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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 29, 2002

OR

For the transition period from              to             

Commission file number 1-6081

COMFORCE Corporation

(Exact name of registrant as specified in its charter)

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

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

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

State the aggregate market value of the voting stock held by nonaffiliates of the registrant at April 9, 2003: $5,558,587.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At April 9, 2003, there were 16,659,363 shares of common stock, par value $0.01 per share, outstanding.

Documents Incorporated by Reference: None.

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.  ¨

PART I

ITEM 1. BUSINESS

Overview

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

Through a national network of 47 offices (37 company-owned and 10 licensed), the Company recruits and places highly skilled contingent personnel and provides financial and outsourcing services for a broad customer base. The Company’s labor force consists primarily of computer programmers, systems consultants, telecommunication engineers, analysts, engineers, technicians, scientists, researchers, healthcare professionals and skilled office support personnel.

Services

The Company provides a wide range of staffing, consulting, financial and outsourcing services, including web-enabled solutions for the effective procurement, tracking and engagement of contingent or non-employee labor. The extensive proprietary database used by the Company coupled with its national reach enable it to draw from a wealth of resources to link highly trained healthcare professionals, computer technicians, telecommunication engineers and other professionals, as well as clerical personnel, with businesses that need highly skilled labor. Management has designed the Company’s services to give its customers maximum flexibility and maximum choice, including by making its professionals available for engagement on a short-term or long-term basis. The Company’s services permit businesses to increase the volume of their work without increasing fixed overhead and permanent personnel costs.

Results are reported by the Company through three operating segments—Staff Augmentation, Human Capital Management Services and Financial Outsourcing Services. The Staff Augmentation segment provides healthcare support, information technology (IT), telecom, technical and other staffing services. The Human Capital Management Services segment provides consulting services for managing the contingent workforce through its PrO Unlimited subsidiary. The Financial Outsourcing Services segment provides payroll, funding and outsourcing services to independent consulting and staffing companies. A description of the types of services provided by each segment follows. See note 17 to the Company’s consolidated financial statements for a presentation of segment results.

Staff Augmentation Segment

Healthcare Support Services

The Company has targeted the healthcare support services as a source of growth. In this sector, the Company provides nurses, allied healthcare professionals and credentialed coders for medical reimbursements and other personnel to support insurance claims processing, billing, transcription and confidential patient record keeping.

The Company’s customers in this area are hospitals, medical offices, multi-physician practices, and other middle market healthcare providers.

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Information Technology

In the IT field, the Company provides highly skilled programmers, help desk personnel, systems consultants and analysts, software engineers and project managers for a wide range of technical assignments, including client server, mainframe, desktop services, help desk and Internet/Intranet. The Company hires the workers it makes available to its customers, in most cases through its recruitment process, and performs all of the obligations of an employer, including processing payrolls, withholding taxes and offering benefits.

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

Telecom

The Company provides skilled telecom personnel to plan, design, engineer, install and maintain wireless, wire line, PBX and enterprise telecommunications systems. COMFORCE Telecom has been selected as a Tier 1 service provider for two major telecommunications manufacturers and one competitive local exchange carrier. In order to serve these major telecommunications clients, COMFORCE Telecom inaugurated a fully outsourced Engineering, Furnish and Installation (EF&I) operations center located in the Dallas/Fort Worth area. In 2002, COMFORCE Telecom commenced the activities necessary to enhance its current International Standards Organization (ISO) certification to the current standards .

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

Technical and Engineering Services

The Company provides technical and engineering services through its Technical Services division for national laboratory research in such areas as environmental safety, alternative energy source development and laser technology. It also provides highly-skilled labor meeting diverse commercial needs in the avionics and aerospace, architectural, automotive, energy and power, pharmaceutical, marine and petrochemical fields.

The Company’s technical and engineering customers include major private sector aerospace companies and federal research facilities.

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 laboratory and scientific support, and professional, clerical, telemarketing and call center staffing. The Company also offers highly specialized chemists, biologists, engineers, laboratory instrumentation operators, technicians and others to companies involved in pharmaceutical, environmental, biotech and other businesses. In addition, the Company also recruits skilled billing, data entry and other clerical personnel who provide support services for smaller businesses such as accounting and law offices.

Human Capital Management Services Segment

The Company provides Human Capital Management services through its PrO Unlimited subsidiary. PrO Unlimited has become a market leader in providing end-to-end web-enabled solutions for the effective procurement, tracking and engagement of contingent or non-employee labor. PrO Unlimited utilizes a combination of proprietary web-based software and intellectual capital to manage all aspects of this rapidly growing segment of the workforce. While the Company focuses on selling its services primarily to Fortune 500 companies, PrO Unlimited’s contingent workforce management tools are suitable for a cross-section of large employers throughout the United States and Canada. The contingent labor force consists of independent contractors, temporary workers, consultants, returning retirees and freelancers. A growing number of corporations are utilizing contingent labor solutions to enable them

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to manage their cost structures more effectively and to better position them to weather business strategy transition and maintain streamlined “just-in-time” labor pools. PrO Unlimited has been a pioneer in assisting companies with government regulatory compliance regarding contingent personnel, particularly the management, tax, benefit and liability issues associated with the contingent workforce.

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

Financial Outsourcing Services Segment

The Company provides funding and back office support services to approximately 100 independent consulting and staffing companies. The Company’s back office services include payroll processing, billing and funding, preparation of various management reports and analysis, payment of all payroll-related taxes and preparation and filing of quarterly and annual payroll tax returns for the contingent personnel employed and placed by independently owned and operated staffing and consulting firms for which the Company earns a fixed fee. Personnel placed by such independent staffing and consulting firms remain employees of such firms. In providing payroll funding services, the Company purchases the accounts receivable of independent staffing firms and receives payments directly from the firms’ clients. The Company pursues the collection of all receivables with the independent consulting and staffing companies; however, the amount of any accounts receivable that are not collected within a specified period after billing is charged back by the Company to such firm.

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Customers

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

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

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

During the year ended December 29, 2002, no single customer accounted for 10% or more of the Company’s revenues. The largest four customers of the Company accounted for approximately 22.4% of the Company’s revenues.

Sales and Marketing

The Company services its customers through a network of 37 company-owned and 10 licensed offices located in 20 states across the United States and its corporate headquarters located in Woodbury, New York. The Company’s sales and marketing strategy is focused on increasing its share of existing customer business, expanding its business with existing customers through cross-selling and by establishing relationships with new customers. The Company solicits customers through personal sales presentations, telephone marketing, direct mail solicitation, referrals from customers, and advertising in a variety of local and national media including the Yellow Pages, magazines, newspapers, trade publications and through the Company’s website (www.comforce.com).

The Company’s Sales and Resource Managers are responsible for maintaining contact with existing clients, maximizing the number of requisitions that the Company will have the opportunity to fill, and then working with the recruiting staff to offer the client the candidate or candidates that best fit the specification. New account targets are chosen by assessing: (1) the need for contract labor with skill sets provided by the Company; (2) the appropriateness of the Company’s niche products to the client’s needs; (3) the potential growth and profitability of the account; and (4) the creditworthiness of the client. While the Company’s corporate office assists in the selection of target accounts, the majority of account selection and marketing occurs locally. Although the Company continues to market to its Fortune 500 client base, it also places a significant marketing focus on faster-growing middle-market companies.

Billable Employees

Within the Staff Augmentation Segment, the Company’s success depends significantly on its ability to effectively and efficiently match skilled personnel with specific customer assignments. The Company has established an extensive national resume database of prospective employees with expertise in the disciplines served by the Company. To identify qualified personnel for inclusion in this database, the Company solicits referrals from its existing personnel and customers, places advertisements in local newspapers, trade magazines, its website and otherwise actively recruits through the Internet. The Company continuously updates its proprietary database to reflect changes in personnel skill levels and availability. Upon receipt of assignment specifications, the Company searches the database to identify suitable personnel. Once an individual’s skills are matched to the specifications, the Company considers other selection criteria such as interpersonal skills, availability and geographic preferences to

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ensure there is a proper fit between the employee and the assignment being staffed. The Company can search its resume database by a number of different criteria, including specific skills or qualifications, to match the appropriate employee with the assignment.

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

The Company believes it has a competitive advantage in attracting and retaining specialty staffing and consulting personnel. It provides assignments with high-profile customers that make use of advanced technology and offers the employees the opportunity to obtain additional experience that can enhance their skills and overall marketability. To attract and retain qualified personnel, the Company also offers flexible schedules and, depending on the contract or assignment, paid holidays, vacation, and certain benefit plan opportunities.

