  |         |   |                  |         |   |                  |         |  
|Accounts, funding and service fees receivable                                     |  |                  | (7,961  | ) |                  | (26,542 | ) |                  | (12,607 | )
|Prepaid expenses and other assets                                                 |  |                  | 1,007   |   |                  | (1,862  | ) |                  | 570     |  
|Income taxes receivable                                                           |  |                  | 37      |   |                  | 97      |   |                  | (51     | )
|Accounts payable and accrued expenses                                             |  |                  | 12,506  |   |                  | 24,075  |   |                  | 16,631  |  
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|Net cash provided by operating activities                                         |  |                  | 14,792  |   |                  | 7,133   |   |                  | 9,688   |  
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|                                                                                  |  |                  |        
|Cash flows from investing activities:                                             |  |                  |         |   |                  |         |   |                  |         |  
|Purchases of property and equipment                                               |  |                  | (3,219  | ) |                  | (2,626  | ) |                  | (1,911  | )
|Cash proceeds from sale of niche telecom operations                               |  |                  |        |   |                  | 225     |   |                  | 2,473   |  
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|Net cash (used in) provided by investing activities                               |  |                  | (3,219  | ) |                  | (2,401  | ) |                  | 562     |  
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|Cash flows from financing activities:                                             |  |                  |         |   |                  |         |   |                  |         |  
|Net borrowings under line of credit agreements                                    |  |                  | 7,283   |   |                  | 6,559   |   |                  | 13,478  |  
|Repurchases of Senior Notes                                                       |  |                  | (23,461 | ) |                  | (18,258 | ) |                  | (15,811 | )
|Debt financing costs                                                              |  |                  | (368    | ) |                  | (76     | ) |                  | (27     | )
|Tax benefit from stock option exercises                                           |  |                  | 135     |   |                  |        |   |                  |        |  
|Proceeds from exercise of stock options                                           |  |                  | 209     |   |                  | 342     |   |                  | 37      |  
|Net repayments under capital lease obligations                                    |  |                  | (6      | ) |                  | (115    | ) |                  | (292    | )
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|Net cash used in financing activities                                             |  |                  | (16,208 | ) |                  | (11,548 | ) |                  | (2,615  | )
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|Net (decrease) increase in cash and cash equivalents                              |  |                  | (4,635  | ) |                  | (6,816  | ) |                  | 7,635   |  
|                                                                                  |  |                  |        
|Cash and cash equivalents, beginning of fiscal year                               |  |                  | 8,417   |   |                  | 15,233  |   |                  | 7,598   |  
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  
|Cash and cash equivalents, end of fiscal year                                     |  | $                | 3,782   |   |                  | 8,417   |   |                  | 15,233  |  
|                                                                                  |  |                  |         |   |                  |         |   |                  |         |  



F-6



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Fiscal years ended December 31,
2006, December 25, 2005 and December 26, 2004

(in thousands)



|                                                                                                                                |  |                  |       |                  |        |                  |            |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | ---------------- | ------ | ---------------- | ---------- | -
|                                                                                                                                |  | December 31,2006 |       | December 25,2005 |        | December 26,2004 |           
|                                                                                                                                |  |                  |       |                  |        |                  | (Continued | )
|Supplemental cash flow information:                                                                                             |  |                  |       |                  |        |                  |            |  
|Cash paid during the fiscal year for:                                                                                           |  |                  |       |                  |        |                  |            |  
|Interest                                                                                                                        |  | $                | 9,333 |                  | 10,367 |                  | 9,673      |  
|Income taxes                                                                                                                    |  |                  | 3,650 |                  | 1,136  |                  | 1,093      |  
|                                                                                                                                |  |                  |      
|Supplemental schedule of significant non-cash investing and financing activities:                                               |  |                  |       |                  |        |                  |            |  
|Exchange of 8% Subordinated Convertible Notes and $11 of accrued interest for the issuance of 2004A Convertible Preferred
Stock |  | $                |      |                  |       |                  | 6,737      |  
|Charge to capital as a result of the exchange of 8% Subordinated Convertible Notes                                              |  |                  |      |                  |       |                  | 3,527      |  
|Capital lease obligations incurred for the purchase of new equipment                                                            |  |                  |      |                  |       |                  | 51         |  

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



F-7



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Not
es to Consolidated Financial Statements

December 31, 2006, December 25, 2005 and December 26, 2004



|(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.

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



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

Fiscal Year

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 31, 2006. Fiscal year 2006 contained 53 weeks and fiscal years 2005 and 2004 each contained 52 weeks.

Principles of Consolidation

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

Revenue Recognition

The
Company provides supplemental staff 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



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



contingent staffing management services, comprise the management of invoicing for a customers multiple services providers that results in the
consolidation of invoices for all of a customers individual staffing vendors. The Company recognizes revenue for the amount of its fees for these services, which are determined as a percentage of the gross billings to customers from the
contingent staffing suppliers, as the services are performed. The Company invoices its customers for its fees together with the billings from the contingent staffing suppliers, which are reflected in accounts receivable as there is no right of
offset with the liabilities for amounts due the 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 31, 2006, December 25, 2005 and December 26, 2004 were approximately $2,519,000, $2,772,000 and $3,052,000, 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.

Property and Equipment

Property and equipment are carried at cost. Depreciation is provided primarily on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the lease or
of the improvement.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



Maintenance and repairs are charged to expense as incurred and improvements that extend the useful life of the related asset are capitalized. The Company
capitalizes its internal costs related to the development of software for internal use under the provisions of SOP 98-1, which are amortized over the estimated life of the software of approximately three to five years.

If events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual disposition in accordance with Financial Accounting Standards Board (FASB) Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). If the sum of the expected undiscounted future cash flows is less than the carrying amount of the long-lived asset, an impairment loss is recognized for the difference between the fair value and carrying value 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. If the reporting units estimated fair value is in excess of its carrying amount, the test is complete and no impairment is recorded. However, 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.

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.

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 fair value of
goodwill, the recoverability of long-lived assets and deferred tax assets, accrued workers compensation liabilities, the assessment of litigation and contingencies and the fair value of share-based payment compensation. Actual results could differ
from those estimates.

