**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D. C.  20549**

##### **FORM10-Q**

| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934.**                                                                                                                                |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                   |
| ** ** | **For the quarterly period ended****July 7, 2007**                                                                                                                                                                           |
| ** ** | ** **                                                                                                                                                                                                                   |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                |
| ** ** | ** **                                                                                                                                                                                                                   |
| ** ** | **For the transition period from                  to                ** |

 

**Commissionfile number 0-24990**

**WESTAFF, INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                       |   | **94-1266151**          |
|------------------------------------|--------|-------------------------|
| (State or other  jurisdiction      |   | (I.R.S. employer        |
| of incorporation  or organization) |   | identification  number) |

 

**298 North Wiget Lane**

**Walnut Creek, California  94598-2453**

(Address ofregistrant’s principal executive offices)

**(925) 930-5300**

(Registrant’s telephonenumber)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes x   No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition ofaccelerated filer and large accelerated filer in Rule 12b-2 of the ExchangeAct.  (Check One):

Large accelerated filer o     Acceleratedfiler o     Non-acceleratedfiler x

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o  No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:
| **Class**                      | ** ** | **Outstanding at August 16, 2007** |
|--------------------------------|------------|------------------------------------|
| Common Stock,  $0.01 par value |       | 16,648,682  shares                 |

 

 

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##### **WESTAFF, INC. AND SUBSIDIARIES**

**INDEX**
|              | ** ** | ** **                                                                                              | ** ** | **PAGE** |
|--------------|------------|---------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I.**  | ** ** | **Financial Information**                                                                               | ** ** | **3**    |
|         |       |                                                                                                    |       |     |
| Item 1.      |       | Financial Statements  (Unaudited)                                                                       |       | 3        |
|         |       |                                                                                                    |       |     |
|         |       | Condensed  Consolidated Balance Sheets - July 7, 2007 and October 28, 2006                              |       | 3        |
|         |       |                                                                                                    |       |     |
|         |       | Condensed  Consolidated Statements of Operations - 12 and 36 weeks ended July 7, 2007  and July 8, 2006 |       | 4        |
|         |       |                                                                                                    |       |     |
|         |       | Condensed  Consolidated Statements of Cash Flows - 36 weeks ended July 7, 2007 and July  8, 2006        |       | 5        |
|         |       |                                                                                                    |       |     |
|         |       | Notes to  Condensed Consolidated Financial Statements                                                   |       | 6        |
|         |       |                                                                                                    |       |     |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             |       | 15       |
|         |       |                                                                                                    |       |     |
| Item 3.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                             |       | 21       |
|         |       |                                                                                                    |       |     |
| Item 4.      |       | Controls and  Procedures                                                                                |       | 22       |
|         |       |                                                                                                    |       |     |
| **Part II.** | ** ** | **Other Information**                                                                                   | ** ** | **23**   |
|         |       |                                                                                                    |       |     |
| Item 1.      |       | Legal Proceedings                                                                                       |       | 23       |
|         |       |                                                                                                    |       |     |
| Item  1A.    |       | Risk  Factors                                                                                           |       | 23       |
|         |       |                                                                                                    |       |     |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                            |       | 30       |
|         |       |                                                                                                    |       |     |
| Item 3.      |       | Defaults Upon  Senior Securities                                                                        |       | 30       |
|         |       |                                                                                                    |       |     |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                                    |       | 31       |
|         |       |                                                                                                    |       |     |
| Item 5.      |       | Other Information                                                                                       |       | 32       |
|         |       |                                                                                                    |       |     |
| Item  6.     |       | Exhibits                                                                                                |       | 32       |
|         |       |                                                                                                    |       |     |
| Signatures   |       | 33                                                                                                      |

 

2

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**Part1.  Financial Information**