Some customers seek out the Company’s extensive back office and payrolling capabilities, or elect for strategic reasons to outsource functions, without utilizing the Company’s recruitment capabilities. Although the Company does not recruit the workers in such instances, they are nonetheless employees of the Company.

Information Systems

The Company uses PeopleSoft^® HRMS and Financials applications software for its back office operations, and during 2002, successfully completed the upgrade to the Pure Internet Architecture of PeopleSoft^® 8.0. Utilizing the state of the art PeopleSoft^® architecture has enabled the Company to consolidate its back office operations, improve business processes, improve efficiency and productivity and enhance customer relationships. Through this system, the Company has also been able to substantially integrate the management information systems of its 11 acquired companies by creating a single database repository of shared business information.

The Company has expanded the use of the EZAccess^® recruiting and sales database application, which has allowed it to consolidate the resume databases of its acquired companies. This software has enabled the Company to streamline the processes of identifying, recruiting and hiring on a national basis. The Company believes that EZAccess^® has enhanced both its recruiting efforts and its customer service capabilities.

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. In the current weak economic climate, management believes that attracting and retaining clients and selling services to them in the face of heightened competition are the principal competitive challenges. 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 stronger economic climates, such as prevailed at the end of the 1990s, the availability and quality of candidates, the effective monitoring of job performance and the scope of geographic service are 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.

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Employees

The Company currently employs approximately 500 full-time staff employees at its headquarters and company-owned offices. The Company issued approximately 19,000 W-2s to employees of the Company who provided services to its customers during 2002, not including W-2s issued as part of the Financial Outsourcing Services segment back office services provided by the Company to its customers. In addition to employees on assignment, the Company maintains a proprietary database of prospective employees with expertise in the disciplines served by the Company. Billable employees are employed by the Company on an as-needed basis dependent on customer demand and are paid only for time they actually work (plus any accrued vacation time). Non-billable administrative personnel provide management, sales and marketing and other services in support of the Company’s services in all of its segments.

Licensed Offices

The Company has granted eight licenses to operate COMFORCE offices. The most recent license for a new office was granted in July 1992, and the Company does not presently expect to grant more licenses. Licensees recruit contingent personnel and promote their services to both existing and new clients obtained through the licensees’ marketing efforts. However, the Company is involved in the determination of the terms under which services are to be offered to its customers, and 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 its does not believe the services to be performed comport with the Company’s objectives. The Company and the licensee office bear joint responsibility for collecting the receivables from the customers and jointly bear the risk of loss for uncollected receivables. The licensee earns a variable percentage of the ultimate gross profit based upon the type of services rendered.

Regulations

Contingent staffing and consulting services firms are generally subject to one or more of the following types of government regulations: (1) registration of the employer/employees; (2) licensing, record keeping and recording requirements; and (3) substantive limitations on operations. The Company is governed by laws regulating the employer/employee relationship, such as tax withholding or reporting, social security or retirement, anti-discrimination and workers compensation. In particular, in the healthcare support sector, the Company is subject to extensive federal and state regulations as well as those of public and private healthcare organizations and authorities. In addition, in some instances, the Company’s licensees are deemed to be franchisees, and the arrangements the Company enters into with them are subject to regulation, both by the Federal Trade Commission and a number of states.

ITEM 2. PROPERTIES

The Company leases all of its office space. Excluding the Company’s headquarters, these leases are for office space ranging in size from small shared executive suites to facilities exceeding 10,000 square feet in size. The remaining terms under the Company’s leases range from less than six months to five years. The Company’s headquarters in Woodbury, New York occupies approximately 38,000 square feet of space in two facilities under separate leases that expire in 2010. 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.

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ITEM 3. LEGAL PROCEEDINGS

The Company is a party to routine contract and employment-related litigation matters arising in the ordinary course of its business. No such pending matters, individually or in the aggregate, if adversely determined, are believed by management to be material to the business or financial condition of the Company. The Company maintains general liability insurance, property insurance, automobile insurance, employee benefit liability insurance, fidelity insurance, errors and omissions insurance, professional medical malpractice insurance, fiduciary insurance and directors’ and officers’ liability insurance. The Company is generally self-insured with respect to workers compensation, but maintains excess workers compensation coverage to limit its maximum exposure to such claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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 by the American Stock Exchange in the Monthly Market Statistics for the periods indicated, were as follows:

The last reported sale price of the Common Stock of the Company on the American Stock Exchange on April 9, 2003 was $0.48. As of such date, there were approximately 4,400 shareholders of record.

No dividends were declared or paid on the Common Stock during 2002. The terms of the Company’s debt obligations effectively prohibit its payment of dividends. Accordingly, the Company does not anticipate that it will pay cash dividends on its Common Stock for the foreseeable future.

Recent Sales of Unregistered Securities

In February 2003, the Company issued 6,148 shares of its Series 2003A Convertible Preferred Stock (“Series 2003A Preferred Stock”) having an aggregate face amount of $6.1 million and a fair market value of $4.3 million in exchange for $12.3 million aggregate amount of indebtedness (representing outstanding principal and

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accrued, unpaid interest through the date of the exchange) under the Company’s 15% Senior Secured PIK Debentures due 2009 (the “PIK Debentures”). As a result of this transaction, the Company will recognize a gain on debt extinguishment of approximately $7.8 million, which includes the reduction of approximately $240,000 of deferred financing costs, in the first quarter of 2003. As part of this transaction, shares of the Series 2003A Preferred Stock were issued to the Fanning CPD Assets Limited Partnership (the “Fanning Partnership”) in which John 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. By virtue of this position, she is deemed to be a beneficial owner of the shares of Series 2003A Preferred Stock issued. 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.

Each share of Series 2003A Preferred Stock has a face amount of $1,000, bears annual cumulative dividends of $75 per share (7.5% per annum), payable if and when declared by the Company’s board of directors, and is convertible into common stock based upon a price of $1.05 per share for such 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). Upon liquidation, the holders of the Series 2003A Preferred Stock will be entitled to a liquidation preference of $1,000 per share plus the amount of accumulated, 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 Series 2003A Preferred Stock outstanding shall have otherwise consented, no series or class of preferred stock having rights or preferences that are not junior to the Series 2003A Preferred Stock shall be issued by the Company.

The Company can only pay dividends on the Series 2003A Preferred Stock if (i) dividends can legally be paid in accordance with Delaware law, (ii) the Company’s board of directors, in its discretion upon the exercise of its fiduciary duties, declares that a dividend be paid, (iii) payment of the dividend is permitted under the terms of the Company’s credit facility agented by Whitehall Business Credit Corporation, and (iv) the Company has sufficient funds to upstream in accordance with the restricted payments tests under the indenture governing COI’s 12% Senior Notes due 2007 (the “Senior Notes”).

In the event that the conversion of Series 2003A Preferred Stock into common stock of COMFORCE would result in either (i) the occurrence of a “change of control” as defined in the indenture governing COI’s Senior Notes, or (ii) require stockholder approval in accordance with the rules and regulations of the Securities and Exchange Commission or the American Stock Exchange (or any other exchange or quotation system on which the Company’s shares are then listed), then the Series 2003A Preferred Stock held by such holder shall not be convertible into common stock, but rather shall be convertible into shares of non-voting participating preferred stock having a liquidation preference of $0.01 per share (but no other preferences) to be created by the Company. The participating preferred stock will in turn be convertible into the Company’s common stock (on the same basis as if the conversion to common stock from Series 2003A Preferred Stock had occurred directly) if the conversion will not result in a “change of control” as defined in the indenture governing COI’s 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). At the request of the holders of a majority of the outstanding participating preferred stock, the Company will seek stockholder approval for its conversion into common stock.

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Equity Compensation Plan Information

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

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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 years in the period ended December 29, 2002. The Company derived the statement of operations and balance sheet data as of and for each of the five years in the period ended December 29, 2002 from its audited historical consolidated financial statements (in thousands, except per share data).

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

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

Overview

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

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

Recent Developments

The following is a discussion of certain developments that have occurred since the beginning of the Company’s 2002 fiscal year. This discussion is not intended to be an exhaustive discussion of all material events that have occurred during this period.

Amendments to Credit Facility

In May 2002, the Company entered into Amendment No. 6 to its credit facility agented by Whitehall Business Credit Corporation, formerly IBJ Whitehall Business Credit Corporation (the “Whitehall Credit Facility”) to, among other things (i) waive the Company’s non-compliance with the fixed-charge coverage ratio for the period ended March 31, 2002, (ii) reduce the fixed-charge coverage ratio in future periods, and (iii) increase each level of the applicable rate and LIBOR margins by 0.25%. In December 2002, the Company entered into Amendment No. 7 to the Whitehall Credit Facility to (i) extend the maturity date of the facility from December 14, 2003 to August 31, 2004, (ii) authorize the exchange transactions with the Fanning Partnership described under “Recent Developments—Retirement of PIK Debentures” in this Item 7, (iii) reduce the maximum borrowing availability from $95.0 million to $85.0 million to eliminate borrowing availability the Company has not previously required, and (iv) further reduce the fixed-charge coverage ratio in future periods.

