The discussion set forth below supplements the information found in the accompanying condensed consolidated financial statements and related notes of COMFORCE Corporation ("COMFORCE") and its wholly-owned subsidiaries, including COMFORCE Operating, Inc. ("COI") (collectively, the "Company").

Overview and Recent Developments

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 has been closely monitoring United States and worldwide economic conditions that, particularly since September 2008, have resulted in an extraordinary tightening of credit markets coupled with volatile commercial interest rates. These economic conditions have resulted in unprecedented intervention in financial institutions and markets by governments throughout the world, including the enactment in the United States of the Emergency Economic Stabilization Act of 2008. These conditions have been characterized in news reports as a global economic crisis. While the impact on the Company's interest expense during the third quarter was limited, we expect our interest expense in future periods to increase unless the current economic problems abate. In addition, our customers are also facing the tightening in the availability of credit, including more restrictive lending standards and higher interest rates. Management has observed a weakening in the labor markets that has resulted in declines in revenues in our Staff Augmentation segment during the third quarter of 2008 as compared to the third quarter of 2007. While these conditions have not had a significant negative impact on our operations through the end of the third quarter of 2008, if these conditions persist or deteriorate, they could potentially have a more significant adverse impact on our operations in future periods.

On August 25, 2008, the Company redeemed all of its outstanding Senior Notes at a redemption price equal to 102% of their outstanding principal amount ($5.2 million), plus accrued interest from June 1, 2008 to the redemption date. The total redemption price, including accrued interest and the 2% premium, was $5.5 million. The Company used loan proceeds under the PNC Credit Facility to pay the redemption price. The Indenture governing the Senior Notes included various covenants and restrictions on COI and its operating subsidiaries, including limitations on COI's ability to upstream funds to its parent, COMFORCE. Although the PNC Credit Facility includes significant restrictions and covenants that continue to be binding on the Company, including many that are comparable to or more restrictive than those that were applicable under the Indenture, the restrictions and covenants under the Indenture are no longer binding on the Company. As a result of this redemption, the Company recognized a loss on debt extinguishment of $149,000 in the third quarter of 2008, including the write-off of $44,000 of deferred financing costs.

Results of Operations

Three Months Ended September 28, 2008 compared to September 30, 2007

Net sales of services for the three months ended September 28, 2008 were $149.4 million, which represents a 0.8% decrease from the $150.7 million in net sales of services recorded for the three months ended September 30, 2007. Net sales of services in the Human Capital Management Services segment increased by $3.8 million, or 4.0%, due to an increase in services provided to new clients. While management believes such increases are reflective of a trend over the past decade for companies to rely increasingly on providers of human capital management services, such as those provided by the Company's PrO Unlimited subsidiary, the current economic environment (see "Overview and Recent Developments" in this Item 2) has impacted this trend. Management has observed over the last two quarters that PrO's customers generally have not sought to expand the scope of services they engage PrO to perform. In the Staff Augmentation segment, the sales decrease of $5.2 million, or 9.1%, is principally attributable to the decrease of services provided to technical services customers, partially offset by an increase in services provided to information technology, telecom and healthcare support customers.

Cost of services for the three months ended September 28, 2008 was 84.2% of net sales of services as compared to cost of services of 84.6% net sales of services for the three months ended September 30, 2007. Cost of services in the Human Capital Management Services segment for the three months ended September 28, 2008 decreased slightly to 86.8% of net sales of services as compared to cost of services of 87.0% net sales of services in this segment for the three months ended September 30, 2007. In the Staff Augmentation segment, cost of services for the three months ended September 28, 2008 was 81.0% of net sales of services as compared to cost of services of 82.0% net sales of services in this segment for the three months ended September 30, 2007 principally due to a reduction of lower margin business during the third quarter of 2008.

Selling, general and administrative expenses as a percentage of net sales of services were 12.5% for the three months ended September 28, 2008, compared to 12.2% for the three months ended September 30, 2007. The $414,000 increase in selling, general and administrative expenses is primarily due to higher personnel costs incurred to support the increase in services provided in the Human Capital Management Services segment discussed above.

