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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 27, 2004

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

Not Applicable

Former name, former address and former fiscal year, if changed since last report

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 Exchange Act).    Yes  ¨     No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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COMFORCE Corporation

INDEX

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMFORCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

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

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COMFORCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

(unaudited)

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

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COMFORCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

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COMFORCE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited interim consolidated financial statements of COMFORCE Corporation (“COMFORCE”) and its subsidiaries, including COMFORCE Operating, Inc. (“COI”) (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. Although management believes that the disclosures made are adequate to ensure that the information presented is not misleading, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003. The results for the three and six month periods ended June 27, 2004 are not necessarily indicative of the results of operations for the entire year.

2. STOCK COMPENSATION PLANS

The Company applies APB Opinion 25 and related interpretations in accounting for stock options; accordingly, no compensation cost has been recognized for any options granted to employees, officers or directors since the exercise price of options was equal to or greater than the market value of the common stock on the date of grant. Had compensation cost been determined based upon the fair value of the stock options at grant date, consistent with the method in the Financial Accounting Standards Board (“FASB”) issued Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), the Company’s net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below:

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3. DEBT

Notes payable and long-term debt at June 27, 2004 and December 28, 2003 (in thousands):

Required principal payments of long-term debt are as follows (in thousands):

PNC Credit Facility: In June 2003, COMFORCE, COI and various of their operating subsidiaries entered into a Revolving Credit and Security Agreement (the “PNC Credit Facility”) with PNC Bank, National Association, as a lender and administrative agent (“PNC”) and other financial institutions participating as lenders to provide for a $75.0 million revolving credit facility with available borrowings based, generally, on 85.0% of the Company’s accounts receivable aged 90 days or less, subject to specified limitations and exceptions. As of June 27, 2004, the Company had remaining availability (as defined) of $14.9 million under the PNC Credit Facility. At closing, the Company borrowed $32.7 million to repay the Company’s then existing revolving credit facility agented by Whitehall Business Credit Corporation (the “Whitehall Credit Facility”), which was thereupon terminated. The Company wrote-off approximately $431,000 of deferred financing costs in the second quarter of 2003 for the early retirement of the Whitehall Credit Facility.

Borrowings under the PNC Credit Facility bear interest, at the Company’s option, at a per annum rate equal to either (1) the greater of the base commercial lending rate of PNC as announced from time to time or the federal funds rate plus 0.5%, or (2) LIBOR plus a margin ranging from 2.5% if the Company’s fixed charges coverage ratio is greater than 1.30:1 to 3.0% if this ratio is 1.05:1 (with the margin having been 2.75% in the second quarter of 2004). The obligations under the PNC Credit Facility are collateralized by a pledge of the capital stock of certain key operating subsidiaries of the Company and by security interests in substantially all of the assets of the Company. The agreements evidencing the PNC Credit Facility contain various financial and other covenants and conditions, including, but not limited to, a prohibition on paying cash dividends and limitations on engaging in affiliate transactions, making acquisitions and incurring additional indebtedness. The maturity date of the PNC Credit Facility is June 24, 2007. The PNC Credit Facility affords the Company greater borrowing flexibility and has a maturity date close to three years beyond the maturity date of the Whitehall Credit Facility. The Company was in compliance with all financial covenants under the PNC Credit Facility at June 27, 2004 and expects to remain in compliance throughout the next twelve months.

PIK Debentures and Series 2003A Preferred Stock: As of June 27, 2004 and December 28, 2003, there were no PIK Debentures outstanding. In February 2003, the Company issued $6.1 million face amount of its Series 2003A Preferred Stock having a fair value of $4.3 million in exchange for $12.3 million of its outstanding PIK Debentures (including accrued interest) from 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”). The Series 2003A Preferred Stock is convertible into common stock at $1.05 per share. 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 Company also repurchased additional PIK Debentures in the amount of $59,000 (including accrued but unpaid interest) from unrelated parties for a cash

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payment of $21,000. As a result of these transactions, the Company recognized a gain on debt extinguishment of $7.8 million, which includes the reduction of approximately $240,000 of deferred financing costs, in the first quarter of 2003. In May 2003, principally in order to eliminate the costs associated with the administration of the PIK Debentures, the Company redeemed the remaining $42,000 of PIK Debentures in accordance with the procedures set forth in the indenture. The related party transactions were treated as gains on the extinguishment of debt and not as contributions to capital since the related party purchased the PIK Debentures (it exchanged for Series 2003A Preferred Stock) from unrelated parties at a discount and the Company received the benefits of this pricing in its transactions with the related party.