Fair Values of Financial Instruments

Cash equivalents, accounts receivable, funding and service fees receivable, accounts payable and accrued expenses are reflected in the consolidated
financial statements at book value which is believed to represent fair value due to the short-term maturity of these financial instruments. The carrying values of the Companys revolving line of credit obligations 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, conditions in the high yield capital markets, and perceptions as to the Companys
condition and prospects.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



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 31, 2006 were: (i) $22.9 million for COIs 12% Senior Notes due 2010 in the outstanding principal amount of $22.9
million, and (ii) $2.1 million for COMFORCEs 8% Convertible Subordinated Note in the outstanding principal amount of $1.5 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
$128,000 in fiscal 2006, $178,000 in fiscal 2005 and $280,000 in fiscal 2004 relating to the early extinguishment of debt (see note 8) which are included in (loss) gain on debt extinguishment in the consolidated statements of operations. In
addition, $186,000 of deferred financing costs were written off in 2004 related to the exchange of debt for preferred stock.

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 the 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. The translation adjustments are accumulated in a separate component of stockholders deficit and transaction gains and losses are
recognized in the consolidated statement of operations 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 of Financial Accounting Standards 123(R), Share-Based Payments(SFAS No. 123(R)), which establishes
the accounting for employee share-based awards. Under the provisions of SFAS No. 123(R), share-based payments are measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee
service period (generally the vesting period of the grant). The Company adopted SFAS No. 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



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



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 year ended December 31, 2006, $98,000 of compensation expense has been recorded within selling, general and administrative expense and the Company has recorded an income tax benefit of $38,000 in the accompanying
consolidated statements of operations for options granted during fiscal 2006, which options immediately vested.

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 operations.

Had the compensation cost of the Companys employee share-based payments for
fiscal years 2005 and 2004 been based upon the fair value method determined in accordance with SFAS No. 123, the Companys pro forma net income and net income per share would have been (in thousands, except per share amounts):



|                                                                                                                                      |  |                   |       |                   |   |      
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | ----------------- | - | -----
|                                                                                                                                      |  | Year Ended       
|                                                                                                                                      |  | December 25, 2005 |       | December 26, 2004
|Net income available to common stockholders as reported                                                                               |  | $                 | 5,267 |                   | $ | 1,226
|Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                   | 504   |                   |   | 26   
|                                                                                                                                      |  |                   |       |                   |   |      
|Pro forma income available to common stockholders                                                                                     |  | $                 | 4,763 |                   | $ | 1,200
|                                                                                                                                      |  |                   |       |                   |   |      
|Income per share:                                                                                                                     |  |                   |       |                   |   |      
|As reported:                                                                                                                          |  |                   |       |                   |   |      
|Basic                                                                                                                                 |  | $                 | 0.31  |                   | $ | 0.07 
|Diluted                                                                                                                               |  |                   | 0.21  |                   |   | 0.07 
|Pro forma:                                                                                                                            |  |                   |       |                   |   |      
|Basic                                                                                                                                 |  |                   | 0.28  |                   |   | 0.07 
|Diluted                                                                                                                               |  |                   | 0.20  |                   |   | 0.07 

Under the modified-prospective method, SFAS No. 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.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



The per share weighted average fair value of stock options granted were $1.40 during the year ended
December 31, 2006, $1.30 during the year ended December 25, 2005 and $0.83 during the year ended December 26, 2004. 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 in the 12 month periods are listed in the table below:



|                        |  |                  |   |  |                  |   |  |                  |  
|----------------------- |  | ---------------- | - |  | ---------------- | - |  | ---------------- | -
|                        |  | Year ended       |  
|                        |  | December 31,2006 |   |  | December 25,2005 |   |  | December 26,2004 |  
|Expected dividend yield |  | 0.0              | % |  | 0.0              | % |  | 0.0              | %
|Expected volatility     |  | 55.0             | % |  | 38.1             | % |  | 35.3             | %
|Risk-free interest rate |  | 5.0              | % |  | 3.8              | % |  | 4.0              | %
|Expected term (years)   |  | 5                |   |  | 5                |   |  | 5                |  

The Company estimates expected volatility based primarily on historical daily price changes of the
Companys stock and other known or expected trends. The risk-free interest rate is based on the United States (U.S.) treasury yield curve in effect at the time of grant. The expected option term is the number of years that the
Company estimates that options will be outstanding prior to exercise. The expected term of 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 $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 and $1,000 for the year ended December 26, 2004.

Impact of Recently Issued Accounting Standards

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 qualitative factors. The Company has changed its method of quantifying errors in
accordance with SAB 108 and recorded a reduction to retained earnings of $136,000. See note 5 for further discussion.

In July 2006, the
FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 establishes a recognition threshold and measurement for income tax positions recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is
measurement. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical
merits of the position. If the tax position meets the more-likely-than-not recognition threshold, it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized. If a
tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



Tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN
No. 48 may be recognized, or continue to be recognized, upon adoption of FIN No. 48. The cumulative effect of applying the provisions of FIN No. 48 shall be reported as an adjustment to the opening balance of retained earnings for the
year of adoption. FIN No. 48 is effective for the Company beginning in fiscal year 2007. The Company is in the process of assessing the effect FIN No. 48 may have on its consolidated financial statements.

In June 2006, the Emerging Issues Task Force issued EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3) to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for
taxes within the scope of this issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority
within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and
the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006. The Company is currently assessing the impact, if any, that
the adoption of EITF 06-3 will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the
impact, if any, that the adoption of SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits companies to elect, at specified election dates, to measure
eligible financial instruments and certain other items at fair value. A company must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize
upfront costs and fees related to those items in earnings as incurred. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact, if any,
that the adoption of SFAS 159 will have on its consolidated financial statements.



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

Property and equipment as
of December 31, 2006 and December 25, 2005, consisted of (in thousands):



|                                               |  |                                |  |      |         |   |      |         |  
|---------------------------------------------- |  | ------------------------------ |  | ---- | ------- | - | ---- | ------- | -
|                                               |  | Estimated usefullives in years |  | 2006 |         |   | 2005 |        
|Computer equipment and related software        |  | 3-7                            |  | $    | 22,105  |   |      | 21,105  |  
|Furniture and fixtures                         |  | 3-10                           |  |      | 2,415   |   |      | 3,009   |  
|Leasehold improvements                         |  | 3-7                            |  |      | 607     |   |      | 654     |  
|                                               |  |                                |  |      |         |   |      |         |  
|                                               |  |                                |  |      | 25,127  |   |      | 24,768  |  
|Less accumulated depreciation and amortization |  |                                |  |      | (19,751 | ) |      | (19,508 | )
|                                               |  |                                |  |      |         |   |      |         |  
|                                               |  |                                |  | $    | 5,376   |   |      | 5,260   |  
|                                               |  |                                |  |      |         |   |      |         |  



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



Depreciation and amortization expense related to property and equipment was $3,055,000, $3,659,000
and $4,168,000 for the fiscal years ended December 31, 2006, December 25, 2005 and December 26, 2004, respectively.