Retirement of PIK Debentures

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

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interest) from unrelated parties for a cash payment of $21,000. As a result of this transaction, the Company will recognize a gain on debt extinguishment of approximately $7.8 million, which includes the reduction of approximately $240,000 of deferred financing costs, in the first quarter of 2003. Virtually all of the PIK Debentures were retired in February 2003, and the Company intends to redeem or repurchase the remaining PIK Debentures having a face amount of less than $50,000 before the next interest payment date. Shares of the Series 2003A Preferred Stock were issued to the Fanning Partnership, a limited partnership in which John 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. By virtue of this position, she is deemed to be a beneficial owner of the shares of Series 2003A Preferred Stock issued.

The purpose of this transaction was to improve the Company’s balance sheet through the elimination of $12.0 million of high interest rate debt (15% per annum), principally through the issuance of equity securities. The Company’s offer to exchange PIK Debentures for Series 2003A Preferred Stock was extended to all holders of the PIK Debentures that remained outstanding. No other holder of PIK Debentures accepted the Company’s offer of exchange for Series 2003A Preferred Stock; however, some elected instead to tender their PIK Debentures to the Company for repurchase at a substantial discount. 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. See “Recent Sales of Unregistered Securities” in Item 5 for a description of the rights and preferences of the Series 2003A Preferred Stock.

Critical Accounting Policies and Estimates

Management’s discussion in this Item 7 addresses the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts. A discussion of the more significant estimates follows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.

Allowance for Doubtful Accounts

The Company has an allowance for doubtful accounts recorded as an estimate of the accounts receivable balance that may not be collected. This allowance is calculated on the trade receivables with consideration for the Company’s historical write-off experience, the current aging of receivables, general economic climate and the financial condition of the customer. After giving due consideration to these factors, the Company establishes specific allowances for bad debt. The allowance for the funding and service fee receivable is calculated with consideration for the ability of the Company’s clients to absorb chargebacks due to the uncollectibility of the funded receivables.

Bad debt expense, which increases the allowance for doubtful accounts, is recorded as an operating expense in the consolidated statements of operations. Factors that would cause this provision to increase primarily relate to increased bankruptcies by customers, the inability of the Companies funding services clients to absorb chargebacks and other difficulties collecting amounts billed. On the other hand, an improved write-off experience and aging of receivables would result in a decrease to the provision.

Reserves for Workers Compensation

The Company records its estimate of the ultimate cost of, and reserves for, workers compensation based on actuarial computations using the Company’s loss history as well as industry statistics. Furthermore, in determining its reserves, the Company includes reserves for estimated claims incurred but not reported. The ultimate cost of workers compensation will depend on actual costs incurred to settle the claims and may differ from the amounts reserved by the Company for those claims.

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Accruals for workers compensation claims are included in accrued expenses in the consolidated balance sheets. A significant increase in claims or changes in laws may require the Company to record additional expenses related to workers compensation. On the other hand, significantly improved claim experience may result in lower annual expense levels.

Income Taxes

The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) issued Statement No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance against deferred tax assets for which utilization of the asset is not likely.

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 on an estimated annual tax rate. In determining this rate, management makes estimates about taxable income in each of the states where the Company operates, as well as the tax rate that will be in effect for each state. To the extent these estimates change during the year, or that actual results differ from these estimates, the estimated annual tax rate may change between quarterly periods and may differ from the actual effective tax rate for the year.

Goodwill Impairment

The Company tested goodwill for impairment in accordance with the provisions of SFAS 142 as of the beginning and end of fiscal year 2002. In connection with the goodwill tests, the Company engaged an independent firm to assist management in the determination of the fair values of its reporting units (as defined by SFAS 142). In its determination of the fair values, the firm engaged by the Company primarily utilized a discounted cash flow analysis as well as various other valuation approaches, including (a) recent values paid by investors and purchasers of companies in businesses similar to that of the Company, (b) capitalization multiples of companies with investment characteristics resembling those of the reporting units, (c) the enterprise value of the Company, and (d) asset and liability structure.

Significant assumptions used in this analysis include (i) expected future revenue growth rates, operating unit profit margins, and working capital levels, (ii) a discount rate, and (iii) a terminal value multiple. The revenue growth rates, working capital levels and operating unit profit margins are based on management’s expectation of future results. As previously discussed, the Company’s operating results, including those of its more specialized operations, have been negatively impacted by the general economic conditions. Based on management’s assessment of the circumstances and considering the firm’s findings, the Company recognized an impairment loss of $52.8 million net of taxes as a cumulative effect of a change in accounting principle during the first quarter of 2002. In the fourth quarter of 2002, the Company, again utilizing this independent firm in testing for goodwill impairment, recognized an additional impairment loss of $19.0 million due to the Company’s failure to meet previous growth expectations. These impairment losses relate primarily to the goodwill attributable to staffing companies acquired by the Company in 1996 and 1997, during which time staffing companies were customarily valued using higher multiples. See note 6 to the consolidated financial statements.

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If management’s expectations of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of the Company’s reporting units could change significantly. Such a change could result in additional goodwill impairment charges in future periods, which could have a significant impact on the Company’s consolidated financial statements.

Results of Operations

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

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

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

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

Operating loss for the year ended December 29, 2002 was $7.4 million as compared to operating income of $17.0 million for the year ended December 30, 2001. This operating loss for the year ended December 29, 2002 is principally attributable to the Company’s fourth quarter $19.0 million write-off related to the impairment of goodwill discussed above and a decrease in sales and gross margins in Staff Augmentation and Financial

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Outsourcing Services segments, partially offset by a reduction of $4.2 million in goodwill amortization due to the adoption of SFAS 142 as well as the more favorable workers compensation history for fiscal 2002 discussed above.

The Company’s interest expense for the year ended December 29, 2002 and December 30, 2001 is attributable to the Whitehall Credit Facility, the Convertible Notes, the Senior Notes and the PIK Debentures. The interest expense was lower for the year ended December 29, 2002 as compared to the year ended December 30, 2001 due to lower market interest rates and lower borrowing levels under the Whitehall Credit Facility as well as the reduction of Senior Notes and PIK Debentures through the transactions described below and in note 10 to the consolidated financial statements.

During 2001, the Company repurchased $13.0 million principal amount of Senior Notes for $8.9 million and $5.2 million principal amount of PIK Debentures for $2.5 million (including accrued and unpaid interest of $340,000), the repurchase prices of which were paid from lower interest rate borrowings under the Whitehall Credit Facility. In 2001, the Company also completed the exchange of $18.0 million principal amount of PIK Debentures for its 8% Convertible Notes in the original principal amount of $8.0 million, plus $1.0 million in cash. The gain on debt extinguishment realized by the Company during the year ended December 30, 2001 as a result of the repurchases (including the exchange) was $15.9 million, which includes the reduction of $1.1 million of deferred financing costs associated with these transactions. See “Financial Condition, Liquidity and Capital Resources” in this Item 7.

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

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

Year Ended December 30, 2001 Compared to Year Ended December 31, 2000

Net sales of services for the year ended December 30, 2001 were $445.9 million, a decrease of 9.5% from net sales of services for the year ended December 31, 2000 of $492.9 million. The Company suffered a decrease in net sales of services in each of its three segments. In the Staff Augmentation segment, the decrease is principally attributable to a sharp decline in the telecom industry resulting in lower sales to telecom customers, partially offset by higher sales to information technology customers. Also, due to the continuing effects of the economic recession, sales were lower in both the Human Capital Management Services and Financial Outsourcing Services segments.

Cost of services for the year ended December 30, 2001 was 79.8% of net sales of services as compared to cost of services of 79.6% for the year ended December 31, 2000. The cost of services as a percentage of net sales for 2001 increased from 2000 levels principally as a result of lower sales (and gross margin percentages on sales) to telecom customers and a decrease in permanent placement fees, partially offset by the Company’s continued focus on higher-margin niche products in the Staff Augmentation segment.

Selling, general and administrative expenses as a percentage of net sales of services were 14.7% for the year ended December 30, 2001, compared to 13.6% for the year ended December 31, 2000. This increase is principally a result of a $2.4 million write-off in the fourth quarter of 2001 relating to uncollectible funding and service fees receivable, and higher payroll and recruiting costs with respect to non-billable staff and investments to expand the infrastructure for the Company’s Human Capital Management Services segment during the first half of 2001, offset partially by initiatives made by management during the second half of 2001 to reduce costs. Excluding

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the write-off, selling, general and administrative expenses as percentage of net sales were 14.1% for the year ended December 30, 2001.