**Item1.  Financial Statements**

**Westaff, Inc.**

**CondensedConsolidated Balance Sheets (Unaudited)**
| ** **                                                                                                                                                   | ** ** | **July 7,**                    | ** ** | **October 28,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2007**                            | ** ** | **2006**             | ** ** |
| ** **                                                                                                                                                   | ** ** | **(In thousands, except** | ** ** |
| ** **                                                                                                                                                   | ** ** | **per share amounts)**    | ** ** |
| **ASSETS**                                                                                                                                                   |       |                                |       |                 |       |
| Current assets:                                                                                                                                              |       |                                |       |                 |       |
| Cash and cash  equivalents                                                                                                                                   |       | $                                   | 2,375      |                 | $          | 3,545 |   |
| Trade accounts  receivable, less allowance for doubtful accounts and other adjustments of  $1,123 and $811                                                   |       | 74,216                              |       | 76,267               |       |
| Income taxes  receivable                                                                                                                                     |       | 0                                   |       | 0                    |       |
| Deferred income  taxes                                                                                                                                       |       | 6,512                               |       | 5,834                |       |
| Prepaid expenses                                                                                                                                             |       | 4,154                               |       | 4,732                |       |
| Other current  assets                                                                                                                                        |       | 2,758                               |       | 4,694                |       |
| Total current  assets                                                                                                                                        |       | 90,015                              |       | 95,072               |       |
|                                                                                                                                                         |       |                                |       |                 |       |
| Property and equipment,  net                                                                                                                                 |       | 15,497                              |       | 15,046               |       |
| Deferred income taxes,  net of current                                                                                                                       |       | 12,262                              |       | 12,404               |       |
| Goodwill                                                                                                                                                     |       | 12,523                              |       | 12,367               |       |
| Intangible assets                                                                                                                                            |       | 3,573                               |       | 3,425                |       |
| Other long-term assets                                                                                                                                       |       | 1,934                               |       | 951                  |       |
| Total Assets                                                                                                                                                 |       | $                                   | 135,804    |                 | $          | 139,265 |   |
|                                                                                                                                                         |       |                                |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                               |       |                                |       |                 |       |
| Current liabilities:                                                                                                                                         |       |                                |       |                 |       |
| Borrowing under  revolving credit facilities                                                                                                                 |       | $                                   | 4,613      |                 | $          | 4,790 |   |
| Current portion  of capital lease obligations                                                                                                                |       | 384                                 |       | 345                  |       |
| Note payable to  related party                                                                                                                               |       | 2,000                               |       | 2,000                |       |
| Accounts payable                                                                                                                                             |       | 4,559                               |       | 5,245                |       |
| Accrued expenses                                                                                                                                             |       | 38,983                              |       | 39,695               |       |
| Income taxes  payable                                                                                                                                        |       | 224                                 |       | 1,105                |       |
| Total current  liabilities                                                                                                                                   |       | 50,763                              |       | 53,180               |       |
|                                                                                                                                                         |       |                                |       |                 |       |
| Long-term capital lease  obligations                                                                                                                         |       | 561                                 |       | 833                  |       |
| Other long-term  liabilities                                                                                                                                 |       | 19,666                              |       | 19,243               |       |
| Total  Liabilities                                                                                                                                           |       | 70,990                              |       | 73,256               |       |
|                                                                                                                                                         |       |                                |       |                 |       |
| Commitments and  contingencies                                                                                                                               |       |                                |       |                 |       |
|                                                                                                                                                         |       |                                |       |                 |       |
| Stockholders’ equity:                                                                                                                                   |       |                                |       |                 |       |
| Preferred stock,  $0.01 par value; authorized and unissued: 1,000,000 shares                                                                                 |       | —                              |       | —               |       |
| Common stock,  $0.01 par value; authorized: 25,000,000 shares; issued and outstanding: 16,637,103  shares at July 7, 2007 and 16,561,520 at October 28, 2006 |       | 166                                 |       | 166                  |       |
| Additional  paid-in capital                                                                                                                                  |       | 39,447                              |       | 38,617               |       |
| Retained  earnings                                                                                                                                           |       | 24,091                              |       | 27,270               |       |
| Accumulated other  comprehensive income (loss)                                                                                                               |       | 1,110                               |       | (44                  | )          |
| Total  stockholders’ equity                                                                                                                             |       | 64,814                              |       | 66,009               |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                             |       | $                                   | 135,804    |                 | $          | 139,265 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**Westaff, Inc.**