The Series 2003A Preferred Stock provides for dividends of 7.5% per annum and, at June 27, 2004, there were cumulated, unpaid and undeclared dividends of $626,000. The Company’s certificate of designation of series and determination of rights and preferences of series 2003A and 2003B convertible preferred stock included in error a clause that could have resulted in the convertible preferred stock being classified as mezzanine equity. The Company filed a certificate of correction eliminating this clause and other provisions purporting to afford to the holders of the preferred shares a liquidation preference upon the occurrence of certain change of control events, which certificate of correction is, under Delaware law, effective as of the respective filing dates of the original certificates of designation of series and determination of rights and preferences for the 2003A and 2003B preferred shares, and results in the preferred shares now being classified in stockholders’ equity. As a result of the filing, and after evaluating the impact on the financial statements, the Company did not reclassify the preferred stock in its balance sheets prior to the filing.

Senior Notes: In June 2003, the Company repurchased $2.0 million principal amount of Senior Notes for $980,000, resulting in a gain on debt extinguishment of $983,000, which includes the reduction of approximately $37,000 of deferred financing costs. In December 2003, the Company repurchased $2.5 million principal amount of Senior Notes for $1.6 million, resulting in a gain on debt extinguishment of $808,000, which includes the reduction of approximately $42,000 of deferred financing costs. In February and March 2004, the Company repurchased an additional $13.5 million principal amount of its 12% Senior Notes for $11.3 million in transactions with unrelated parties. As a result of these repurchases during the first quarter of 2004, the Company recognized a gain on debt extinguishment of $2.0 million in the first six months of 2004, including a reduction of $219,000 of deferred financing costs.

Convertible Notes: The Convertible Notes are convertible into common stock at $1.70 per share. In September 2003, the Company issued 513 shares of its Series 2003B Preferred Stock having an aggregate face amount and fair value of $513,000 in exchange for $2.0 million principal amount of Convertible Notes, plus accrued interest, in a transaction with a related party (the Fanning Partnership). The Series 2003B Preferred Stock is convertible into common stock at $0.54 per share. The consideration paid to the Fanning Partnership in September 2003 for the principal amount of the Convertible Notes exchanged in this transaction was substantially less than the consideration the Fanning Partnership had paid for the securities it had previously exchanged for the Convertible Notes. As a result of this transaction, in the third fiscal quarter of 2003, the Company recorded a contribution to capital of $913,000, net of taxes, in lieu of recognizing a gain on the extinguishment of debt. The Series 2003B Preferred Stock provides for dividends of 7.5% per annum and, at June 27, 2004, there were cumulated, unpaid and undeclared dividends of $29,000.

The debt service costs associated with the Convertible Notes may be satisfied through issuance of new Convertible Notes through December 1, 2004. In June 2004, $297,000 of the Convertible Notes were issued at a conversion rate of $1.70 per share of common stock for payment of interest, which resulted in a beneficial conversion feature of $71,000 that increased deferred financing costs and paid-in capital. Beginning with the interest payment due June 1, 2005, 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 its revolving credit facility agented by PNC Bank, National Association, 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 2, 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 governing the Senior Notes, COI is subject to restrictions in upstreaming funds to its

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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. Principally as a result of losses incurred by COI in fiscal 2001, 2002, 2003 and 2004 to date, as well as 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 $7.9 million before it will be able to upstream any funds to COMFORCE under the restrictive payments test of the indenture in order to pay cash interest on the Convertible Notes (which is required beginning on June 1, 2005) or to repay the Convertible Notes at their maturity on December 2, 2009. In calculating net income for this purpose, under the terms of the indenture, the Company must apply generally accepted accounting principles as in effect at the time the indenture was entered into in 1997.