Operating income for the year ended December 30, 2001 was $17.0 million as compared to operating income of $25.4 million for the year ended December 31, 2000. This 33.1% decrease in operating income for the year ended December 30, 2001 resulted principally from a decrease in sales in each of the Company’s three segments, particularly in the telecom sector, the $2.4 million write-off referred to above and an increase in depreciation and amortization. Operating income for 2000 included a one-time $1.1 million charge for the settlement of a longstanding lawsuit (see note 13 to the consolidated financial statements).

The Company’s interest expense for the year ended December 30, 2001 is attributable to the Whitehall Credit Facility, the Convertible Notes (which were issued in September 2001), the Senior Notes and the PIK Debentures. The Company’s interest expense for the year ended December 31, 2000 is attributable to its former credit facility with institutional lenders which was terminated in December 2000 (the “Retired Credit Facility”), the Whitehall Credit Facility (which was entered into in December 2000), the Senior Notes and the PIK Debentures. The Whitehall Credit Facility was entered into to repay the Retired Credit Facility and provide the Company with additional borrowing availability. The obligations evidenced by the Retired Credit Facility and those evidenced by the Senior Notes and PIK Debentures were incurred in 1997, principally in connection with the funding of business acquisitions.

During the first quarter of 2001, the Company repurchased $13.0 million principal amount of Senior Notes for $8.9 million and $5.2 million principal amount of PIK Debentures for $2.5 million (including accrued and unpaid interest of $340,000), the repurchase prices of which were paid from lower interest rate borrowings under the Whitehall Credit Facility. In September 2001, the Company completed the exchange of $18.0 million principal amount of PIK Debentures (including accrued and unpaid interest of $860,000) for its Convertible Notes in the original principal amount of $8.0 million (bearing interest at the per annum rate of 8%), plus $1.0 million in cash. The gain on debt extinguishment realized by the Company during the year ended December 30, 2001 as a result of the repurchases (including the exchange) was $15.9 million, which includes the reduction of $1.1 million of deferred financing costs associated with these transactions. During the third quarter of 2000, the Company repurchased $10.0 million principal amount of the Senior Notes for a purchase price of $5.1 million. The gain on debt extinguishment that was realized by these repurchases was $4.7 million which includes the reduction of $200,000 of deferred financing costs associated with these repurchases. See “Financial Condition, Liquidity and Capital Resources” in this Item 7.

The interest expense was lower for the year ended December 30, 2001 as compared to the year ended December 31, 2000 due to lower market interest rates and lower borrowing levels under the Whitehall Credit Facility as well as the reduction of Senior Notes and PIK Debentures through the repurchases (including the exchange) described above.

The income tax provision for the year ended December 30, 2001 was $6.9 million on income of $12.9 million before taxes. The income tax provision for the year ended December 31, 2000 was $5.0 million on income before taxes and of $7.3 million. The difference between the federal statutory income tax rate and the Company’s effective tax rate relates primarily to the nondeductibility of amortization expense associated with certain intangible assets, the nondeductibility of a portion of the interest expense associated with the PIK Debentures and state income taxes.

Financial Condition, Liquidity and Capital Resources

The Company generally pays its billable employees weekly for their services, and remits certain statutory payroll and related taxes as well as other fringe benefits. Invoices are generated to reflect these costs plus the Company’s markup. These bills are typically paid within 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.

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The following table represents contractual commitments associated with operating agreements:

The Company was obligated under various agreements to make earn-out payments to the sellers of companies acquired by the Company and to sellers of franchised businesses repurchased by the Company, subject to the sellers meeting specified contractual requirements. During fiscal 2002, the Company made earn-out payments totaling $323,000. It has no remaining obligation to make earn-out payments to any person in future periods.

The Company also had standby letters of credit outstanding at December 29, 2002 in the aggregate amount of $3.8 million.

During the year ended December 29, 2002, the Company’s primary sources of funds to meet working capital needs were from borrowings under the Whitehall Credit Facility. Cash and cash equivalents increased $2.3 million during the year ended December 29, 2002. Cash flows provided by operating activities of $19.6 million exceeded cash flows used in financing activities of $14.6 million and cash flows used in investing activities of $2.7 million.

As of December 29, 2002, the Company had outstanding $35.0 million principal amount under the Whitehall Credit Facility bearing interest at a weighted average rate of 4.6% per annum. In addition, as of December 29, 2002, the Company had outstanding $12.0 million principal amount of PIK Debentures bearing interest at a rate of 15% per annum (virtually all of which were subsequently retired, as described in this Item 7 under “Recent Developments—Retirement of PIK Debentures”), $87.0 million principal amount of Senior Notes bearing interest at a rate of 12% per annum and $8.8 million principal amount of Convertible Notes bearing interest at the rate of 8% per annum. As more fully described below, interest on the Convertible Notes may be satisfied through the issuance of new Convertible Notes through December 1, 2003. Through the last interest payment date on December 1, 2002, the Company elected to issue new Convertible Notes to pay interest due thereon and expects to continue to do so through December 1, 2003.

The Company entered into the Whitehall Credit Facility in December 2000 to provide greater borrowing availability and flexibility. The Whitehall Credit Facility has been amended several times since it was entered into, including to ensure the Company’s compliance with financial covenants at March 31, 2002 and subsequent periods as described in this Item 7 under “Recent Developments—Amendments to Credit Facility,” and to lessen the financial requirements through December 2003. The Whitehall Credit Facility, as amended, has permitted the Company to execute its strategy of reducing its higher interest rate debt and improving its balance sheet by retiring Senior Notes and PIK Debentures. In the most recent amendment, the maturity date was extended from December 14, 2003 to August 31, 2004. The Whitehall Credit Facility currently provides for borrowing availability of up to $85.0 million based upon a specified percentage of the Company’s eligible accounts receivable. At year end, the Company had remaining availability based upon then outstanding eligible accounts receivable of $16.6 million.

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Substantially all of the consolidated net assets of the Company are assets of COI and all of the net income that had been generated by the Company was attributable to the operations of COI. Except for permitted distributions, these assets and any cumulated net income are restricted as to their use by COMFORCE. The indenture governing the Senior Notes imposes restrictions on COI making specified payments, which are referred to as “restricted payments,” including making distributions or paying dividends (referred to as upstreaming funds) to COMFORCE. Under the indenture, COI is not permitted to make cash distributions to COMFORCE other than (1) to upstream $2.0 million annually to pay public company expenses, (2) to upstream up to $10.0 million to pay income tax related to deemed forgiveness of PIK Debentures to facilitate the purchase or exchange by COMFORCE of PIK Debentures at less than par, (3) under certain circumstances in connection with a disposition of assets, to upstream proceeds therefrom to repay the PIK Debentures, and (4) to upstream funds to the extent COI meets the restricted payments test under the indenture, the most significant component of which is based upon a percentage of net income generated by COI since January 1, 1998 on a cumulative basis, less prior distributions made in reliance on this provision. Management believes that $2.0 million annually (if COI has funds available for this purpose) will be sufficient to pay COMFORCE’s annual public company expenses for the foreseeable future. Principally as a result of losses incurred by COI in fiscal 2002 and prior distributions made by COI to COMFORCE, COI can make no distributions to COMFORCE based upon the cumulative net income provisions of the indenture. It is anticipated that COI must generate net income of approximately $564,000 before it will be able to upstream funds to COMFORCE under the restrictive payments test of the indenture.

Through December 1, 2002, interest under the PIK Debentures was payable, at the option of COMFORCE, in cash or in kind through the issuance of additional PIK Debentures. In addition, through December 1, 2003, interest on the Convertible Notes is payable, at the option of COMFORCE, in cash or in kind through the issuance of additional Convertible Notes. To date, COMFORCE has paid all interest under the PIK Debentures and Convertible Notes in kind. Virtually all of the PIK Debentures were retired in February 2003, and the Company intends to redeem or repurchase the remaining PIK Debentures having a face amount of less than $50,000 before the next interest payment date. Beginning with the interest payment due June 1, 2004, COMFORCE will be required to pay interest on the Convertible Notes in cash. Its ability to do so is expected to be dependent on its availability of funds for this purpose, whether through borrowings by COI under the Whitehall Credit Facility, funds from COI’s operations or otherwise, and on COI’s ability to upstream funds in accordance with the restricted payments test under the indenture for the Senior Notes. COMFORCE’s ability to repay Convertible Notes at their maturity on December 1, 2009, or on any earlier required repayment or repurchase dates, will also be dependent on any restrictions under its loan agreements as then in effect and availability of funds.