**CondensedConsolidated Statements of Operations (Unaudited)**
| ** **                                     | ** ** | **12 Weeks Ended**                                          | ** ** | **36 Weeks Ended** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **July 7,**                                                      | ** ** | **July 8,**             | ** ** | **July 7,** | ** ** | **July 8,** | ** ** |
| ** **                                     | ** ** | **2007**                                                              | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Revenue                                        |       | $                                                                     | 132,740    |                         | $          | 140,859 |   | $ | 392,519 |   | $ | 418,095 |   |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Costs of  services                             |       | 108,859                                                               |       | 115,420                      |       | 322,372 |   | 345,342 |   |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Gross profit                                   |       | 23,881                                                                |       | 25,439                       |       | 70,147 |   | 72,753 |   |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Franchise agents’  share of gross profit  |       | 4,026                                                                 |       | 4,111                        |       | 11,083 |   | 12,451 |   |
| Selling and  administrative expenses           |       | 19,703                                                                |       | 18,715                       |       | 57,189 |   | 55,714 |   |
| Depreciation and  amortization                 |       | 908                                                                   |       | 1,148                        |       | 2,703 |   | 3,492 |   |
| Restructuring  expenses                        |       | 2,300                                                                 |       | —                       |       | 2,300 |   | — |   |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Operating income  (loss)                       |       | (3,056                                                                | )          | 1,465                        |       | (3,128 | ) | 1,096 |   |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Interest expense                               |       | 278                                                                   |       | 292                          |       | 865 |   | 850 |   |
| Interest income                                |       | (53                                                                   | )          | (26                          | )          | (149 | ) | (76 | ) |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Income (loss)  before income taxes             |       | (3,281                                                                | )          | 1,199                        |       | (3,844 | ) | 322 |   |
| Income tax  provision (benefit)                |       | (362                                                                  | )          | 17                           |       | (665 | ) | (198 | ) |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Net income  (loss)                             |       | $                                                                     | (2,919     | )                            | $          | 1,182 |   | $ | (3,179 | ) | $ | 520 |   |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Earnings (loss)  per share:                    |       |                                                                  |       |                         |       |   |   |   |   |
| Basic and diluted                              |       | $                                                                     | (0.18      | )                            | $          | 0.07 |   | $ | (0.19 | ) | $ | 0.03 |   |
|                                           |       |                                                                  |       |                         |       |   |   |   |   |
| Weighted average  shares outstanding - basic   |       | 16,623                                                                |       | 16,483                       |       | 16,607 |   | 16,419 |   |
| Weighted average shares  outstanding - diluted |       | 16,623                                                                |       | 16,557                       |       | 16,607 |   | 16,502 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**Westaff, Inc.**