Operating income for the three months ended September 28, 2008 of $4.0 million, or 2.7% of net sales, as compared to operating income of $4.2 million, or 2.8% of net sales, for the three months ended September 30, 2007. The Company's operating income for the third quarter of 2008 is slightly lower than for the third quarter of 2007 principally due to an increase in selling, general, and administrative expenses discussed above, partially offset by an increase in net sales of services and related gross margins in Human Capital Management Services.

The Company's interest expense for the three months ended September 28, 2008 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Note and, prior to their redemption, the Senior Notes. The interest expense of $1.0 million for the third quarter of 2008 was lower as compared to the interest expense of $1.9 million for the third quarter of 2007. This decrease in interest expense was principally due to the repurchases and redemptions of $22.9 million of Senior Notes since the beginning of 2007, including the redemption of the remaining $5.2 million principal amount of Senior Notes in August 2008, and to lower interest rates under the PNC Credit Facility, partially offset by higher borrowings under the PNC Credit Facility in the third quarter of 2008 as compared to the year ago period.

As a result of its final redemption of Senior Notes in August 2008, the Company recognized a loss on debt extinguishment of $149,000 in the third quarter of 2008, including the write-off of $44,000 of deferred financing costs.

Other expense, net, for the three months ended September 28, 2008 of $445,000 principally consists of losses on foreign currency exchanges, as compared to other income, net, for the three months ended September 30, 2007 of $363,000 principally consisting of gains on foreign currency exchanges.

The Company's income tax provision consists of U.S. federal, state, local and foreign taxes in amounts necessary to align the Company's year-to-date income tax provision with the effective tax rate that the Company expects to achieve for the full year. The Company's annual effective tax rate for 2008 is estimated to be 45.9% based upon the Company's anticipated earnings both in the U.S. and in foreign jurisdictions. The income tax provision for the three months ended September 28, 2008 was $1.1 million (a rate of 44.9%) on income before income taxes of $2.4 million. Included in the income tax provision for the three months ended September 28, 2008 are discrete items related to an income tax benefit for certain return-to-provision items based on the filing of the Company's 2007 tax return, partially offset by the accrual of interest pursuant to FIN 48. The income tax provision for the three months ended September 30, 2007 was $874,000 (a rate of 32.8%) on income before income taxes of $2.7 million. Included in the income tax provision for the three months ended September 30, 2007 is an income tax benefit related to certain tax deductions realized upon the dissolution of a subsidiary that operated one branch office that has been closed.

The Company's total unrecognized tax benefit as of September 28, 2008 was approximately $485,000, which, if recognized would affect the Company's effective tax rate. As of September 28, 2008, the Company had approximately $26,000 of accrued interest and penalties. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

Nine Months Ended September 28, 2008 compared to September 30, 2007

Net sales of services for the nine months ended September 28, 2008 were $452.4 million, which represents a 2.4% increase from the $442.0 million in net sales of services recorded for the nine months ended September 30, 2007. Net sales of services in the Human Capital Management Services segment increased by $16.0 million, or 5.9%, due to an increase in services provided to new clients. While management believes that such increase is reflective of a trend over the past decade for companies to rely increasingly on providers of human capital management services, such as those provided by the Company's PrO Unlimited subsidiary, the current economic environment (see "Overview and Recent Developments" in this Item 2) has impacted this trend. Management has observed over the last two quarters that PrO's customers generally have not sought to expand the scope of services they engage PrO to perform. In the Staff Augmentation segment, the sales decrease of $5.8 million, or 3.5%, is principally attributable to the decrease of services provided to technical services customers, partially offset by an increase in services provided to healthcare support services and information technology customers.

Cost of services for the nine months ended September 28, 2008 was 84.1% of net sales of services as compared to cost of services of 84.5% net sales of services for the nine months ended September 30, 2007. Cost of services in the Human Capital Management Services segment for each of the nine months ended September 28, 2008 and September 30, 2007 was 86.9%. In the Staff Augmentation segment, cost of services for the nine months ended September 28, 2008 was 80.5% of net sales of services as compared to cost of services of 81.7% net sales of services in this segment for the nine months ended September 30, 2007 principally due to a reduction in lower margin business during the 2008 period.

Selling, general and administrative expenses as a percentage of net sales of services were 12.8% for the nine months ended September 28, 2008, compared to 12.4% for the nine months ended September 30, 2007. The $3.2 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.