The Company and the Fanning Partnership are currently discussing a possible exchange transaction under which the Company would issue to the Fanning Partnership shares of a new Series 2004 Convertible Preferred Stock in exchange for all or a substantial portion of the outstanding Convertible Notes held by the Fanning Partnership ($7.7 million principal, with accrued interest of $51,000). The Series 2004 Convertible Preferred Stock is expected to have rights and preferences that are identical to the Company’s existing 2003A and 2003B Convertible Preferred Stock except for the conversion rate, which has not been determined. The Company will not enter into any such transaction unless the terms are approved by the Company’s independent directors, and the board obtains the opinion of an independent investment banking firm that the terms of the transaction are fair to the Company from a financial point of view.

4. INCOME (LOSS) PER SHARE

Basic income (loss) per common share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted income (loss) per share is computed assuming the conversion of stock options and warrants with an exercise price less than the average market value of the Company’s common stock during the period, as well as the conversion of the convertible debt and preferred stock for common stock to the extent such conversion assumption is dilutive. The following represents a reconciliation of the numerators and denominators for basic and diluted income (loss) per share computations (in thousands):

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As of June 27, 2004, 4.6 million shares of common stock issuable upon conversion of Convertible Notes and 6.5 million shares issuable upon conversion of the Series 2003A Preferred Stock were excluded from the computation of diluted income per share because their effect would be anti-dilutive. Options and warrants to purchase 2.0 million and 3.5 million shares of common stock were outstanding as of June 27, 2004 and June 29, 2003, respectively, but were not included in the computation of diluted income per share because their effect would be anti-dilutive.

5. INDUSTRY SEGMENT INFORMATION

COMFORCE has determined that its reportable segments can be distinguished principally by the types of services offered to the Company’s clients. The Company reports its results through three operating segments — Human Capital Management Services, Staff Augmentation and Financial Outsourcing Services. The Human Capital Management Services segment provides contingent workforce management services. The Staff Augmentation segment provides healthcare support, technical and engineering services, information technology (IT), telecom and other staffing services. The Financial Outsourcing Services segment provides funding and back office support services to independent consulting and staffing companies.

The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in note 2 to the Company’s consolidated financial statements for the fiscal year ended December 28, 2003. COMFORCE evaluates the performance of its segments and allocates resources to them based on operating contribution, which represents segment revenues less direct costs of operations, excluding the allocation of corporate general and administrative expenses. Assets of the operating segments reflect primarily net accounts receivable and goodwill associated with segment activities; all other assets are included as corporate assets. The Company does not account for expenditures for long-lived assets on a segment basis.

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The table below presents information on the revenues and operating contribution for each segment for the three and six months ended June 27, 2004 and June 29, 2003, and items which reconcile segment operating contribution to COMFORCE’s reported income (loss) from continuing operations before income taxes (in thousands):

6. RECLASSIFICATIONS

Certain reclassifications have been made to conform prior period amounts to the current period presentation.

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7. COMPREHENSIVE INCOME

The components of comprehensive income (loss) are as follows (in thousands):

8. SALE OF NICHE TELECOM OPERATIONS

Effective as of March 1, 2004, COMFORCE sold an 80% interest in two telecom subsidiaries in the Staff Augmentation segment and sold its remaining 20% minority interest in these companies by June 29, 2004. These subsidiaries operated in the customer premise equipment services niche of the telecom sector, a niche that had remained outside of the Company’s core competency in telecom. The buyer, Spears Holding Company, Inc., is controlled by an individual who was one of the principals of these companies when they were sold to COMFORCE in 1998. Revenues for the subsidiaries that were sold represented less than 3.5% of the Company’s consolidated revenues in fiscal 2003. All cash proceeds received by the Company to date from this sale have been used to pay down bank debt. The total consideration was a combination of cash, short-term promissory notes and long-term promissory notes, as follows:

These long-term notes in the total principal amount of $3.7 million were valued at $1.4 million by an independent valuation firm. The sale resulted in a gain of $1,135,000, which represented the excess of the net proceeds (cash and short-term notes of $2,598,000 plus the fair value of the long-term notes of $1,400,000, less transaction costs of $111,000), over the net book value of the net assets of the business sold of $2,752,000. The Company will recognize no gain on this transaction until the cash payments it receives exceed its investment ($2,863,000) in the business sold. All cash initially received under the sale agreement, including principal and interest on the notes, will be recorded as a reduction of net assets held for sale. After such balance has been eliminated, subsequent cash received will be recorded as a gain from discontinued operations up to the amount of the $1,135,000 gain. Once the entire gain has been recognized, additional cash receipts, if any, will be recorded as interest income within other income in continuing operations. The deferred gain has been reflected as an offset to the related notes receivable in the accompanying balance sheet at June 27, 2004. After application of the consideration received through June 27, 2004 of $1,954,000 described above, and $40,000 of interest received, the Company has recorded on its balance sheet net assets held for sale of $869,000.

In accordance with FASB 144, the results of operations from the sale of the Company’s niche telecom operations have been recorded as discontinued operations. The net (loss) income from discontinued operations was $(17,000) and $77,000 for the six months ended June 27, 2004 and June 29, 2003, respectively. The presentation of discontinued operations on the statement of operations for the six months ended June 29, 2003 has been reclassified.

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9. RELATED PARTY TRANSACTION

In March 2004, the Fanning Partnership agreed to extend the payment-in-kind terms under the Convertible Notes from the original termination date on December 1, 2003 for one additional year. The Company’s board has directed management, in consultation with an independent financial advisor, to advise the board as to appropriate consideration, if any, to pay to the holder for agreeing to this accommodation. This consideration, if any, when determined, would be recorded in fiscal 2004.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

Staffing personnel placed by the Company are employees of the Company. The Company is responsible for 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 — Human Capital Management Services, Staff Augmentation and Financial Outsourcing Services. The Human Capital Management Services segment provides consulting services for managing the contingent workforce. The Staff Augmentation segment provides healthcare support, technical, information technology (IT), telecom and other staffing services. The Financial Outsourcing Services segment provides payroll, funding and outsourcing support services to independent consulting and staffing companies.

Management of the Company has observed improvement in the business environment for staffing companies beginning in the first quarter of 2003 and continuing to the present. Recent industry statistics generally support management’s observations including, since the beginning of 2004, improvement in the rate of job creation in the United States. The Company has sought to position itself competitively in what it expects to be an improving marketplace. In addition to taking steps to improve operational efficiencies, management has sought to improve the Company’s balance sheet. Since June 2000, the Company has reduced its public debt from $138.8 million to $69.0 million. As a result, it has reduced its annual interest expense by approximately $7.0 million, including by borrowing at the lower rates available under the PNC Credit Facility to effectuate repurchases of public debt and by exchanging preferred equity and lower interest rate convertible notes for this public debt.

Critical Accounting Policies

As disclosed in the annual report on Form 10-K for the fiscal year ended December 28, 2003, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates. Our most critical accounting policies relate to allowance for doubtful accounts; reserves for workers’ compensation; goodwill impairment; and income taxes. Since December 28, 2003, there have been no changes in our critical accounting policies and no other significant changes to the methods used in the assumptions and estimates related to them.

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Results of Operations

Three Month Period Ended June 27, 2004 Compared to Three Month Period Ended June 29, 2003

Net sales of services for the three month period ended June 27, 2004 were $117.6 million, which represents a 32.3% increase from the $88.9 million in net sales of services realized for the three month period ended June 29, 2003. The Company experienced an increase in all business segments. Net sales of services in the Human Capital Management Services segment increased by $19.8 million or 43.1%, principally due to an increase in its client base. Management believes that there is a trend for companies to rely increasingly on providers of human capital management services, such as the Company’s PrO Unlimited subsidiary. In the Staff Augmentation segment, the increase of $8.3 million or 20.0% is principally attributable to increased net sales to technical services customers under government contracts and telecom contracts for engineering, furnishing and installment (EF&I). Also, net sales of services were higher by $652,000 or 38.1% in the Financial Outsourcing Services segment, principally due to non-recurring items, including liquidated damages paid by a customer to the Company for the early termination of that customer’s contract with the Company.