**Condensed Consolidated Statementsof Cash Flows (Unaudited)**

 
| ** **                                                                                | ** ** | **36 Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                | ** ** | **July 7,**             | ** ** | **July 8,** | ** ** |
| ** **                                                                                | ** ** | **2007**                     | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | **(In thousands)**      | ** ** |
| **Cash  flows from operating activities**                                                 |       |                         |       |   |   |
| Net income (loss)                                                                         |       | $                            | (3,179     | ) | $ | 520 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                             |       | 2,703                        |       | 3,492 |   |
| Stock-based compensation                                                                  |       | 547                          |       | 204 |   |
| Tax benefits from employee stock plans                                                    |       | (88                          | )          | — |   |
| Provision for losses on doubtful accounts                                                 |       | 721                          |       | 317 |   |
| Amortization of deferred gain on sale-leaseback                                           |       | (515                         | )          | (515 | ) |
| Amortization of debt issuance costs                                                       |       | 193                          |       | 257 |   |
| Deferred income taxes                                                                     |       | (475                         | )          | (424 | ) |
| Amortization of deferred gain from sales of  affiliate operations                         |       | (110                         | )          | (145 | ) |
| Loss on sale or disposal of assets                                                        |       | 18                           |       | 10 |   |
| Changes in assets and liabilities:                                                        |       |                         |       |   |   |
| Trade accounts receivable                                                                 |       | 3,063                        |       | 13,279 |   |
| Other assets                                                                              |       | 2,023                        |       | 881 |   |
| Accounts payable and accrued expenses                                                     |       | (2,001                       | )          | 184 |   |
| Income taxes payable                                                                      |       | (1,110                       | )          | (509 | ) |
| Other liabilities                                                                         |       | 1,030                        |       | 29 |   |
| Net cash  provided by operating activities                                                |       | 2,820                        |       | 17,580 |   |
|                                                                                      |       |                         |       |   |   |
| **Cash  flows from investing activities**                                                 |       |                         |       |   |   |
| Capital expenditures                                                                      |       | (3,194                       | )          | (3,763 | ) |
| Payments for the purchase of affiliate operations                                         |       | (307                         | )          | (1,593 | ) |
| Proceeds from sales of affiliate operations                                               |       | 24                           |       | 35 |   |
| Other, net                                                                                |       | (35                          | )          | (317 | ) |
| Net cash used in  investing activities                                                    |       | (3,512                       | )          | (5,638 | ) |
|                                                                                      |       |                         |       |   |   |
| **Cash  flows from financing activities**                                                 |       |                         |       |   |   |
| Net repayments under line of credit agreements                                            |       | (584                         | )          | (6,244 | ) |
| Principal payments on capital lease obligations                                           |       | (233                         | )          | (224 | ) |
| Payment of debt issuance costs                                                            |       | (157                         | )          | (19 | ) |
| Proceeds from the issuance of common stock                                                |       | 245                          |       | 399 |   |
| Excess tax benefits from stock-based compensation                                         |       | 126                          |       | — |   |
| Net cash used in  financing activities                                                    |       | (603                         | )          | (6,088 | ) |
|                                                                                      |       |                         |       |   |   |
| Effect of  exchange rate changes on cash                                                  |       | 125                          |       | 65 |   |
|                                                                                      |       |                         |       |   |   |
| Net change in  cash and cash equivalents                                                  |       | (1,170                       | )          | 5,919 |   |
| Cash and cash  equivalents at beginning of period                                         |       | 3,545                        |       | 3,014 |   |
| Cash and cash equivalents  at end of period                                               |       | $                            | 2,375      |   | $ | 8,933 |   |

 

5

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**Westaff,Inc.**

**Notes to Condensed Consolidated FinancialStatements (Unaudited)**

**1.****             Basis of Presentation**

The accompanyingcondensed consolidated financial statements of Westaff, Inc. and its domesticand foreign subsidiaries (together, the “Company”), as of July 7, 2007 and forthe 12-week and 36-week periods ended July 7, 2007 and July 8, 2006 areunaudited.

The condensedconsolidated financial statements, in the opinion of management, reflect alladjustments, which are of a normal recurring nature, necessary for a fairpresentation of the financial position, results of operations and cash flowsfor the periods presented.  The condensedconsolidated balance sheet as of October 28, 2006 presented herein, has beenderived from the audited balance sheet included in the Company’s Annual Reporton Form 10-K for the fiscal year ended October 28, 2006.

The Company’s criticalaccounting policies are described in Item 7 “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and in the notes tothe consolidated financial statements in the Company’s previously filed AnnualReport on Form 10-K for the fiscal year ended October 28, 2006.  There were no changes to these policiesduring the 36-week period ended July 7, 2007. Certain financial information normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States that is not required for interim reporting purposes hasbeen condensed or omitted.  Theaccompanying condensed consolidated financial statements should be read inconjunction with the financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended October 28,2006.

The Company’sfiscal year is a 52 or 53-week period ending the Saturday nearest the end ofOctober. For interim reporting purposes, the first three fiscal quarterscomprise 12 weeks each, while the fourth fiscal quarter consists of 16 or 17weeks.  The results of operations for the12-week and 36-week periods ended July 7, 2007 are not necessarily indicativeof the results to be expected for the full fiscal year or for any futureperiod.  Fiscal 2006 consisted of 52weeks, with the fourth fiscal quarter consisting of 16 weeks.  Fiscal 2007 will consist of 53 weeks, withthe last quarter consisting of 17 weeks.