Under the indenture, COI is subject to restrictions in upstreaming funds to its parent COMFORCE. The Company does not currently have sufficient availability under the indenture to make a cash payment of semi-annual interest under the Convertible Notes. Management anticipates that the Company will need to be profitable in 2003 and the first quarter of 2004 in order to have adequate funds eligible for upstreaming to COMFORCE to pay cash interest that will first become due under the Convertible Notes on June 1, 2004. If the Company does not have adequate availability under the indenture to upstream funds to pay interest on the Convertible Notes, the Company expects to request the holder of the Convertible Notes, which is a partnership in which John Fanning, the Company’s chairman and chief executive officer, holds the principal economic interest, to consider alternative arrangements. Such arrangements could include exchanging the Notes for preferred stock or extending payment-in-kind interest provisions.

The Convertible Notes are convertible into the Company’s common stock based on a price of $1.70 per share of common stock, provided that if such conversion would result in a change of control occurring under the terms of the indentures governing the PIK Debentures or the Senior Notes, the Convertible Note will be convertible into shares of non-voting participating preferred stock having a nominal liquidation preference (but no other preferences), which in turn will be convertible into common stock at the holder’s option at any time so long as the conversion would not result in a change of control. Notice of conversion must be given at least 61 days in advance.

As of December 29, 2002, approximately $60.2 million, or 37.0%, of the Company’s total assets were goodwill recorded in connection with the Company’s acquisitions. Effective at the beginning of fiscal 2002, the Company ceased recording amortization expense relating to goodwill amounting to approximately $4.2 million

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annually upon its required adoption of a new accounting standard (SFAS 142). The Company evaluated the recoverability of goodwill on its books under the new standards under SFAS 142 at its adoption in the first quarter of 2002, resulting in its write-off of $55.0 million of goodwill in that quarter, and again in the fourth quarter of 2002, resulting in an additional write-off of $19.0 million of goodwill in that quarter. See note 6 to the consolidated financial statements for a discussion of SFAS 142 and the Company’s methodology in determining these write-offs for impairment of goodwill.

If management’s expectations of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of the Company’s reporting units could change significantly. Such a change could result in additional goodwill impairment charges in future periods, which could have a significant impact on the Company’s consolidated financial statements.

Management of the Company believes that cash flow from operations and funds anticipated to be available under the Whitehall Credit Facility will be sufficient to service the Company’s indebtedness and to meet currently anticipated working capital requirements throughout 2003. Although the Company has made significant progress in improving its capital structure, most recently through the elimination of debt in connection with the transactions completed in February 2003, as described under “Recent Sales of Unregistered Securities” in Item 5, management has initiated discussions with financial institutions to explore additional strategies to further eliminate high interest rate debt.

The Company is currently undergoing an income tax audit by the Internal Revenue Service for the fiscal year 1999. The results under this audit are not yet known.

In April 2003, the Company discussed with the staff of the Securities and Exchange Commission a question previously raised by the staff in a comment letter to the Company relating to the gross versus net display of revenues from the Company’s licensed offices. The Commission staff did not agree with the position taken by the Company, but agreed to consider additional factual information which the Company believes supports this position. The Company believes that its position is appropriate and intends to seek to convince the Commission staff of the merits of the position. If, however, the Commission staff ultimately declines to accept the Company’s position, the Company believes that any additional changes recommended by the staff in connection with this item will reduce revenue for fiscal 2002 by less than 4% and will have no impact on the Company’s net loss for fiscal 2002.

Impact of Recently Issued Accounting Standards

In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. The Company is required to adopt SFAS 143, effective for calendar year 2003. The Company does not expect the adoption of SFAS 143 to have a material impact on its future consolidated operations or financial position, as the Company is now constituted.

In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 will be applied to exit or disposal activities beginning in fiscal 2003 and is not expected to have an effect on the Company.

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by the FASB issued Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. The disclosure requirements have been adopted as of the period ended December 29, 2002. The Company intends to continue to apply the intrinsic value method of accounting for stock-based employee compensation. The adoption of this pronouncement will not have any impact on the Company’s consolidated financial position or results of operations.

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

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telecom staffing services has historically been lower during the second half of the fourth quarter through the following first quarter, and, generally, shows gradual improvement until the second half of the fourth quarter.

Forward Looking Statements

Various statements made in this Report concerning the manner in which the Company intends to conduct its future operations, and potential trends that may impact future results of operations, are forward looking statements. The Company may be unable to realize its plans and objectives due to various important factors, including, but not limited to the following: a continuation of the current recessionary environment, particularly in the aircraft manufacturing, telecom, information technology and other sectors served by the Company (which may reflect cyclical conditions or, particularly in the case of telecom, fundamental changes in these industries), could further reduce demand for contingent personnel and further heighten the competition for customers, resulting in lower revenues and margins and affecting the Company’s ability to continue to meet the financial covenants under the Whitehall Credit Facility; the Company’s significant leverage may leave it with a diminished ability to obtain additional financing for working capital or other capital expenditures, for retiring higher interest rate debt or for otherwise improving the Company’s competitiveness and capital structure or expanding its operations; SFAS 142, which requires the Company to evaluate at least annually the recoverability of goodwill on its books, could cause the Company to write-off goodwill in future periods (in addition to the write-offs of $74.0 million in 2002), which could have a material adverse impact on the Company’s financial condition and results of operations; or, if COI fails to generate sufficient consolidated net income (after covering its cumulative deficit at December 29, 2002 of $564,000) or to have other funds available to upstream to COMFORCE under the restricted payments test of the Senior Notes indenture in order for it to pay cash interest on the Convertible Notes (which is required beginning on June 1, 2004) or to repay the Convertible Notes at their maturity on December 1, 2009, or on any earlier required repayment or repurchase date, then, unless COMFORCE obtains a loan or sells its capital stock or other securities to provide funds for this purpose, the Company will default under the indenture governing the Senior Notes and under the Whitehall Credit Facility.

Additional important factors that could cause the Company to be unable to realize its plans and objectives are described under “Risk Factors” in the Registration Statement on Form S-3 of the Company filed with the Securities and Exchange Commission on December 21, 2000 (Registration No. 333-52356). The disclosure under “Risk Factors” in the Registration Statement may be accessed through the Web site maintained by the Securities and Exchange Commission at “www.sec.gov.” In addition, the Company will provide, without charge, a copy of such “Risk Factors” disclosure to each stockholder of the Company who requests such information. Requests for copies should be directed to the attention of Linda Annicelli, Vice President, Administration at COMFORCE Corporation, 415 Crossways Park Drive, P.O. Box 9006, Woodbury, New York 11797, telephone 516-437-3300.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Most of the Company’s borrowings are fixed rate obligations, including $87.0 million principal amount of Senior Notes bearing interest at a fixed rate of 12% per annum, $8.8 million principal amount of Convertible Notes bearing interest at a fixed rate of 8% per annum, and $12.0 million principal amount of PIK Debentures bearing interest at a fixed rate of 15% per annum. The estimated fair value of these debt obligations at December 29, 2002 was $45.7 million for the Senior Notes, $3.1 million for the Convertible Notes and $4.2 million for the PIK Debentures. Management of the Company does not believe that a 10% increase in interest rates would have a material impact to the fair value of these fixed rate obligations. Borrowings under the Whitehall Credit Facility aggregating $35.0 million at December 29, 2002 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 4.64%, the impact to the Company in annualized interest payable would be approximately $162,000. Accordingly, the Company has not entered into any swap agreements or other hedging transactions as a means of limiting exposure to interest rate fluctuations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information Concerning Directors

Set forth below is information concerning each director of the Company, including his or her business experience during at least the past five years, his or her positions with the Company, and certain directorships held by him or her. There are no family relationships among any of the directors, nor, except as hereinafter described, are there any arrangements or understandings between any director and another person pursuant to which he or she was selected as a director. Each director is to hold office until the next annual meeting of the stockholders or until his or her successor has been elected and qualified.

John C. Fanning has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since 1998. From 1997 to 1998 he was President of the Company’s Financial Outsourcing Services and Human Capital Management divisions. Mr. Fanning was the founder of Uniforce Services, Inc. (“Uniforce”) and served as its Chairman, Chief Executive Officer and President and as one of its directors from 1961, the year in which Uniforce’s first office was opened, until its acquisition by the Company in 1997. Mr. Fanning entered the employment field in 1954, when he founded the Fanning Personnel Agency, Inc., his interest in which he sold in 1967 to devote his efforts solely to Uniforce’s operations. He also founded and served as the first president of the Association of Personnel Agencies of New York.