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

The changes in the carrying amount of
goodwill for each of the three fiscal years ended December 31, 2006 is as follows (in thousands):



|                                                                         |  |                   |        |   |                        |   |       |  |   |        |  
|------------------------------------------------------------------------ |  | ----------------- | ------ | - | ---------------------- | - | ----- |  | - | ------ | -
|                                                                         |  | StaffAugmentation |        |   | HumanCapitalManagement |   | Total | 
|Balance at December 28, 2003                                             |  | $                 | 23,042 |   |                        | $ | 9,200 |  | $ | 32,242 |  
|Goodwill associated with the niche telecom operations sold in 2004       |  |                   | (169   | ) |                        |   |      |  |   | (169   | )
|Balance as of December 26, 2004, December 25, 2005 and December 31, 2006 |  | $                 | 22,873 |   |                        | $ | 9,200 |  | $ | 32,073 |  



|(5) | Staff Accounting Bulletin No. 108
|--- | ---------------------------------

As
discussed under Impact of Recently Issued Accounting Standards in note 2, in September 2006, the SEC released SAB 108. 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, the Company corrected its consolidated financial statements to: (i) reduce the 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.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



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

Accrued expenses as of
December 31, 2006 and December 25, 2005, consisted of (in thousands):



|                                               |  |      |         |      |       
|---------------------------------------------- |  | ---- | ------- | ---- | ------
|                                               |  | 2006 |         | 2005
|Payroll, payroll taxes and sub-vendor payables |  | $    | 88,966  |      | 72,425
|Vacation/retirement plan                       |  |      | 2,948   |      | 2,869 
|Income taxes payable                           |  |      | 2,525   |      | 3,968 
|Commissions                                    |  |      | 1,678   |      | 1,499 
|Interest                                       |  |      | 558     |      | 934   
|Other                                          |  |      | 4,093   |      | 5,612 
|                                               |  |      |         |      |       
|                                               |  | $    | 100,768 |      | 87,307
|                                               |  |      |         |      |       

The increase in payroll, payroll taxes and sub-vendor payables is primarily attributable to the
increase in the Companys contingent staffing management services. See note 2.



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

Income tax provision (benefit) for
the years ended as of December 31, 2006, December 25, 2005, and December 26, 2004 was allocated as follows (in thousands):



|                                  |  |      |       |      |        |   |      |       |  
|--------------------------------- |  | ---- | ----- | ---- | ------ | - | ---- | ----- | -
|                                  |  | 2006 |       | 2005 |        |   | 2004 |      
|Income from continuing operations |  | $    | 3,373 |      | (1,455 | ) |      | 2,058 |  
|Discontinued operations           |  |      |      |      | (19    | ) |      | (13   | )
|                                  |  |      |       |      |        |   |      |       |  
|                                  |  | $    | 3,373 |      | (1,474 | ) |      | 2,045 |  
|                                  |  |      |       |      |        |   |      |       |  

The provision for (recovery of) income taxes as of December 31, 2006, December 25,
2005, and December 26, 2004, consisted of (in thousands):



|                              |  |      |       |      |        |   |      |       |  
|----------------------------- |  | ---- | ----- | ---- | ------ | - | ---- | ----- | -
|                              |  | 2006 |       | 2005 |        |   | 2004 |      
|Current:                      |  |      |       |      |        |   |      |       |  
|Federal                       |  | $    | 1,734 |      | (1,870 | ) |      | 1,774 |  
|Foreign                       |  |      | 117   |      | 24     |   |      |      |  
|State                         |  |      | 165   |      | (190   | ) |      | 505   |  
|                              |  |      |       |      |        |   |      |       |  
|Total current                 |  |      | 2,016 |      | (2,036 | ) |      | 2,279 |  
|                              |  |      |       |      |        |   |      |       |  
|                              |  |      |      
|Deferred:                     |  |      |       |      |        |   |      |       |  
|Federal                       |  |      | 1,059 |      | 496    |   |      | (309  | )
|State                         |  |      | 298   |      | 85     |   |      | 88    |  
|                              |  |      |       |      |        |   |      |       |  
|Total deferred                |  |      | 1,357 |      | 581    |   |      | (221  | )
|                              |  |      |       |      |        |   |      |       |  
|Total tax provision (benefit) |  | $    | 3,373 |      | (1,455 | ) |      | 2,058 |  
|                              |  |      |       |      |        |   |      |       |  

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):



|                                                    |  |      |       |      |        |   |      |       |  
|--------------------------------------------------- |  | ---- | ----- | ---- | ------ | - | ---- | ----- | -
|                                                    |  | 2006 |       | 2005 |        |   | 2004 |      
|Income taxes at statutory federal tax rate of 34.0% |  | $    | 2,533 |      | 1,614  |   |      | 1,303 |  
|State and local taxes, net of federal tax           |  |      | 221   |      | 519    |   |      | 436   |  
|Change in deferred tax rates and estimates used     |  |      | 54    |      | 203    |   |      | (44   | )
|Foreign tax rates                                   |  |      | 6     |      |       |   |      |      |  
|Tax contingency matters                             |  |      | 247   |      | (4,317 | ) |      |      |  
|Other non-deductible expenses                       |  |      | 312   |      | 526    |   |      | 363   |  
|                                                    |  |      |       |      |        |   |      |       |  
|Income tax provision (benefit)                      |  | $    | 3,373 |      | (1,455 | ) |      | 2,058 |  
|                                                    |  |      |       |      |        |   |      |       |  