Operating income for the nine months ended September 28, 2008 was $11.5 million, or 2.6% of net sales, as compared to operating income of $11.8 million, or 2.7% of net sales, for the nine months ended September 30, 2007. The Company's operating income for the first nine months of 2008 is slightly lower than for the first nine months of 2007 principally due to an increase in selling, general, and administrative expenses discussed above, partially offset by an increase in net sales of services and related gross margins in Human Capital Management Services and healthcare support services.

The Company's interest expense for the nine months ended September 28, 2008 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Note and, prior to their redemption, the Senior Notes. The interest expense of $3.5 million for the first nine months of 2008 was lower as compared to the interest expense of $5.9 million for the first nine months of 2007. This decrease in interest expense was principally due to the repurchases and redemptions of $22.9 million of Senior Notes since the beginning of 2007, including the redemption of the remaining $5.2 million principal amount of Senior Notes in August 2008, and to lower interest rates under the PNC Credit Facility, partially offset by higher borrowings under the PNC Credit Facility in the first nine months of 2008 as compared to the year ago nine-month period.

As a result of its repurchase of $6.5 million principal amount of Senior Notes April 2008 and its final redemption of $5.2 million principal amount of Senior Notes in August 2008, the Company recognized a loss on debt extinguishment of $278,000 in the nine months ended September 28, 2008, including the write-off of $108,000 of deferred financing costs. As a result of its redemption of $10.0 million of Senior Notes during the nine months ended September 30, 2007, the Company recognized a loss on debt extinguishment of $424,000, including a reduction of $124,000 of deferred financing costs.

Other expense, net, for the nine months ended September 28, 2008 of $622,000 principally consists of losses on foreign currency exchanges as compared to other income, net, for the nine months ended September 30, 2007 of $703,000 principally consisting of gains on foreign currency exchanges.

The Company's income tax provision consists of U.S. federal, state and local and foreign taxes in amounts necessary to align the Company's year-to-date income tax provision with the effective tax rate that the Company expects to achieve for the full year. The Company's annual effective tax rate for 2008 is estimated to be 45.9% based upon the Company's anticipated earnings both in the U.S. and in foreign jurisdictions.

The income tax provision for the nine months ended September 28, 2008 was $3.2 million (a rate of 44.6%) on income before income taxes of $7.1 million. Included in the income tax provision for the nine months ended September 28, 2008 are discrete items related to an income tax benefit for certain return-to-provision items based on the filing of the Company's 2007 tax return, partially offset by the accrual of interest pursuant to FIN 48. The income tax provision for the nine months ended September 30, 2007 was $2.3 million (a rate of 38.2%) on income before income taxes of $6.1 million. Included in the income tax provision for the nine months ended September 30, 2007 is an income tax benefit related to certain tax deductions realized upon the dissolution of a subsidiary that operated one branch office that has been closed.

The Company's total unrecognized tax benefit as of September 28, 2008 was approximately $485,000, which, if recognized would affect the Company's effective tax rate. As of September 28, 2008, the Company had approximately $26,000 of accrued interest and penalties. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

Financial Condition, Liquidity and Capital Resources

As described in "Overview and Recent Developments" in this Item 2, management has observed weakening of the labor markets and a tightening of the credit markets coupled with an increase in interest rates. These conditions, which are interrelated, could affect our liquidity in future periods in a number of ways, including by:

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

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

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

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

Staffing personnel placed by the Company are employees of the Company. The Company is responsible for employment related expenses for its employees, including workers compensation, unemployment compensation insurance, Medicare and Social Security taxes and general payroll expenses. The Company offers health, dental, 401(k), disability and life insurance to its eligible employees. Staffing and consulting companies, including the Company, typically pay their billable employees for their services before receiving payment from their customers, resulting in significant outstanding receivables. To the extent the Company grows, these receivables will increase and there will be greater need for borrowing availability under the PNC Credit Facility. At October 26, 2008, the Company had outstanding $78.5 million principal amount under the PNC Credit Facility with remaining availability of up to $16.6 million, as defined under the PNC Credit Facility agreement, to fund operations.