**2.****             ShareholderTransaction**

**In a private transaction in February 2007, W. RobertStover, Westaff’s founder and former Chairman of the Board of Directors, soldall of his common stock in Westaff to DelStaff, LLC, a Delaware limitedliability company (“DelStaff”).  Thosepurchased shares plus additional shares purchased on the open market, gaveDelStaff beneficial ownership in 8,262,696 shares of common stock which representedapproximately 49.7% of the Company’s outstanding stock at the time of thetransaction.**

**The Company has previously disclosed the following itemsrelated to the change in control of the common stock:**

**·**                 The Company entered into a Governance Agreement withDelStaff, Michael T. Willis, and Mr. Stover on April 30, 2007 (the “GovernanceAgreement”).  All references herein tothe Governance Agreement are qualified in their entirety by the full text ofthe Governance Agreement, a complete and accurate copy of which is attached asExhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC onMay 1, 2007.  Pursuant to the GovernanceAgreement, the following events (among others) have occurred:

**·**                 The size of the Company’s Board of Directors was expandedfrom five to nine,

**·**                 Patricia M. Newman resigned her positions as the Company’sPresident, Chief Executive Officer and a director,

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**·**                 Mr. Stover resigned as a director,

**·**                 Mr. Willis, John R. Black, Michael R. Phillips, Gerald E.Wedren and John G. Ball were nominated by DelStaff and elected to the Board ofDirectors, and

**·**                 Mr. Willis was appointed as President, Chief ExecutiveOfficer and Chairman of the Board of Directors.

Subsequent to the end of the third quarter of fiscal2007, Walter W. Macauley was appointed to the Board of Directors.

**3.**             CompanyRestructure

In the third quarter offiscal 2007, the Company approved certain restructuring plans to, among otherthings, reduce its workforce and consolidate facilities. Restructuring andasset impairment charges have been recorded to align the Company’s coststructure with changing market conditions and to create a more efficientorganization. The Company’s restructuring charges have been comprised primarilyof: (i) severance and termination benefit costs related to the reduction of ourworkforce; (ii) lease termination costs and costs associated with permanentlyvacating certain facilities; and (iii) the write-off of certain internationalorganizational costs as unrecoverable assets. The Company accounted for each ofthese costs in accordance with FASB No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” or FASB No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.”

In the third quarter offiscal 2007, we began to make changes to our operations that managementbelieves will significantly reduce our costs. We terminated 25 positions in our field and corporate offices and weclosed 21 branch offices. The customers served by our closed offices have beentransferred to other offices within the proximity of the closed offices. Thedetail is as follows (in thousands):
|                                     | ** ** | **Paid** | ** ** | **Unpaid** | ** ** | **Non-cash** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|----------|------------|------------|------------|--------------|------------|-----------|------------|
|                                |       |     |       |       |       |         |       |      |       |
| Severance and  termination benefits |       | $        | 652        |       | $          | 899          |       | $         | 373        |   | $ | 1,924 |   |
| Excess  facilities                  |       | —   |       | 308        |       | —       |       | 308       |       |
| Unrecoverable  assets               |       | 68       |       | —     |       | —       |       | 68        |       |
|                                |       |     |       |       |       |         |       |      |       |
| Total restructuring  costs          |       | $        | 720        |       | $          | 1,207        |       | $         | 373        |   | $ | 2,300 |   |

 

The $373,000 non-cashexpense relates to the acceleration of options and restricted stock awards uponthe departure of a specific executive. The accrual for future cash paymentsremaining on the Company’s balance sheet at July 7, 2007, is $1,207,000. Theunpaid $899,000 in severance and termination benefits will be paid in thefourth quarter of fiscal 2007. Of the $308,000 of unpaid excess facilities,$295,000 will be paid before the end of fiscal 2008.

After the end of the thirdquarter of fiscal 2007, we made some additional reductions in our fieldoperations, and we expect to continue to do so. To date in the fourth quarterof fiscal 2007, we have eliminated 86 field positions and reduced the number ofour geographic regions from eight to four. We expect that additionalrestructuring charges in the fourth quarter will range from a low of $0.6million to a high of $1.2 million.