F-16



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



The components of deferred tax assets and liabilities at December 31, 2006 and December 25,
2005 (in thousands) are as follows:



|                                                              |  |      |        |   |      |        |  
|------------------------------------------------------------- |  | ---- | ------ | - | ---- | ------ | -
|                                                              |  | 2006 |        |   | 2005 |       
|Deferred tax assets:                                          |  |      |        |   |      |        |  
|Receivable allowances                                         |  | $    | 107    |   |      | 275    |  
|Excess book amortization expense                              |  |      | 1,130  |   |      | 1,906  |  
|Accrued liabilities and other                                 |  |      | 2,304  |   |      | 2,177  |  
|Tax benefit of capital loss carryforward                      |  |      | 1,134  |   |      | 1,134  |  
|Tax benefit of state NOL carryforwards, net of federal effect |  |      | 606    |   |      | 581    |  
|                                                              |  |      |        |   |      |        |  
|                                                              |  |      | 5,281  |   |      | 6,073  |  
|Less valuation allowance                                      |  |      | (1,483 | ) |      | (1,423 | )
|                                                              |  |      |        |   |      |        |  
|Total deferred tax assets                                     |  | $    | 3,798  |   |      | 4,650  |  
|                                                              |  |      |        |   |      |        |  
|Deferred tax liabilities:                                     |  |      |        |   |      |        |  
|Prepaids                                                      |  | $    | 795    |   |      | 437    |  
|Excess tax depreciation                                       |  |      | 1,032  |   |      | 1,004  |  
|Other                                                         |  |      | 208    |   |      | 105    |  
|                                                              |  |      |        |   |      |        |  
|Total deferred tax liabilities                                |  |      | 2,035  |   |      | 1,546  |  
|                                                              |  |      |        |   |      |        |  
|Net deferred tax asset                                        |  | $    | 1,763  |   |      | 3,104  |  
|                                                              |  |      |        |   |      |        |  

At December 31, 2006, the Company had available $918,000 of state tax benefits from state net
operating losses which are required under various state laws to be carried forward to future years. These tax benefits are available to offset future state income tax and expire in the tax years 2007 through 2025. The Company has established a
valuation allowance of $262,000 against the state tax net operating loss deferred tax asset for those states where management has determined it is unlikely that any of the benefits will be realized during the carryforward period. The estimated
future taxable income needed to fully utilize the remaining state net operating loss deferred tax asset approximates $8.7 million.

As of
December 31, 2006, the Company had available approximately $1.1 million of federal and state tax benefits from a capital loss carryforward generated when the Company sold a portion of its Telecom division in the first quarter of 2004. This
capital loss, the benefit of which only can be used to the extent of future capital gain income, has been carried forward as required under federal and state laws to future years and will expire on December 31, 2009. The related deferred tax
asset has been reserved due to the uncertainty of future capital gain income.

In assessing the realizability of deferred tax assets,
management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is provided when it is more-likely-than-not that some portion, or all, of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income, the ability to carryback future losses to recover income taxes paid and tax planning strategies that could be
implemented. Due to the fact that the Company has entered into litigation with the buyer for nonpayment of its note payable to the Company as partial consideration for the sale of its niche telecom operations and the collectibility of any additional
interest payments is uncertain, the Company established a full valuation allowance against these related deferred assets of $87,000.

Based
on the Companys ability to carryback reversals of deferred tax assets in future periods, to obtain a refund of taxes paid in current and prior years, along with the Companys history of, and projections for future taxable income,
management believes that it is more-likely-than-not that the Company will realize the benefit of the net deferred tax assets existing at December 31, 2006. There can be no assurance, however, that the Company will generate any earnings or any
specific level of continuing earnings in the future.



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



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

Long-term debt at December 31, 2006 and
December 25, 2005, consisted of (in thousands):



|                                                                                                                                                                                                         |  |      |        |      |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | -------
|                                                                                                                                                                                                         |  | 2006 |        | 2005
|12% Senior Notes, due December 1, 2010                                                                                                                                                                   |  | $    | 22,890 |      | 46,310 
|8% Subordinated Convertible Note, due December 2, 2009                                                                                                                                                   |  |      | 1,520  |      | 1,405  
|Revolving 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 7.25% at December 31, 2006, and 6.24% at December 25, 2005 |  |      | 65,360 |      | 58,077 
|                                                                                                                                                                                                         |  |      |        |      |        
|Total long-term debt                                                                                                                                                                                     |  | $    | 89,770 |      | 105,792
|                                                                                                                                                                                                         |  |      |        |      |        

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



|      |  |   |       
|----- |  | - | ------
|2009  |  | $ | 1,520 
|2010  |  |   | 88,250
|      |  |   |       
|Total |  | $ | 89,770
|      |  |   |       

Senior Notes: In November 1997, COI issued $110 million original principal
amount of its 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.

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 31, 2006) 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
| | - |  | -----------------------------------------------------------------------------------------------------



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



| |  |  | COI does not invest in other businesses or engage in other business activities unless permitted under the Indenture.
| | - |  | --------------------------------------------------------------------------------------------------------------------

In 2004, the Company repurchased an aggregate of $18.1 million principal amount of its Senior Notes for $15.8 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 a gain on debt extinguishment of $2.0 million in 2004, net of $280,000 of deferred financing costs.

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.

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 Credit Facility in this note 8, below). 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:        
|103%              |  | from August 16, 2006 through November 30,
2007 
|102%              |  | from December 1, 2007 through November 30,
2008
|101%              |  | from December 1, 2008 through November 30,
2009
|100%              |  | on December 1, 2009 or thereafter              

---

|* | As a percentage of the principal outstanding at the redemption date, plus accrued interest to the redemption date.
|- | ------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



Convertible Note: The Companys 8.0% Subordinated Convertible Notes due
December 2, 2009 (the Convertible Note) are convertible into common stock at $1.70 per share.

In December 2004, the
Company issued 6,737 shares of its Series 2004A Convertible Preferred Stock in exchange for $6.7 million of its Convertible Note, plus accrued interest of $10,463, in a transaction with the Fanning CPD Assets, LP (the Fanning
Partnership), a related party, as described below. This exchange eliminated $6.7 million of long-term debt while maintaining, under the terms of the 2004A Series Preferred Stock, the same common stock conversion rights as existed for the
Convertible Note. As part of the transaction, the Convertible Note was restated at the principal amount of $1.3 million, and the terms were modified to permit the Company to pay interest in cash or kind, at its election, for the balance of the term
of the Convertible Note.

Under the terms of the Convertible Note prior to this amendment, interest was to be payable only in cash
beginning with the interest payment due on June 1, 2005. This amendment extended, for the balance of the term, the provision allowing the Company to pay interest either in cash or in kind, and as a result the debt service costs associated with
the Convertible Note have been satisfied through additions to principal through December 1, 2006 (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 $60,000 during 2006 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 Notes following notice of prepayment.

