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

Overview

Staffing personnel placed by the Company are employees of the Company. The Company is responsible for employment related expenses for its employees, including workers compensation, unemployment compensation insurance, Medicare and Social Security taxes and general payroll expenses. The Company offers health, dental, 401(k), disability and life insurance to its eligible employees. Staffing and consulting companies, including the Company, typically pay their billable employees for their services before receiving payment from their clients, 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 April 19, 2009, the Company had outstanding $71.1 million principal amount under the PNC Credit Facility with remaining availability of up to $14.9 million, based upon the borrowing base as defined in the loan agreement, to fund operations. The Company has had preliminary discussions with PNC to extend the PNC Credit Facility beyond its current maturity date of July 24, 2010. No assurance can be given that the Company will resolve such discussions on a satisfactory basis. If we are unable to satisfactorily resolve such discussions with PNC or otherwise find a source of capital to repay or refinance this obligation, we will be unable to repay the PNC Credit Facility at maturity, which would have a material adverse effect on our financial condition. The credit markets have tightened significantly since the second quarter of 2008. We cannot predict whether capital will be available to us with interest rates and on terms acceptable to us, if at all, when the PNC Credit Facility matures.

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.

Recent Developments

Current United States and worldwide economic conditions have resulted in an extraordinary tightening of credit markets. These economic conditions have been characterized in news reports as a global economic crisis that has been marked by dramatic and rapid shifts in market conditions and government responses, and they have resulted in unprecedented intervention in financial institutions and markets by governments throughout the world. Although many economists originally characterized this crisis as limited to the subprime mortgage markets, the current adverse conditions have quickly spread to broader financial, manufacturing and labor markets. As reported by the Bureau of Labor Statistics (U.S. Department of Labor) in a report released April 3, 2009, nonfarm payroll employment continued to decline sharply (by 663,000) in March 2009, with the unemployment rate rising to 8.5% from 8.1% in February 2009. This report further stated that payroll employment had decreased by 3.3 million over the past five months and described job losses in March 2009 as "large and widespread across the major industry sectors." The staffing industry has been significantly and adversely affected by current economic conditions and weak labor markets.

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

Management has been closely monitoring the economic conditions and government responses. The Company has also implemented new procedures to contain or reduce its expenses. The impact of the tight credit markets on our interest expense through the first quarter of 2009 was limited, but we expect our interest expense in future periods to increase unless the credit markets improve significantly. While the current economic conditions did not have a significant impact on our operations through the end of 2008, we have observed a weakening in the labor markets that has resulted in declines in revenues in all segments of our business during the first quarter of 2009 as compared to the comparable 2008 period. Furthermore, some of our clients have announced reductions in workforce, including contingent labor, which may cause some of the vendors we manage as part of our Human Capital Management Services and RightSourcing Services programs to reduce or discontinue operations, which would further impact our management of these programs. We continue to experience the impact of these conditions as of the date of this filing.

See "Risk Factors--Global economic conditions have created turmoil in credit and labor markets that could have a significant adverse impact on our operations" in Item 1A of our annual report on Form 10-K.

Results of Operations

Three Months ended March 29, 2009 compared to March 30, 2008

Net sales of services for the three months ended March 29, 2009 were $138.0 million, which represents an 8.1% decrease from the $150.2 million in net sales of services recorded for the three months ended March 30, 2008. Net sales of services in the Human Capital Management Services segment decreased by $5.3 million, or 5.5% due primarily to a decrease in services provided to existing clients, particularly in the services provided to clients that have been significantly affected by economic conditions. This decrease in services provided to existing clients was partially offset by an increase of services provided to new clients. While management believes that over the past decade there has been a historical trend 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 has impacted this trend (see "Overview and Recent Developments" in this Item
2). Management has also observed that, during 2008 and the first quarter of 2009, PrO's clients generally did not seek to expand the scope of services they engaged PrO to perform. In the Staff Augmentation segment, net sales of services decreased $6.7 million, or 12.5%, reflecting a decrease in clients' demand for services across all lines of business in this segment.

Cost of services for the three months ended March 29, 2009 was 85.1% of net sales of services as compared to 84.2% for the three months ended March 30, 2008. Cost of services as a percentage of net sales of services in the Human Capital Management Services segment for the first three months of 2009 was 87.3% as compared to 87.0% for the first three months of 2008. In the Staff Augmentation segment, cost of services as a percentage of net sales of services for the first three months of 2009 was 81.7% as compared to 80.1% for the first three months of 2008, principally due to pricing pressures and to lower sales volume to higher margin clients.

Selling, general and administrative expenses as a percentage of net sales of services were 13.6 % for the three months ended March 29, 2009, compared to 13.1% for the three months ended March 30, 2008. The $845,000 decrease in selling, general and administrative expenses is primarily due to lower personnel costs in the Human Capital Management Services segment principally due to the decrease of net sales of services discussed above. However, selling, general and administrative expenses as a percentage of net sales of services increased in the first three months of 2009 as compared to the same period in 2008 because net sales declined at a faster rate than these expenses were reduced.

Operating income for the three months ended March 29, 2009 was $1.0 million, or 0.7% of net sales, as compared to operating income of $3.5 million, or 2.3% of net sales, for the three months ended March 30, 2008. The Company's operating income for the first three months of 2009 was lower than for the 2008 period principally due to a decrease in net sales of services in the Human Capital Management Services sector and to a decrease in net sales of services and lower gross margins in the Staff Augmentation sector, partially offset by a decrease in selling, general, and administrative expenses discussed above.