Our total net annualizedsavings from all of our completed and expected personnel changes are expectedto range between $3.0 and $3.5 million, but there can be no assurance thatthese savings will be realized. Additionally, the company is making additionalchanges in non-employee expenses that 

7

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are estimated to reduceannualized expenses in fiscal 2008 by up to $3.0 million. However, we have notyet completed these non-personnel changes and our actual savings may varyconsiderably from our current estimate and there can be no assurance that theywill be realized.

**4.**             Stock-BasedCompensation

*StockIncentive Plan and Employee Stock Purchase Plan*.  TheCompany has a stock incentive plan and an Employee Stock Purchase Plan. Pleaserefer to Note 12 of the Company’s financial statements, which are included inthe Company’s Annual Report on Form 10-K for the year ended October 28, 2006,for additional information related to these stock-based compensation plans.

*Stock-based compensation*. Effective with the beginning of the first quarter of fiscal 2006, theCompany adopted Statement of Financial Accounting Standards No. 123 (revised2004) “Share-Based Payment” (“SFAS 123(R)”) using the modified prospectivemethod of adoption.

For the 12-week and 36-weekperiods ended July 7, 2007 and July 8, 2006, the Company recognized stock-basedcompensation expense as follows:
|                           | ** ** | **12 Weeks Ended** | ** ** | **36 Weeks Ended** | ** ** |
|---------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **July 7,**             | ** ** | **July 8,**             | ** ** | **July 7,** | ** ** | **July 8,** | ** ** |
| ** **                | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**      | ** ** |
| Stock-based  compensation |       | $                            | 408        |                         | $          | 67 |   | $ | 547 |   | $ | 204 |   |
|                           |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

Stock-based compensationexpense is included in selling and administrative expenses.  The 12 weeks and 36 weeks ended July 7, 2007,included $373,000 of expense related to the acceleration of options andrestricted stock awards upon the departure of a specific executive, inconnection with the Company restructuring described in Footnote 3.

The determination of thefair value of stock options and ESPP shares, using the Black-Scholes model, isaffected by the Company’s stock price as well as assumptions as to the Company’sexpected stock price volatility over the term of the awards, actual andprojected employee stock option exercise behavior, the risk-free interest rate,and expected dividends.

The Company estimates the expected term of options granted taking intoaccount historical and expected future exercise, cancellation and forfeiturebehavior.  The Company estimates thevolatility of the common stock by using historical volatility over a periodequal to the award’s expected term. The risk-free interest rates that are usedin the valuation models are based upon yields of the U.S. Treasuryconstant maturities at the time of grant having a term that approximates theexpected life of the options.  Dividendyield is zero as we did not declare or pay dividends during fiscal 2007 orfiscal 2006, and our current credit facilities prohibit payment of dividends.

SFAS No. 123(R)requires companies to estimate future expected forfeitures at the date of grantand revise those estimates in subsequent periods if actual forfeitures differfrom those estimates.  In previous years,the Company had recognized the impact of forfeitures as they occurred.  Now, the Company uses historical data toestimate pre-vesting forfeiture rates in determining the amount of stock-basedcompensation expense to recognize. During the 12 weeks ended April 14, 2007, the Company revised itsforfeiture rate from 29% to 5% by analyzing historic forfeiture rates andreviewing outstanding unvested option grants and it remained at 5% for the 12weeks ended July 7, 2007.

8

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All stock-basedcompensation awards are amortized on a straight-line basis over the requisiteservice periods of the awards.

The fair value of stockoptions granted during the respective periods were estimated using theBlack-Scholes option pricing model and the following weighted averageassumptions:
|                                        | ** ** | **12 Weeks Ended** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **July 7,**             | ** ** | **July 8,** | ** ** |
| **Stock Options**                 | ** ** | **2007**                     | ** ** | **2006** | ** ** |
|                                   |       |                         |       |   |   |
| Expected life  from grant date (years) |       | 6.5                          |       | 6.0 |   |
| Expected  volatility                   |       | 151.8                        | %          | 132.6 | % |
| Risk-free  interest rate               |       | 4.6                          | %          | 4.9 | % |
| Dividend yield                         |       | None                         |       | None |   |

 

The total compensation costrelated to nonvested stock options and awards not yet recognized is currentlyexpected to be a combined total of approximately $160,000 over the next 1.65years.