Cost of services for the three month period ended June 27, 2004 was 84.9% of net sales of services as compared to cost of services of 83.4% of net sales of services for the three month period ended June 29, 2003. The cost of services as a percentage of net sales for the second fiscal quarter of 2004 increased from the second fiscal quarter of 2003 principally as a result of increased competitive pricing, higher state unemployment rates prevalent throughout the country and higher growth in Human Capital Management Services (which have a higher cost of services as a percentage of net sales of services). Management believes that, under market conditions prevailing in the staffing industry, these and other factors will result in increasing pressure being placed on margins in the immediate future.

Selling, general and administrative expenses as a percentage of net sales of services were 11.5% for the three month period ended June 27, 2004, compared to 13.3% for the three month period ended June 29, 2003. Since the first fiscal quarter of 2003, management’s on-going initiatives to contain selling, general and administrative costs and improve back office efficiencies have enabled the Company to increase sales at a rate greater than the rate of the increase in selling, general and administrative expenses, which has contributed to the Company’s overall improvement in selling, general and administrative expenses as a percentage of net sales.

Operating income for the three month period ended June 27, 2004 was $3.2 million as compared to operating income of $1.9 million for the three month period ended June 29, 2003. The Company experienced an increase in operating income principally due to an increase in sales in the second fiscal quarter of 2004.

The Company’s interest expense for the three month period ended June 27, 2004 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Notes and the Senior Notes. The interest expense was lower for the three month period ended June 27, 2004 as compared to the three month period ended June 29, 2003 due to the retirement of Senior Notes in the second quarter of 2003 and the first quarter of 2004 and Convertible Notes in the third quarter of 2003. See “Financial Condition, Liquidity and Capital Resources” in this Item 2.

The Company incurred a write-off of deferred financing costs of $431,000 in the second quarter of 2003 related to the early retirement of the Whitehall Credit Facility.

The gain on debt extinguishment realized by the Company during the three months ended June 29, 2003 was the result of the Company’s repurchase of Senior Notes from an unaffiliated holder, as described under note 3 to the consolidated financial statements. As a result of this transaction, the Company recognized a gain on debt extinguishment of $983,000, which includes the reduction of approximately $37,000 of deferred financing costs, in the second quarter of 2003.

The income tax provision for the three month period ended June 27, 2004 was $60,000 on income before

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tax of $125,000. The income tax provision for the three month period ended June 29, 2003 was $538,000 on a loss before tax of $1.0 million. The difference between the federal statutory income tax rate and the Company’s effective tax rate relates primarily to state income taxes, and a disallowance for travel and entertainment expenses. Included in income tax expense for the quarter ended June 29, 2003 is an assessment of $975,000 based on an income tax audit by the IRS for tax years 1999 through 2001.

In accordance with FASB 144, the results of operations from the sale of the Company’s niche telecom operations (as described in note 8 to the consolidated financial statements) have been recorded as discontinued operations. The net income from discontinued operations was $46,000 for the three months ended June 29, 2003. The presentation of discontinued operations on the statement of operations for the three months ended June 29, 2003 has been reclassified.

Six Month Period Ended June 27, 2004 Compared to Six Month Period Ended June 29, 2003

Net sales of services for the six month period ended June 27, 2004 were $225.0 million, which represents a 29.3% increase from the $173.9 million in net sales of services realized for the six month period ended June 29, 2003. The Company experienced an increase in all business segments. Net sales of services in the Human Capital Management Services segment increased by $35.3 million or 40.2%, principally due to an increase in its client base. Management believes that there is a trend for companies to rely increasingly on providers of human capital management services, such as the Company’s PrO Unlimited subsidiary. In the Staff Augmentation segment, the increase of $14.8 million or 17.9% is principally attributable to technical services customers under government contracts and telecom EF&I contracts. Also, net sales of services were higher by $906,000 or 29.3% in the Financial Outsourcing Services segment, principally due to liquidated damages paid by a customer to the Company for the early termination of that customer’s contract with the Company, increase in demand for staffing services from existing clients and non-recurring income.