The Fanning
Partnership is a limited partnership in which John C. Fanning, the Companys chairman and chief executive officer, holds the principal economic interest. Rosemary Maniscalco, a director and vice chairman of the Company, is the general partner
of the Fanning Partnership, but holds no pecuniary interest therein. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a
financial point of view, and the Companys independent directors approved the terms of the transaction.

Revolving Line of
Credit: At December 31, 2006, COMFORCE, COI and various of their operating subsidiaries, as co-borrowers and guarantors, were parties to a $110.0 million Revolving Credit and Security Agreement (the PNC Credit
Facility) with PNC Bank, National Association, as a lender and administrative agent (PNC), and other financial institutions participating as lenders to provide for a revolving line of credit with available borrowings based,
generally, on 87.0% of the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions.

Effective as of July 12, 2006, the Company entered into an amendment to the PNC Credit Facility to, among other things:



| |  |  | increase the maximum availability under the facility from $85.0 million to $110.0 million, with borrowings based, generally, on 87.0% (as compared to 85.0% prior to
the amendment) of the Companys accounts receivable aged 90 days or less, subject to specified limitations and exceptions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



| |  |  | lower the per annum interest rate calculated in reference to LIBOR to 1.50% in excess of LIBOR if the Companys fixed charge coverage ratio is greater than
1.75:1.00;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | extend the maturity of the PNC Credit Facility until July 24, 2010; and
| | - |  | -----------------------------------------------------------------------



| |  |  | permit up to $25.0 million of loan proceeds to be used, and were used to pay the redemption price of the Senior Notes (as described above in this note 8 under
Senior Notes), subject to a reduction of the maximum funds available under the PNC Credit Facility to effect redemptions in 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As amended, 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              |  | 1.50      
|greater than 1.50:1.00              |  | 1.75      
|greater than 1.30:1.00 to 1.50:1.00 |  | 2.00      
|greater than 1.05:1.00 to 1.30:1.00 |  | 2.25      
|equal 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 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 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 (as described above in this note 8 under Senior Notes), 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, subject to 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 31, 2006, the Company had
remaining availability, as defined in the agreement, under the PNC Credit Facility of $20.4 million. As of December 31, 2006, the Company had outstanding $5.1 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 31, 2006.



|(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):



F-21



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



|                                                                                              |  |      |        |      |        |      |       
|--------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | ------ | ---- | ------
|                                                                                              |  | 2006 |        | 2005 |        | 2004
|Basic income per common share:                                                                |  |      |        |      |        |      |       
|Income from continuing operations                                                             |  | $    | 4,078  |      | 6,202  |      | 1,776 
|Dividends on preferred stock:                                                                 |  |      |        |      |        |      |       
|Series 2003A                                                                                  |  |      | 461    |      | 461    |      | 461   
|Series 2003B                                                                                  |  |      | 38     |      | 38     |      | 38    
|Series 2004A                                                                                  |  |      | 506    |      | 506    |      | 31    
|                                                                                              |  |      |        |      |        |      |       
|                                                                                              |  |      | 1,005  |      | 1,005  |      | 530   
|                                                                                              |  |      |        |      |        |      |       
|Income available to common stockholders from continuing operations                            |  | $    | 3,073  |      | 5,197  |      | 1,246 
|                                                                                              |  |      |        |      |        |      |       
|Weighted average common shares outstanding                                                    |  |      | 17,317 |      | 16,907 |      | 16,675
|Basic income per common share from continuing operations                                      |  | $    | 0.18   |      | 0.31   |      | 0.07  
|                                                                                              |  |      |        |      |        |      |       
|Diluted income per common share:                                                              |  |      |        |      |        |      |       
|Income available to common stockholders from continuing operations                            |  | $    | 3,073  |      | 5,197  |      | 1,246 
|Dividends on preferred stock:                                                                 |  |      |        |      |        |      |       
|Series 2003A                                                                                  |  |      | 461    |      | 461    |      |      
|Series 2003B                                                                                  |  |      | 38     |      | 38     |      | 38    
|Series 2004A                                                                                  |  |      | 506    |      | 506    |      |      
|                                                                                              |  |      |        |      |        |      |       
|                                                                                              |  |      | 1,005  |      | 1,005  |      | 38    
|After tax equivalent of interest expense on 8% Subordinated Convertible Notes                 |  |      | 70     |      | 65     |      |      
|                                                                                              |  |      |        |      |        |      |       
|Income for purposes of computing diluted income per common share from continuing operations   |  | $    | 4,148  |      | 6,267  |      | 1,284 
|                                                                                              |  |      |        |      |        |      |       
|Weighted average common shares outstanding                                                    |  |      | 17,317 |      | 16,907 |      | 16,675
|Dilutive stock options                                                                        |  |      | 363    |      | 424    |      | 479   
|Assumed conversion of 8% Subordinated Convertible Notes                                       |  |      | 832    |      | 769    |      |      
|Assumed conversion of Preferred Stock:                                                        |  |      |        |      |        |      |       
|Series 2003A                                                                                  |  |      | 7,111  |      | 6,672  |      |      
|Series 2003B                                                                                  |  |      | 1,111  |      | 1,039  |      | 968   
|Series 2004A                                                                                  |  |      | 4,278  |      | 3,982  |      |      
|                                                                                              |  |      |        |      |        |      |       
|Weighted average common shares outstanding for purposes of computing diluted income per share |  |      | 31,012 |      | 29,793 |      | 18,122
|                                                                                              |  |      |        |      |        |      |       
|Diluted income per common share from continuing operations                                    |  | $    | 0.13   |      | 0.21   |      | 0.07  
|                                                                                              |  |      |        |      |        |      |       

The following shares of common stock were excluded from the above calculations as their effect
would have been anti-dilutive:



| |  |  | As of December 26, 2004: 764,000 shares issuable upon conversion of the Convertible Note; 6,672,000 shares issuable upon conversion of the Series 2003A
Preferred Stock; and 3,981,000 shares issuable upon conversion of the Series 2004A Preferred Stock.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



In addition, options and warrants to purchase 1,295,000, 1,755,000 and 2,697,000 shares of common
stock were outstanding as of the end of the fiscal years 2006, 2005 and 2004, respectively, but were not included in the computation of diluted income per share because their effect would be anti-dilutive.



|(10) | Preferred Stock
|---- | ---------------

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

In December 2004, the Company issued 6,737 shares of its Series 2004A Preferred Stock having a face amount of $6,737,000 and a fair value of $10,264,000 in exchange for $6,736,848 in principal and accrued interest of
the Convertible Note in a transaction with the Fanning Partnership. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a
financial point of view, and the Companys independent directors approved the terms of the transaction. As a result of this transaction, the Company recorded a charge to additional paid-in capital of $3.5 million, in lieu of recognizing a loss
on the extinguishment of debt, for the excess of the fair value of the preferred stock issued over the carrying value of the Convertible Note retired, as the exchange was considered a capital transaction with a major stockholder of the Company. The
conversion price of $1.70 per share for the Series 2004A Preferred Stock, as discussed below, is the same common stock conversion rights as existed for the Convertible Note.