Harry V. Maccarrone has served as Executive Vice President, Secretary and a Director of the Company since 1998 and as the Chief Financial Officer of the Company since 2000. Mr. Maccarrone, who joined Uniforce in 1988 as Assistant Vice President—Finance, served as Vice President—Finance of Uniforce from 1989 to 1997. From 1989 until 1997 he also served as Uniforce’s Treasurer and Chief Financial Officer.

Rosemary Maniscalco has served as the Vice Chairman of the Company since August 2001 and as a Director of the Company since June 2001. She has also served since 1999 as the president of Corporate ImageMakers, Inc., a consulting company that advises corporations on critical employment and timely workplace issues. Prior thereto, Ms. Maniscalco served with Uniforce from 1981 until its 1997 merger with the Company, including as a member of Uniforce’s board of directors (from 1984 to 1997) and as its president and chief operating officer (from 1992 to 1997). Following Uniforce’s merger with the Company, she served as the president of the Company’s Staff Augmentation division until joining Corporate ImageMakers^TM in 1999.

Kenneth J. Daley has served as a Director of the Company since 1999. From 1957 until his retirement in 1998, Mr. Daley held various positions with Chase Manhattan Bank (“Chase”) and, prior to its acquisition by Chase, Chemical Banking Corporation, most recently as Division Executive responsible for middle market business in the Long Island region. He currently serves as a director of National Medical Health Card Systems Inc., a provider of prescription benefit management services, a consultant to Key Span Energy and Citicorp, a trustee of Briarcliff College and a trustee of the Long Island Catholic Charities.

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Daniel Raynor has served as a Director of the Company since 1998. He is a managing partner of The Argentum Group, a private equity firm, a position he has held since 1987. Mr. Raynor also serves as a director of NuCO₂, Inc., a public company, and several privately-held companies. He received a B.S. in economics from The Wharton School, University of Pennsylvania.

Gordon Robinett has served as a Director of the Company since 1998. He is currently a consultant to Command Security, a security services firm based in Poughkeepsie, New York. Mr. Robinett retired as the vice president—finance and treasurer of Uniforce in 1989, after more than 20 years of service.

Information Concerning Executive Officers

The following table sets forth certain information concerning each individual who currently serves as an executive officer or key employee of the Company, including such person’s business experience during at least the past five years and positions held with the Company. Executive officers are appointed by the Board of Directors and serve at the discretion of the Board. There are no family relationships among the executive officers, nor are there any arrangements or understandings between any executive officer and another person pursuant to which he or she was selected as an officer except as may be hereinafter described.

John C. Fanning. See “Information Concerning Directors” in this Item 10 for additional information concerning Mr. Fanning’s business experience.

Harry V. Maccarrone. See “Information Concerning Directors” in this Item 10 for additional information concerning Mr. Maccarrone’s business experience.

Robert F. Ende has served as the Company’s Senior Vice President, Finance since April 2002, having previously served as the Company’s Vice President, Finance from 2000 to April 2002, as its Vice President of Financial Services from 1999 to 2000 and as its Vice President and Controller from the time of Uniforce’s merger with the Company in 1997 until 1999. Mr. Ende previously served as the Controller of Uniforce from 1994 to 1997. Prior to joining Uniforce, he held various financial executive positions in the service industry from 1983 to 1994. Mr. Ende was associated with Ernst & Young from 1980 to 1983 and is a certified public accountant.

Linda Annicelli has served as the Company’s Vice President, Administration since 1999, having previously served as the Company’s General Manager and Director of Corporate Services from 1998 to 1999 and as its General Manager from the time of Uniforce’s merger with the Company in 1997 until 1998. Prior thereto, Ms. Annicelli held various marketing and administrative positions with Uniforce, including as General Manager from 1992 to 1997 and as Director of Communications and Administration from 1989 to 1992.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, certain of its officers and persons who own more than 10% of the Company’s common stock to file reports of

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ownership and changes in ownership with the SEC. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, the Company believes that all Section 16(a) filing requirements applicable to persons who are officers or directors of the Company or holders of 10% of the Company’s common stock were complied with in fiscal 2002.

ITEM 11. EXECUTIVE COMPENSATION

Director Compensation and Arrangements

During fiscal 2002, all directors received fees of $10,000 ($2,500 per quarter). In addition to this cash compensation, during fiscal 2002 each director received options to purchase 10,000 shares of common stock under the Company’s Long-Term Stock Investment Plan at an exercise price of $1.10 per share. Each director is entitled to receive options to purchase 10,000 shares of the Company’s common stock upon his or her initial election to the Board and, annually thereafter, upon his or her reelection to the Board, at an exercise price equal to the market price on the date of grant. All of the options awarded to date are for terms of 10 years, subject to earlier termination following the conclusion of a director’s service as a director and under certain other circumstances as provided, in the case of options issued to date, under the Company’s Long-Term Stock Investment Plan, or, in the case of options to be issued in fiscal 2003 or thereafter, under the Company’s 2002 Stock Option Plan.

Executive Officer Compensation

The following table shows all compensation paid by the Company and its subsidiaries for the fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000 to (1) the person who has served as the chief executive officer of the Company throughout fiscal 2002 (John C. Fanning) and (2) the three other persons who served as executive officers of the Company during fiscal 2002 and whose income exceeded $100,000 (collectively, the “Named Executive Officers”).

Summary Compensation Table (1)

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(1) Does not include perquisites and other personal benefits, securities or other property, if any, received by any such executive officer which did not exceed the lesser of $50,000 or 10% of such executive officer’s salary and bonus for the year indicated.

(2) Represents deferred compensation under deferred compensation arrangements.

(3) Represents options to purchase the Company’s common stock at an exercise price of $1.10 per share for 10,000 shares and $1.45 for 75,000 shares.

(4) Represents options to purchase the Company’s common stock at an exercise price of $1.50 per share.

(5) Represents options to purchase the Company’s common stock at an exercise price of $2.00 per share.

(6) Represents options to purchase the Company’s common stock at an exercise price of $1.45 per share.

Option Awards and Values

In 1993, the Company adopted with stockholder approval a Long-Term Stock Investment Plan (the “1993 Plan”) which authorized the grant of options to purchase up to 5,000,000 shares of the Company’s common stock to executives, key employees and agents of the Company and its subsidiaries. All executive officers and other officers, directors and employees, as well as independent agents and consultants, of the Company and its subsidiaries were eligible to participate in the 1993 Plan and to receive grants made before December 31, 2002. Effective as of December 31, 2002, the Company can no longer make option grants under the 1993 Plan.

In 2002, the Company adopted with stockholder approval the 2002 Stock Option Plan (the “2002 Plan”) which authorizes the grant of options to purchase up to 1,000,000 shares of the Company’s common stock to executives, key employees and agents of the Company and its subsidiaries. All executive officers and other officers, directors and employees, as well as independent agents and consultants, of the Company and its subsidiaries are eligible to participate in the 2002 Plan and to receive grants. No option grants were issued under the 2002 Plan in fiscal 2002.

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The following table shows options awarded to the Named Executive Officers under the 1993 Plan in fiscal 2002 and the assumed appreciated value of such options. None of the Named Executive Officers received stock appreciation rights in fiscal 2002.

Option Grants in Fiscal Year 2002

(1) The potential realizable value shown is calculated based upon appreciation of the Company’s common stock issuable under options, calculated over the full term of the options assuming 5% and 10% annual appreciation in the value of the common stock from the date of grant, net of the exercise price of the options.

The following table shows information concerning the aggregate number and values of options granted under the 1993 Plan that were held by the Named Executive Officers as of December 29, 2002. None of the Named Executive Officers holds stock appreciation rights and none of such persons exercised any options in fiscal 2002.

Aggregated Option Exercises in Last Fiscal Year

and FY-End Option Values (1)

(1) This information is presented as of December 29, 2002.

(2) The exercise prices of these options are less than the closing market price of the Company’s common stock on December 29, 2002. See the notes to the “Summary Compensation Table” for a description of the terms of the options listed in this table.