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

                                              Payments due by fiscal year (in thousands)
                                  2008             2009          2010          2011         Thereafter
Operating Leases               $      757       $    2,734     $   1,737     $   1,054     $        708
Employment Agreements                 247                -             -             -                -
PNC Credit Facility(1)-
principal repayments                    -                -        79,877             -                -
Convertible Note(1) -
principal repayments                    -            1,710             -             -                -
Total                          $    1,004       $    4,444     $  81,614     $   1,054     $        708

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

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

The Company also had standby letters of credit outstanding under the PNC Credit Facility at September 28, 2008 in the aggregate amount of $4.2 million.

As reported in the accompanying cash flow statement, during the first nine months of 2008, the Company's primary sources of funds were $11.7 million provided by its operating activities due significantly to the continued profitability of the Company. The Company also used cash of $4.7 million in investing activities due to the purchases of property and equipment. In addition, the cash used in financing activities of $2.7 million is primarily a result of the repurchase and redemption of $11.9 million aggregate principal amount of Senior Notes, partially offset by increased borrowings of $9.4 million under the PNC Credit Facility to facilitate the repurchase and redemption.

At September 28, 2008, the Company had outstanding $79.9 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 4.14% per annum. At such date, the Company had remaining availability of up to $11.8 million, as defined in the agreement, under the PNC Credit Facility.

At September 28, 2008, the Company also had outstanding $1.7 million principal amount of Convertible Notes bearing interest at 8% per annum.

The Company has made significant progress in improving its capital structure and reducing interest expenses through the elimination of long-term debt through the repurchase, redemption or exchange of Senior Notes, Convertible Notes and other instruments. Since June 2000 and through the date of this Report, the Company has eliminated $138.8 million of public debt and reduced its total long-term debt from $195.3 million to $81.6 million. The Company has reduced its annualized interest expense principally by borrowing at the lower rates available under the PNC Credit Facility to effectuate the repurchase 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. Prior to the redemption of the remaining Senior Notes in August 2008 (as described under "Overview and Recent Developments" in this Item 2), these assets and any cumulated net income were restricted as to their use by COMFORCE. The Indenture imposed restrictions on COI making specified payments, which were referred to as "restricted payments," including making distributions or paying dividends (referred to as upstreaming funds) to COMFORCE. Upon the completion of the redemption of the Senior Notes, these restrictions were eliminated. However, the PNC Credit Facility includes significant restrictions and covenants that continue to be binding on the Company, including many that are comparable to or more restrictive than those that were applicable under the Indenture (see note 4 to our condensed consolidated financial statements).

The Company's Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at September 28, 2008 there were cumulated, unpaid and undeclared dividends of $2.6 million on the Series 2003A Preferred Stock, $193,000 on the Series 2003B Preferred Stock and $1.9 million on the Series 2004A Preferred Stock. If such dividends and underlying instruments were converted to voting or non-voting common stock, the aggregate amount would equal 14.7 million shares at September 28, 2008 (as compared to 13.9 million shares at September 30, 2007).

Management of the Company believes that cash flow from operations and funds anticipated to be available under the PNC Credit Facility will be sufficient to service the Company's indebtedness and to meet currently anticipated working capital requirements for the next 12 months. The Company was in compliance with all covenants under the PNC Credit Facility at September 28, 2008 and expects to remain in compliance for the next 12 months.

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

In 2006, COMFORCE Technical Services, Inc. ("CTS") entered into a contract with a United States government agency (the "Agency") to provide technical, operational and professional services in foreign countries throughout the world for humanitarian purposes. Persons employed by CTS in the host countries include US nationals, nationals of the host countries (local nationals) and nationals of other countries (third country nationals). The contract provides, generally, that the U.S. government will reimburse the Company for all direct labor properly chargeable to the contract plus fringe benefits, in some cases at specified rates and profit. Although not anticipated, the amount of foreign payroll taxes and other taxes related to these employees could potentially exceed the amount available to us from our own resources or under the PNC Credit Facility. See note 9 to our condensed consolidated financial statements.

Critical Accounting Policies and Estimates

As disclosed in the annual report on Form 10-K for the year ended December 30, 2007, the discussion and analysis of our financial condition and results of operations are based upon our condensed 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. Our most critical accounting policies relate to allowance for doubtful accounts, accrued workers compensation liability, goodwill impairment, and income taxes. Since December 30, 2007, there have been no changes in our critical accounting policies and no other significant changes to the methods used in the assumptions and estimates related to them.

Seasonality

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

Forward Looking Statements

We have made statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" under this Item 2, as well as in other sections of this report that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," . . .