The rights and preferences of the Series 2004A Preferred Stock are substantially identical to those of the Companys Series 2003A and 2003B
Convertible Preferred Stock, 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 2004A, Series 2003A or Series 2003B 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 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 2003A, 2003B and 2004A Preferred Stock (collectively, the 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 31, 2006, there were cumulative,
unpaid and undeclared dividends on the Series 2003A, 2003B and 2004A Preferred Stock of $1.8 million, $125,000 and $1.0 million, respectively.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



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.

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 31, 2006:



|                                                 |  |                 |   |  |                              |      |                                                    |      |                         |   |        
|------------------------------------------------ |  | --------------- | - |  | ---------------------------- | ---- | -------------------------------------------------- | ---- | ----------------------- | - | -------
|                                                 |  | Number ofShares |   |  | WeightedAverageExercisePrice |      | Weighted Average Remaining ContractualTerm (Years) |      | AggregateIntrinsicValue
|Outstanding at December 25, 2005                 |  | 3,178,378       |   |  | $                            | 3.40 |                                                    |      |                         |   |        
|Granted                                          |  | 70,000          |   |  |                              | 2.66 |                                                    |      |                         |   |        
|Forfeitures                                      |  | (42,300         | ) |  |                              | 2.43 |                                                    |      |                         |   |        
|Expired                                          |  | (527,250        | ) |  |                              | 7.05 |                                                    |      |                         |   |        
|Exercised                                        |  | (290,628        | ) |  |                              | 0.72 |                                                    |      |                         | $ | 539,906
|                                                 |  |                 |   |  |                              |      |                                                    |      |                         |   |        
|Outstanding and exercisable at December 31, 2006 |  | 2,388,200       |   |  | $                            | 2.91 |                                                    | 5.13 |                         | $ | 813,120
|                                                 |  |                 |   |  |                              |      |                                                    |      |                         |   |        



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



The total cash received from stock option exercises for the years ended December 31,
2006, December 25, 2005 and December 26, 2004 was $209,000, $342,000 and $37,000, respectively. The Company expects to settle future employee stock option exercises with the issuance of new shares.

Warrants:

At
December 31, 2006, December 25, 2005 and December 26, 2004, 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 20thcenturies 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 is initiating inquiries of the insurance carriers for Apeco to determine if it has coverage under
old insurance policies. Although another company had agreed to indemnify the Company against environmental liabilities, this indemnitor is currently in bankruptcy and the Company does not expect to pursue its indemnity claims since obtaining any
recovery against this indemnitor appears to be unlikely.

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 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.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



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 March 28, 2007, CTS has settled with 15 of the 19 plaintiffs, in each case within the limits of its primary policy, except as described below. With the most recent
settlements, the limits under the primary policy are expected to be 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, other than to estimate that any losses will be less than $2.0 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 initiated a lawsuit against the purchaser of the Companys niche telecom operations, and the
parties are participating in a court-ordered mediation process. 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 and 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 2006, 2005 or 2004.

Certain employees who perform work for
governmental agencies are required to be covered under a separate defined contribution plan. During 2006, 2005 and 2004, the Company recorded approximately $1,325,000, $1,797,000 and $2,296,000, 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 2006, 2005 and 2004 approximated $3,183,000, $3,204,000 and $3,057,000, respectively.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



As of December 31, 2006, future minimum rent payments due under the terms of noncancelable
operating leases excluding amounts that will be paid for operating costs are (in thousands):



|           |  |   |      
|---------- |  | - | -----
|2007       |  | $ | 2,614
|2008       |  |   | 2,189
|2009       |  |   | 1,923
|2010       |  |   | 978  
|2011       |  |   | 368  
|Thereafter |  |   | 328  
|           |  |   |      
|           |  | $ | 8,400
|           |  |   |      



|(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 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. For fiscal 2004, the Company did not have any customers with accounts receivable balances that aggregated 10.0% or more of the Companys total accounts receivable. The largest four
customers of the Company accounted for an aggregate of approximately 25.3%, 21.6%, and 20.1% of the Companys revenues for the fiscal years 2006, 2005, and 2004, 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 net 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 the revenues and operating contribution for each segment for the years ended December 31, 2006, December 25, 2005 and December 26, 2004, and items which reconcile segment operating contribution
to COMFORCEs reported income from continuing operations before income taxes (in thousands):