Cost of services for the six month period ended June 27, 2004 was 84.8% of net sales of services as compared to cost of services of 83.1% of net sales of services for the six month period ended June 29, 2003. The cost of services as a percentage of net sales for the first six months of 2004 increased from the first six months of 2003 principally as a result of increased competitive pricing, higher state unemployment rates prevalent throughout the country and higher growth in Human Capital Management Services (which have a higher cost of services as a percentage of net sales of services).

Selling, general and administrative expenses as a percentage of net sales of services were 11.6% for the six month period ended June 27, 2004, compared to 12.9% for the six month period ended June 29, 2003. The six month period ended June 29, 2003 included a $1.6 million insurance claim recovery (representing 0.9% of net sales of services) related to uncollectible funding and service fees receivables that were written-off in the fourth fiscal quarter of 2001. Since the first fiscal quarter of 2003, management’s on-going initiatives to contain selling, general and administrative costs and improve back office efficiencies have enabled the Company to increase sales at a rate greater than the rate of the increase in selling, general and administrative expenses, which has contributed to the Company’s overall improvement in selling, general and administrative expenses as a percentage of net sales.

Operating income for the six month period ended June 27, 2004 was $5.9 million as compared to operating income of $4.8 million for the six month period ended June 29, 2003. The Company experienced an increase in operating income for the 2004 period principally due to an increase in sales and a decrease in general and administrative expenses as a percentage of sales in the first half of fiscal 2004.

The Company’s interest expense for the six month period ended June 27, 2004 was principally attributable to interest recorded on the PNC Credit Facility, the Convertible Notes and the Senior Notes. The interest expense was lower for the six month period ended June 27, 2004 as compared to the six month period ended June 29, 2003 due to the retirement of PIK Debentures in the first quarter of 2003, Senior Notes in the second quarter of 2003 and the first quarter of 2004 and Convertible Notes in the third quarter of 2003. See “Financial Condition, Liquidity and Capital Resources” in this Item 2.

The Company incurred a write-off of deferred financing costs of $431,000 in the second quarter of 2003 related to the early retirement of the Whitehall Credit Facility.

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The gain on debt extinguishment realized by the Company during the first six months of 2004 was the result of the Company’s repurchase of Senior Notes in February and March of 2004. As a result of these transactions, the Company recognized a gain on debt extinguishment of $2.0 million in the first six months of 2004, including a reduction of $219,000 of deferred financing costs. As a result of Company’s exchange and repurchase of PIK Debentures in the first six months of 2003, the Company recognized a gain on debt extinguishment of $8.8 million, which includes the reduction of approximately $277,000 of deferred financing costs. The purpose of these transactions was to improve the Company’s balance sheet through the elimination of higher interest rate debt.

Other expense was $57,000 for the six months ended June 27, 2004 as compared to other income of $645,000 for the six months ended June 29, 2003. The other income in 2003 principally related to gains on foreign currency transactions.

The income tax provision for the six month period ended June 27, 2004 was $773,000 on income before tax of $1.6 million. The income tax provision for the six month period ended June 29, 2003 was $3.7 million on income before tax of $6.4 million. The difference between the federal statutory income tax rate and the Company’s effective tax rate relates primarily to state income taxes, and a disallowance for travel and entertainment expenses. Included in income tax for the six months ended June 29, 2003 is an assessment of $975,000 based on an income tax audit by the IRS for tax years 1999 through 2001.

In accordance with FASB 144, the results of operations from the sale of the Company’s niche telecom operations (as described in note 8 to the consolidated financial statements) have been recorded as discontinued operations. The net (loss) income from discontinued operations was $(17,000) and $77,000 for the six months ended June 27, 2004 and June 29, 2003, respectively. The presentation of discontinued operations on the statement of operations for the six months ended June 29, 2003 has been reclassified.

Financial Condition, Liquidity and Capital Resources

The Company generally pays its billable employees weekly or bi-weekly for their services, and remits certain statutory payroll and related taxes as well as other fringe benefits. Invoices are generated to reflect these costs plus the Company’s markup. These bills are typically paid within 35 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.

During the six month period ended June 27, 2004, the Company had no off-balance sheet arrangements other than operating leases entered into in the normal course of business, as indicated in the table below. The following table represents contractual commitments associated with operating agreements and principal repayments on debt obligations (excluding interest):