The Company's interest expense was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Note and, prior to their redemption, the 12% Senior Notes. Interest expense of $644,000 for the first three months of 2009 was lower as compared to the interest expense of $1.4 million for the first three months of 2008. This decrease in interest expense was principally due to the repurchase and redemption of $11.7 million of the Company's 12% Senior Notes due December 1, 2010 (the "Senior Notes") since the end of the first quarter of 2008, and to lower interest rates under the PNC Credit Facility.

Other expense, net, for the three months ended March 29, 2009 of $73,000 compared to $283,000 for the three months ended March 30, 2008, principally consists of losses on foreign currency exchanges.

The income tax provision for the three months ended March 29, 2009 was $136,000 (a rate of 46.6%) on income before income taxes of $292,000. The income tax provision for the three months ended March 30, 2008 was $800,000 (a rate of 44.6%) on income before income taxes of $1.8 million.

The Company's total unrecognized tax benefit as of March 29, 2009 was approximately $822,000, which, if recognized, would affect the Company's effective tax rate. As of March 29, 2009, the Company had approximately $7,200 of accrued interest and penalties reflected in the tax provision.

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 clients' 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 April 19, 2009, the Company had outstanding $71.1 million principal amount under the PNC Credit Facility with remaining availability of up to $14.9 million based upon the borrowing base, as defined under the PNC Credit Facility agreement, to fund operations.

Off-Balance Sheet and Contractual Obligations: As of March 29, 2009, we had no off-balance sheet arrangements other than operating leases entered into in the normal course of business, as indicated in the table below. The following table represents contractual commitments associated with operating lease agreements, employment agreements and principal repayments on debt obligations (excluding interest):

                                        Payments due by fiscal year (in thousands)
                          2009              2010            2011           2012         Thereafter

Operating Leases       $     2,200       $     1,837     $    1,182     $      700     $          23
Employment
Agreements                     741                 -              -              -                 -
PNC Credit
Facility(1)-
principal repayments             -            73,088              -              -                 -
Convertible Note(1)
- principal
repayments                   1,778                 -              -              -                 -
Total                  $     4,719       $    74,925     $    1,182     $      700     $          23

(1) See note 4 to our condensed consolidated financial statements.

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

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

The Company also had standby letters of credit outstanding under the PNC Credit Facility at March 29, 2009 in the aggregate amount of $4.2 million, principally as security for the Company's obligations under its workers compensation insurance policies.

As reported in the accompanying cash flow statement, during the first quarter of 2009, our primary source of funds was $4.8 million provided by financing activities, which, as a result of our lower profitability, was less than the $5.3 million used in operating activities. We also used cash of $553,000 in investing activities due to the purchases of property and equipment.

At March 29, 2009, we had outstanding $73.1 million principal amount under the PNC Credit Facility bearing interest at a weighted average rate of 2.16% per annum. At such date, we had remaining availability of up to $17.9 million based upon the borrowing base, as defined in the agreement, under the PNC Credit Facility.

At March 29, 2009, we also had outstanding $1.8 million principal amount of Convertible Notes bearing interest at 8% per annum.

Our Series 2003A, 2003B and 2004A Preferred Stock provide for dividends of 7.5% per annum and, at March 29, 2009 there were cumulated, unpaid and undeclared dividends of $2.8 million on the Series 2003A Preferred Stock, $212,000 on the Series 2003B Preferred Stock and $2.2 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 15.1 million shares at March 29, 2009 (as compared to 14.3 million shares at March 30, 2008).

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 March 29, 2009 and expects to remain in compliance for the next 12 months. The Company has had preliminary discussions with PNC to extend the PNC Credit Facility beyond its current maturity date of July 24, 2010. No assurance can be given that the Company will resolve such discussions on a satisfactory basis.

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

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

Critical Accounting Policies and Estimates

As disclosed in the annual report on Form 10-K for the year ended December 28, 2008, 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 revenue recognition, allowance for doubtful accounts, accrued workers compensation liability, goodwill impairment, and income taxes. Since December 28, 2008, 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.

New Accounting Pronouncements

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

In December 2007, the FASB issued FAS 160, Noncontrolling Interest in Consolidated Financial Statements. FAS 160 re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and requires the classification of minority interests as a component of equity. Under FAS 160, a change in control will be measured at fair value, with any gain or loss recognized in earnings. The effective date for FAS 160 was December 29, 2008 for the Company. We currently do not have minority interests in our consolidated subsidiaries.

On December 31, 2007, we adopted certain provisions of SFAS 157, Fair Value Measurement. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 applies when another standard requires or permits assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not require any new fair value measurements. On December 29, 2008, we adopted the remaining provisions of SFAS 157 as it relates to nonfinancial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of SFAS 157 did not materially impact our consolidated financial statements.

Seasonality

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

Forward Looking Statements

We have made statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" under this Item 2, as well as in other sections of this report that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "forecasts," "projects," "predicts," "intends," "potential," "continue," the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business and industry. These statements are only predictions based on our current expectations and projections about future events.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, level of activity, performance or achievements, particularly in light of the current global economic crisis that has been marked by dramatic and rapid shifts in market conditions and government responses (see "Overview and Recent Developments" and "Financial Condition, Liquidity and Capital Resources," each in this Item
2). 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 clients to defer hiring contingent workers or reduce spending on the human capital management services and staffing that we provide;

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

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

· 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 clients, including the amount of any wages we have paid to our employees for work performed for these clients;

· 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 client proprietary information, misappropriation of funds, discrimination, harassment, theft of property, accidents, torts or other claims;

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

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

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

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

· any of the other factors described under "Risk Factors" in Item 1A of our annual report on Form 10-K for the year ended December 28, 2008.