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



|                                                      |  |                  |         |                  |         |                  |         |  
|----------------------------------------------------- |  | ---------------- | ------- | ---------------- | ------- | ---------------- | ------- | -
|                                                      |  | December 31,2006 |         | December 25,2005 |         | December 26,2004 |        
|Net sales of services:                                |  |                  |         |                  |         |                  |         |  
|Human Capital Management Services                     |  | $                | 337,741 |                  | 311,497 |                  | 270,130 |  
|Staff Augmentation                                    |  |                  | 226,304 |                  | 223,672 |                  | 203,575 |  
|Financial Outsourcing Services                        |  |                  | 3,776   |                  | 4,672   |                  | 7,182   |  
|                                                      |  |                  |         |                  |         |                  |         |  
|                                                      |  | $                | 567,821 |                  | 539,841 |                  | 480,887 |  
|                                                      |  |                  |         |                  |         |                  |         |  
|Operating contribution:                               |  |                  |         |                  |         |                  |         |  
|Human Capital Management Services                     |  | $                | 14,878  |                  | 12,228  |                  | 10,799  |  
|Staff Augmentation                                    |  |                  | 20,085  |                  | 19,753  |                  | 18,018  |  
|Financial Outsourcing Services                        |  |                  | 2,854   |                  | 3,706   |                  | 5,518   |  
|                                                      |  |                  |         |                  |         |                  |         |  
|                                                      |  |                  | 37,817  |                  | 35,687  |                  | 34,335  |  
|                                                      |  |                  |         |                  |         |                  |         |  
|Consolidated expenses:                                |  |                  |         |                  |         |                  |         |  
|Corporate general and administrative expenses         |  |                  | 17,744  |                  | 16,346  |                  | 16,053  |  
|Depreciation and amortization                         |  |                  | 3,095   |                  | 3,700   |                  | 4,219   |  
|Interest and other, net                               |  |                  | 9,358   |                  | 10,558  |                  | 12,228  |  
|Loss (gain) on debt extinguishment                    |  |                  | 169     |                  | 336     |                  | (1,999  | )
|                                                      |  |                  |         |                  |         |                  |         |  
|                                                      |  |                  | 30,366  |                  | 30,940  |                  | 30,501  |  
|                                                      |  |                  |         |                  |         |                  |         |  
|Income from continuing operations before income taxes |  | $                | 7,451   |                  | 4,747   |                  | 3,834   |  
|                                                      |  |                  |         |                  |         |                  |         |  
|Total assets:                                         |  |                  |         |                  |         |                  |         |  
|Human Capital Management Services                     |  |                  | 91,836  |                  | 76,480  |                  |         |  
|Staff Augmentation                                    |  |                  | 54,316  |                  | 58,794  |                  |         |  
|Financial Outsourcing Services                        |  |                  | 13,170  |                  | 15,715  |                  |         |  
|Corporate                                             |  |                  | 15,816  |                  | 22,989  |                  |         |  
|                                                      |  |                  |         |                  |         |                  |         |  
|                                                      |  | $                | 175,138 |                  | 173,978 |                  |         |  
|                                                      |  |                  |         |                  |         |                  |         |  



|(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 $9.1 million. However, COMFORCE has approximately $2.0 million available to it at December 31, 2006 from proceeds it has generated from the sale of stock, principally upon the exercise of options and warrants. This $2.0 million
may be used by COMFORCE to pay interest on the Convertible Notes or for other business purposes.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



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 31, 2006, COMFORCE has paid all interest under the 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.

In March 2004, the holder of the Convertible Note, the Fanning Partnership, a partnership in which John Fanning, the Companys chairman and chief executive officer, holds the principal economic interest, agreed to extend the
payment-in-kind terms under the Convertible Note from the original termination date on December 1, 2003 for one additional year. In December 2004, as part of a partial exchange of the Convertible Note for Series 2004A Preferred Stock (see note
10), the Fanning Partnership agreed to further extend the payment-in-kind terms under the Convertible Note until the maturity date.



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

Convertible Note
and Preferred Stock Transactions: During 2004, the Company entered into a transaction with the Fanning Partnership under which the Company issued 6,737 shares of its Series 2004A Convertible Preferred Stock in exchange for $6.7 million of
its Convertible Note, plus accrued interest of $10,463. This exchange eliminated $6.7 million of long-term debt while maintaining, under the terms of the 2004A Series Preferred Stock, the same common stock conversion rights as existed for the
Convertible Note. As part of the transaction, the Convertible Note was restated at the principal amount of $1.3 million, and the terms were modified to permit the Company to pay interest in cash or kind, at its election, for the balance of the term
of the Convertible Note.

The Fanning Partnership is a limited partnership in which John C. Fanning, the Companys chairman and chief
executive officer, holds the principal 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. This
transaction is described in notes 8 and 10. For this transaction, the Company obtained the opinion of an independent investment banking firm that the terms of the exchange or other transactions with the Fanning Partnership were fair to the Company
from a financial point of view, and the Companys independent directors approved the terms of the transaction.

Other
Transactions: Rosemary Maniscalco, through a company owned by her, provides consulting services to the Company, at the rate of up to $1,300 per day plus expenses. During 2006, 2005 and 2004, the Company paid $71,220, 74,258 and $60,490,
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, the Vice Chairman of the Company, is the general partner of the Fanning Partnership but holds no pecuniary interest in the Fanning Partnership.



|(19) | Sale of Niche Telecom Operations
|---- | --------------------------------

Effective as of
March 1, 2004, COMFORCE sold an 80% interest in two telecom subsidiaries in the Staff Augmentation segment and sold its remaining 20% minority interest in these companies by June 29, 2004. These subsidiaries operated in the customer
premise equipment services niche of the telecom sector, a niche that was outside of the Companys core competency in telecom. 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. All cash proceeds received by the Company from this sale were used to pay down bank debt. The total consideration included cash of $1,448,000 and short-term promissory notes of
$1,150,000 which were paid during fiscal 2004.



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



In addition, the Company accepted 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 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. Additional cash received by the Company in future periods, if any, will be recorded as an additional gain from the sale of discontinued operations up to the remaining amount of the $1,001,000 gain. If and when the entire
gain has been recognized, additional cash receipts, if any, will be recorded as interest income within other income from continuing operations.

In accordance with SFAS 144, the results of operations from the sale of the Companys niche telecom operations have been recorded as discontinued operations.

In June 2005, the Company received a copy of a notice to Spears from Spears senior lender. The notice stated that defaults had occurred and were
continuing under Spears credit agreement with its senior lender. Spears has subsequently failed to make the payments of principal and interest that were due and payable on and after July 1, 2005 under the long-term notes it issued to the
Company as part of the consideration for the telecom businesses.

The long-term notes from Spears to the Company are subject to a
subordination agreement between the Company, Spears and Spears senior lender. Under that agreement, among other things, the Company cannot accept payments under the long-term notes from Spears if there is a default under the senior
lenders credit agreement with Spears, subject to a 180-day standstill period after which the Company can take action to enforce its rights under the long-term notes. In July 2005, the Company gave notice of the default under Spears
credit agreement with the senior lender, commencing the running of the 180-day standstill period. In January 2006, following the expiration of the standstill period, the Company filed an action to enforce its rights under the notes. The Company also
has the right to enforce a keep well agreement between the individual who controls Spears, and Spears senior lender and has brought an action to enforce that right. The parties have been engaged in a court-ordered mediation process that has
not resulted in a resolution of the matter. There can be no assurance that any of these actions will result in the cure of Spears defaults, or any further payments to the Company.



|(20) | Selected Quarterly Financial Data (unaudited)
|---- | ---------------------------------------------