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Employment Agreements

Effective as of January 1, 1999, the Company entered into an employment agreement with John C. Fanning, Chairman and Chief Executive Officer of the Company. As amended, the agreement provides for a salary of $385,000 per year, subject to annual increases of the higher of 7% or the percentage increase in the Consumer Price Index, annual incentive compensation equal to 5% of the Company’s pre-tax operating income in excess of $2.5 million and less than $3.0 million and 3.5% of the Company’s pre-tax operating income in excess of $3.0 million, and participation in the Company’s benefit programs. As amended to date, the agreement continues until December 31, 2005 and provides for a non-accountable expense allowance of $20,000 annually. In 2001 and 2002, Mr. Fanning elected to receive cash payments of less than $5,000 in lieu of the Company’s payment of medical insurance premiums on his behalf. At Mr. Fanning’s request, the agreement was amended to (i) eliminate the salary increases that otherwise would have gone into effect in January 2002 and 2003 and (ii) ensure that he would realize no benefit from an increase in pre-tax operating income resulting from the elimination of goodwill amortization in accordance with the Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets.

The agreement is terminable by the Company only for “just cause,” and imposes customary non-competition and confidentiality restrictions. The agreement provides that, if it is terminated or not extended, other than for just cause, Mr. Fanning will be entitled to a severance payment equal to one year’s compensation (with the bonus calculated at the highest rate during the last three years) and reimbursement for health insurance costs for three years. Furthermore, the agreement provides that, if Mr. Fanning resigns within one year following a “change of control,” or if the agreement is terminated or not extended within three years following a change of control, other than for just cause, he will be entitled to receive three times the amount of the Company’s pension, deferred compensation and like contributions made by the Company on his behalf, if any, and his annual base salary and bonus (calculated at the highest rate during the last three years). In addition, in the event the agreement is terminated or not extended prior to a change of control or within three years after a change of control, other than for just cause, or if Mr. Fanning resigns within one year after a change of control, all unvested stock options shall immediately vest and remain exercisable throughout their original term. Mr. Fanning is also entitled to receive a payment equal to the excise taxes payable by him in respect of any of the termination payments described above plus a “gross up” payment based on projected federal, state and local income taxes payable by him due to his receipt of this additional compensation.

Effective as of January 1, 1999, the Company entered into an employment agreement with Harry V. Maccarrone, who then served as the Company’s Executive Vice President and Secretary of the Company. As amended to date, the agreement provides for a salary of $257,500 per year, subject to annual increases of the higher of 7% or the percentage increase in the Consumer Price Index, and participation in the Company’s benefit programs. His agreement is in other respects substantially the same as Mr. Fanning’s agreement.

Compensation Committee Interlocks and Insider Participation

Kenneth J. Daley and Gordon Robinett serve on the Company’s Compensation Committee. There are no interlocking relationships, as defined in the regulations of the Securities and Exchange Commission, involving any of these individuals.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the number of shares and percentage of common stock known to the Company (based upon representations made to it or public filings with the Securities and Exchange Commission) to be beneficially owned as of February 3, 2003 by (i) each person who beneficially owns more than 5% of the shares of common stock, (ii) each director and executive officer of the Company, and (iii) all directors and executive officers of the Company as a group. Unless stated otherwise, each person

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so named exercises sole voting and investment power as to the shares of common stock so indicated. Unless otherwise indicated below, the business address for each person shown is 415 Crossways Park Drive, P.O. Box 9006, Woodbury, NY 11797. At April 9, 2003, there were 16,659,363 shares of common stock of the Company outstanding.

(1) For purposes of this table, shares are considered “beneficially owned” if the person directly or indirectly has the sole or shared power to vote or direct the voting of the securities or the sole or shared power to dispose of or direct the disposition of the securities. A person is also considered to beneficially own shares that such person has the right to acquire within 60 days, and options exercisable within such period are referred to herein as “currently exercisable.”

(2) The shares beneficially owned by Mr. Fanning, the Chairman and Chief Executive Officer of the Company, are (i) 24,200 shares currently held of record by him, (ii) 3,606,564 shares owned by the John C. Fanning Irrevocable Trust, of which Mr. Fanning is the beneficiary, (iii) 1,421,615 shares held by a limited partnership of which the John C. Fanning Irrevocable Trust is the general partner, (iv) 200,000 shares issuable upon exercise of a currently exercisable option at an exercise price of $5.25 per share, (v) 200,000 shares issuable upon exercise of a currently exercisable option at an exercise price of $2.00 per share, (vi) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.50 per share, (vii) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.10 per share and (viii) 50,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.45 per share. Mr. Fanning disclaims beneficial ownership of shares owned by the limited partnership in excess of his proportionate interest in the limited partnership. Harry V. Maccarrone holds sole voting power with respect to the shares held by the limited partnership and the John C. Fanning Irrevocable Trust.

(3) Not included in the shares beneficially owned by either John C. Fanning or Rosemary Maniscalco are up to 15,580,303 shares of common stock issuable upon conversion of the Convertible Notes or Series 2003A Convertible Preferred Stock held by the Fanning CPD Assets, LP, a limited partnership in which John C. Fanning holds the principal economic interest. Ms. Maniscalco is the general

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partner of this limited partnership. Under their terms, neither the Convertible Notes nor the Series 2003A Preferred Stock can be converted into common stock if the conversion would result in the occurrence of a “change of control” under the indenture governing the Senior Notes. In such case, the Convertible Notes and the Series 2003A Preferred Stock are 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. This participating preferred stock will in turn be convertible into common stock (on the same basis as if a direct conversion had been permitted) once the same restrictions are removed. As a result of Mr. Fanning’s current beneficial ownership position, a conversion into common stock is not permitted, nor is anticipated that it will be permitted prior to the repayment of the Senior Notes, which mature on December 1, 2007.

(4) The shares beneficially owned by Mr. Maccarrone, Executive Vice President, Chief Financial Officer and Secretary of the Company, are (i) 10,552 shares currently held of record by him, (ii) 30,000 shares issuable to him upon exercise of a currently exercisable option at an exercise price of $7.00 per share, (iii) 100,000 shares issuable upon exercise of a currently exercisable option at an exercise price of $5.25 per share, (iv) 130,000 shares issuable upon exercise of three currently exercisable options at an exercise price of $2.00 per share, (v) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.50 per share, (vi) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.10 per share, (vii) 50,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.45 per share, (viii) 3,606,564 shares owned by the John C. Fanning Irrevocable Trust, of which Mr. Maccarrone is the trustee, and (ix) 1,421,615 shares held by a limited partnership of which the John C. Fanning Irrevocable Trust is the general partner. Harry V. Maccarrone holds sole voting power with respect to the shares held by the limited partnership and the John C. Fanning Irrevocable Trust.

(5) The shares beneficially owned by Ms. Maniscalco, the Vice Chairman and a Director of the Company are (i) 15,000 shares currently held of record by her, (ii) 10,000 shares issuable to her upon the exercise of a currently exercisable option at an exercise price of $1.50 per share, (iii) 10,000 shares issuable to her upon the exercise of a currently exercisable option at an exercise price of $1.10 per share and (iv) 16,667 shares issuable to her upon the exercise of a currently exercisable option at an exercise price of $1.45 per share.

(6) The shares beneficially owned by Mr. Raynor, a Director of the Company, are (i) 10,000 shares issuable to him upon exercise of a currently exercisable option at an exercise price of $4.94 per share, (ii) 10,000 shares issuable to him upon exercise of a currently exercisable option at an exercise price of $3.13 per share, (iii) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.75 per share, (iv) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.50 per share, and (v) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.10 per share.

(7) The shares beneficially owned by Mr. Robinett, a Director of the Company, are (i) 1,043 shares owned of record, (ii) 10,000 shares issuable to him upon exercise of a currently exercisable option at an exercise price of $4.94 per share, (iii) 10,000 shares issuable to him upon exercise of a currently exercisable option at an exercise price of $3.13 per share, (iv) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.75 per share, (v) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.50 per share, and (vi) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.10 per share.

(8) The shares beneficially owned by Mr. Daley, a Director of the Company, are (i) 10,000 shares issuable to him upon exercise of a currently exercisable option at an exercise price of $3.13 per share, (ii) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.75 per share, (iii) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.50 per share, and (iv) 10,000 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.10 per share.

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(9) The shares beneficially owned by Mr. Ende, Senior Vice President, Finance of the Company, are (i) 3,422 shares owned of record by him, (ii) 5,000 shares issuable to him upon exercise of a currently exercisable option at an exercise price of $10.00 per share, (iii) 30,000 shares issuable to him upon the exercise of currently exercisable options at an exercise price of $2.00 per share and (iv) 33,333 shares issuable to him upon the exercise of a currently exercisable option at an exercise price of $1.45 per share.

(10) The shares beneficially owned by Ms. Annicelli, the Vice President, Administration of the Company, are (i) 2,031 shares owned of record by her, (ii) 5,000 shares issuable to her upon exercise of a currently exercisable option at an exercise price of $10.00 per share, (iii) 20,000 shares issuable to her upon the exercise of currently exercisable options at an exercise price of $2.00 per share, and (iv) 10,000 shares issuable to her upon the exercise of a currently exercisable option at an exercise price of $1.45 per share.