(In
thousands, except per share data and footnotes)



|                      |  |         |         |                            |   |         |  |        |         |  |   |         |  |   |        
|--------------------- |  | ------- | ------- | -------------------------- | - | ------- |  | ------ | ------- |  | - | ------- |  | - | -------
|Fiscal 2006 (1)       |  | Quarter |         | Year endedDecember 31,2006
|                      |  | First   |         | Second                     |   | Third   |  | Fourth |        
|Net sales of services |  | $       | 135,001 |                            | $ | 143,577 |  | $      | 140,158 |  | $ | 149,085 |  | $ | 567,821
|Gross profit          |  |         | 20,161  |                            |   | 22,153  |  |        | 21,951  |  |   | 24,629  |  |   | 88,894 
|Net income            |  |         | 245     |                            |   | 1,007   |  |        | 935     |  |   | 1,891   |  |   | 4,078  
|                      |  |         |         |                            |   |         |  |        |         |  |   |         |  |   |        
|Income per share:     |  |         |         |                            |   |         |  |        |         |  |   |         |  |   |        
|Basic                 |  | $       | 0.00    |                            | $ | 0.04    |  | $      | 0.04    |  | $ | 0.09    |  | $ | 0.18   
|Diluted               |  | $       | 0.00    |                            | $ | 0.03    |  | $      | 0.03    |  | $ | 0.06    |  | $ | 0.13   



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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, December 25,
2005 and December 26, 2004



|                         |  |         |         |                            |        |   |         |  |        |         |  |   |         |  |   |        
|------------------------ |  | ------- | ------- | -------------------------- | ------ | - | ------- |  | ------ | ------- |  | - | ------- |  | - | -------
|Fiscal 2005              |  | Quarter |         | Year endedDecember 25,2005
|                         |  | First   |         |                            | Second |   | Third   |  | Fourth |        
|Net sales of services    |  | $       | 123,694 |                            |        | $ | 134,909 |  | $      | 139,066 |  | $ | 142,172 |  | $ | 539,841
|Gross profit             |  |         | 16,891  |                            |        |   | 19,793  |  |        | 20,628  |  |   | 21,948  |  |   | 79,260 
|Net (loss) income (2)    |  |         | (250    | )                          |        |   | 509     |  |        | 5,113   |  |   | 900     |  |   | 6,272  
|                         |  |         |         |                            |        |   |         |  |        |         |  |   |         |  |   |        
|(Loss) income per share: |  |         |         |                            |        |   |         |  |        |         |  |   |         |  |   |        
|Basic                    |  | $       | (0.03   | )                          |        | $ | 0.02    |  | $      | 0.29    |  | $ | 0.04    |  | $ | 0.31   
|Diluted                  |  | $       | (0.03   | )                          |        | $ | 0.01    |  | $      | 0.17    |  | $ | 0.03    |  | $ | 0.21   

---

|(1) | Revised for the adoption of SAB 108 (see note 5).
|--- | -------------------------------------------------

|(2) | Includes a tax benefit of $4.3 million from the resolution of certain federal and state tax contingencies for the year ended December 25, 2005 and quarter ended
September 25, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



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##### Table of Contents

Schedule

COMFORCE CORPORATION AND SUBSIDIARIES

Schedule II V
aluation and Qualifying Accounts

Fiscal years ended December 31, 2006, December 25, 2005 and
December 26, 2004

(in thousands)



|                                             |  |                              |       |                          |      |   |                             |      |   |                         |   |                                        |      |   |                        |      
|-------------------------------------------- |  | ---------------------------- | ----- | ------------------------ | ---- | - | --------------------------- | ---- | - | ----------------------- | - | -------------------------------------- | ---- | - | ---------------------- | -----
|                                             |  | Balance atbeginningof period |       | Impact ofAdoptingSAB 108 |      |   | Charged tocosts andexpenses |      |   | Chargedto otheraccounts |   | Deductions(Net (write-offs)recoveries) |      |   | Balanceat end ofperiod
|For the fiscal year ended December 31, 2006: |  |                              |       |                          |      |   |                             |      |   |                         |   |                                        |      |   |                        |      
|Allowance for doubtful accounts              |  | $                            | 705   |                          | (421 | ) |                             | 85   |   |                         |  |                                        | (93  | ) |                        | 276  
|                                             |  |                              |       |                          |      |   |                             |      |   |                         |   |                                        |      |   |                        |      
|For the fiscal year ended December 25, 2005: |  |                              |       |                          |      |   |                             |      |   |                         |   |                                        |      |   |                        |      
|Allowance for doubtful accounts              |  | $                            | 1,042 |                          |     |   |                             | (236 | ) |                         |  |                                        | (101 | ) |                        | 705  
|                                             |  |                              |       |                          |      |   |                             |      |   |                         |   |                                        |      |   |                        |      
|For the fiscal year ended December 26, 2004: |  |                              |       |                          |      |   |                             |      |   |                         |   |                                        |      |   |                        |      
|Allowance for doubtful accounts              |  | $                            | 892   |                          |     |   |                             | 38   |   |                         |  |                                        | 112  |   |                        | 1,042
|                                             |  |                              |       |                          |      |   |                             |      |   |                         |   |                                        |      |   |                        |      



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##### Table of Contents

EXHIBIT INDEX

Unless otherwise indicated, for documents incorporated herein by reference to exhibits included in SEC filings of COMFORCE Corporation, the registration number for COMFORCE Corporation is 001-06801.



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



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                                                                                                             
|      | 
|10.2* |  | Amended and Restated Employment Agreement dated as of August 7, 2006 among COMFORCE Corporation, COMFORCE Operating, Inc. and Harry Maccarrone.                                                                                                                                                                                                                                                                              
|      | 
|10.3* |  | Amendment to Amended and Restated Employment Agreement dated as of March 27, 2007 among COMFORCE Corporation, COMFORCE Operating, Inc. and Harry Maccarrone.                                                                                                                                                                                                                                                                 
|      | 
|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 November 1, 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 November 1, 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).                                   



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 Annual Report on Form 10-K for the year ended September 24, 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).                      
|      | 
|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.                                                                                                                                                                                                                                                                                               
|      | 
|99.1  |  | Code of Ethics and Business Conduct (included as an exhibit to COMFORCE Corporations Quarterly Report on Form 10-Q for the quarter ended June 27, 2004 and incorporated herein by
reference).                                                                                                                                                                                                                        

---

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



E-3