(11) The shares shown to be beneficially owned by the directors and officers as a group include shares held of record by them or an affiliate and shares issuable upon the exercise of options.

(12) ARTRA Group Incorporated, a Delaware corporation, presently owns all of such shares of record directly or through a wholly-owned subsidiary, Fill-Mor Holding, Inc.

See “Equity Compensation Plan Information” under Item 5 for a table describing the options and warrants issued as part of the Company’s equity compensation plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In September 2001, the Company completed the exchange of $18.0 million principal amount of its PIK Debentures for Convertible Notes in the principal amount of $8.0 million, plus $1.0 million in cash. Fanning CPD Assets, LP, a limited partnership in which John C. Fanning, the Company’s Chairman and Chief Executive Officer, holds the principal economic interest (the “Fanning Partnership”), was the holder of the $18.0 million PIK Debentures that were exchanged for the Convertible Notes and cash. The Fanning Partnership purchased these PIK Debentures from unaffiliated third parties in arm’s length transactions in 2000. The Convertible Notes permit payment of semi-annual interest on an in-kind basis until December 1, 2003 through the issuance of additional Convertible Notes. In accordance with this provision, the Company issued additional Convertible Notes to the Fanning Partnership in the aggregate principal amount of $784,000 as in-kind interest payments on December 1, 2001, June 1, 2002 and December 1, 2002. Rosemary Maniscalco, the Vice Chairman of the Company, is the general partner of the Fanning Partnership. By virtue of this position, she is deemed to be the beneficial owner of the Convertible Notes. Prior to the 2001 exchange, Ms. Maniscalco on behalf of the Fanning Partnership, which was then the record holder of a majority in principal amount of the PIK Debentures, consented to the elimination of certain of the covenants in the indenture governing the PIK Debentures.

The Convertible Notes are convertible into the Company’s common stock based on a price of $1.70 per share of common stock, provided that if such conversion would result in a “change of control” occurring under the terms of the indenture governing the Senior Notes, the Convertible Notes will be convertible into shares of non-voting participating preferred stock having a nominal liquidation preference (but no other preferences), which in turn will be convertible into common stock at the holder’s option at any time so long as the conversion would not result in a change of control.

The purpose of this transaction was to improve the Company’s balance sheet through the exchange of higher interest rate debt (15% per annum) for lower interest rate debt (8% per annum) and elimination of $9.0 million of debt. No other holder of PIK Debentures accepted the Company’s offer of exchange and repurchase on these terms. The Company obtained the opinion of an independent investment banking firm that this transaction was fair to the Company from a financial point of view, and the Company’s independent directors approved the terms of the transaction. The consideration paid to the Fanning Partnership for the principal amount of the PIK Debentures exchanged in this transaction approximated in value the consideration that the Fanning Partnership had previously been paid to the unrelated third party sellers of the PIK Debentures.

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In February 2003, the Company issued 6,148 shares of its Series 2003A Preferred Stock having an aggregate face amount of $6.1 million and a fair market value of $4.3 million in exchange for $12.3 million aggregate amount of indebtedness (representing outstanding principal and accrued, unpaid interest through the date of the exchange) under the PIK Debentures. As a result of this exchange, the Company will recognize a gain on debt extinguishment of approximately $7.8 million, which includes the reduction of approximately $240,000 of deferred financing costs, in the first quarter of 2003. The Fanning Partnership was the holder of the $12.3 million PIK Debentures that were exchanged for the Series 2003A Preferred Stock. The Fanning Partnership purchased these PIK Debentures from an unaffiliated third party in arm’s length transactions in 2002. John Fanning, the Company’s Chairman and Chief Executive Officer, holds the principal economic interest in the Fanning Partnership. Rosemary Maniscalco, a director of the Company, is the general partner of the Fanning Partnership. By virtue of this position, she is deemed to be a beneficial owner of the shares of Series 2003A Preferred Stock issued.

The purpose of this transaction was to improve the Company’s balance sheet through the elimination of high interest rate debt (15% per annum) through the issuance of equity securities. The Company also extended an offer to the other holders of PIK Debentures to either exchange their PIK Debentures for Series 2003A Preferred Stock on the same basis as offered to the Fanning Partnership or, alternatively, to purchase the PIK Debentures held by them for cash at a substantial discount. The Company obtained the opinion of an independent investment banking firm that the terms of the exchange transaction with the Fanning Partnership were fair to the Company from a financial point of view, and the Company’s independent directors approved the terms of the transaction. The consideration paid to the Fanning Partnership for the principal amount of the PIK Debentures exchanged in this transaction approximated in value the consideration that the Fanning Partnership had previously been paid to the unrelated third party sellers of the PIK Debentures.

Each share of Series 2003A Preferred Stock has a face amount of $1,000, bears annual cumulative dividends of $75 per share (7.5% per annum), payable if and when declared by the Company’s board of directors, and is convertible into common stock based upon a price of $1.05 per share for such 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). Upon liquidation, the holders of the Series 2003A Preferred Stock will be entitled to a liquidation preference of $1,000 per share plus the amount of accumulated, 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 Series 2003A Preferred Stock outstanding shall have otherwise consented, no series or class of preferred stock having rights or preferences that are not junior to the Series 2003A Preferred Stock shall be issued by the Company.

In the event that the conversion of Series 2003A Preferred Stock into common stock of COMFORCE would result in either (i) the occurrence of a “change of control” as defined in the indenture governing COI’s Senior Notes, or (ii) require stockholder approval in accordance with the rules and regulations of the Securities and Exchange Commission or the American Stock Exchange (or any other exchange or quotation system on which the Company’s shares are then listed), then the Series 2003A Preferred Stock held by such holder shall not be convertible into common stock, but rather shall be convertible into shares of non-voting participating preferred stock having a liquidation preference of $0.01 per share (but no other preferences) to be created by the Company. The participating preferred stock will in turn be convertible into the Company’s common stock (on the same basis as if the conversion to common stock from Series 2003A Preferred Stock had occurred directly) if the conversion will not result in a “change of control” as defined in the indenture governing COI’s 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). At the request of the holders of a majority of the outstanding participating preferred stock, the Company will seek stockholder approval for its conversion into common stock.

Rosemary Maniscalco, through a company owned by her, provides consulting services to the Company at the rate of $1,000 per day, plus expenses. During fiscal 2002, the Company paid $92,000 for such consulting services.

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See “Employment Agreements” in Item 11 for a description of the employment agreements entered into between the Company and each of John C. Fanning, the Chairman and Chief Executive Officer of the Company, and Harry V. Maccarrone, the Executive Vice President of the Company.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART IV

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

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

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

3. Exhibits as listed on page E-1.

The Company did not file any current reports on Form 8-K during the fourth quarter of fiscal 2002.

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SIGNATURES

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

Date: April 9, 2003

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.

CERTIFICATIONS

I, John C. Fanning, Chairman and Chief Executive Officer of COMFORCE Corporation, hereby certify that:

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COMFORCE CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 29, 2002, December 30, 2001 and December 31, 2000

Date: April 9, 2003

I, Harry V. Maccarrone, Executive Vice President and Chief Financial Officer of COMFORCE Corporation, hereby certify that:

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Date: April 9, 2003

37

COMFORCE CORPORATION AND SUBSIDIARIES

Table of Contents

F-1

Independent Auditors’ Report

Board of Directors and Stockholders

COMFORCE Corporation:

We have audited the accompanying consolidated balance sheets of COMFORCE Corporation and subsidiaries as of December 29, 2002 and December 30, 2001, and the related consolidated statements of operations, stockholders’ (deficit) equity and comprehensive income (loss), and cash flows for each of the periods in the three-year period ended December 29, 2002. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule for each of the periods in the three-year period ended December 29, 2002 as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of COMFORCE Corporation and subsidiaries as of December 29, 2002 and December 30, 2001, and the results of their operations and their cash flows for each of the periods in the three-year period ended December 29, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for each of the periods in the three-year period ended December 29, 2002 when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As disclosed in note 6 to the consolidated financial statements, effective as of December 31, 2001, the Company changed the manner in which it accounts for goodwill and other intangible assets upon the adoption of the Financial Accounting Standards Board-issued Statement No. 142, Goodwill and Other Intangible Assets.

/s/ KPMG LLP

     KPMG LLP

Melville, New York

March 14, 2003

F-2

COMFORCE CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

December 29, 2002 and December 30, 2001

(in thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements.

F-3

COMFORCE CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the years ended December 29, 2002, December 30, 2001 and December 31, 2000

(in thousands, except per share amounts)