*Stock option activity*. The following table summarizes stock optionactivity for the 36-weeks ended July 7, 2007:
|                                          | ** ** | **Shares**               | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted average  remaining  contractual  term (years)** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **(In 000’s)** | ** ** | ** **                             | ** ** | ** **                                                           | ** ** | **(In ’000’s)**  | ** ** |
| ** **                               | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **                                                           | ** ** | ** **                      | ** ** |
| Options  outstanding at October 28, 2006 |       | 417                      |       | $                                      | 3.39       |                                                                 |       |                            |       |   |
| Granted                                  |       | 41                       |       | 5.00                                   |       |                                                                 |       |                            |       |
| Exercised                                |       | (62                      | )          | 3.14                                   |       |                                                                 |       |                            |       |
| Cancelled                                |       | (24                      | )          | 5.42                                   |       |                                                                 |       |                            |       |
| Options outstanding at  July 7, 2007     |       | 372                      |       | $                                      | 3.48       |                                                                 | 7.00       |                            | $          | 392 |   |
|                                          |            |                          |            |                                        |            |                                                                      |            |                                 |            |  |  |

 

The following tablesummarizes information about the weighted average remaining contractual life(in years) and the weighted average exercise prices for stock options bothoutstanding and exercisable as of July 7, 2007:
|                                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **Number of**           | ** ** | **Remaining**                | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise price range** | ** ** | **Shares**                   | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| ** **                         | ** ** | **(In 000’s)**     | ** ** | ** **                   | ** ** | ** ** | ** ** | **(In 000’s)** | ** ** | ** ** | ** ** |
| $ 2.20 to $ 2.45         |       | 27                           |       | 5.88                         |       | $ | 2.33 |   | 27 |   | $ | 2.33 |   |
| $ 3.15 to $ 3.15         |       | 79                           |       | 5.10                         |       | 3.15 |   | 79 |   | 3.15 |   |
| $ 3.20 to $ 3.20         |       | 3                            |       | 3.88                         |       | 3.20 |   | 3 |   | 3.20 |   |
| $ 3.22 to $ 3.22         |       | 200                          |       | 7.75                         |       | 3.22 |   | 200 |   | 3.22 |   |
| $ 3.50 to $ 16.17        |       | 63                           |       | 7.64                         |       | 5.20 |   | 32 |   | 5.20 |   |
| Totals                             |       | 372                          |       | 7.00                         |       | $ | 3.48 |   | 341 |   | $ | 3.32 |   |

 

9

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Net cash proceeds from theexercise of stock options were approximately $73,000 and $310,000 for the 12weeks ended July 7, 2007 and July 8, 2006, respectively.  Net cash proceeds from the exercise of stockoptions were approximately $198,000 and $340,000 for the 36 weeks ended July 7,2007 and July 8, 2006, respectively.

*Employee stock purchaseplan activity*.  There were no stock issuances under theEmployee Stock Purchase Plan for the 12 weeks ended July 7, 2007 or July 8,2006.  Net cash proceeds from sharesissued under the Employee Stock Purchase Plan for the 36 weeks ended July 7,2007 and July 8, 2006, were $47,000 and $59,000, respectively.  

**5.****             Goodwill**

The following summarizes the change in goodwill duringthe period ended July 7, 2007: 
|                                         | ** ** | **Domestic**               | ** ** | ** **    | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|---------------|------------|------------|------------|
| ** **                              | ** ** | **Business Services** | ** ** | **Australia** | ** ** | **Total**  | ** ** |
| ** **                              | ** ** | **(In thousands)**    | ** ** |
| Balance at  October 28, 2006            |       | $                          | 11,369     |          | $          | 998        |       | $ | 12,367 |   |
| Effect of  foreign currency translation |       | —                     |       | 156           |       | 156        |       |
| Balance at July 7, 2007                 |       | $                          | 11,369     |          | $          | 1,154      |       | $ | 12,523 |   |

 

The Company performs its annual impairment evaluationin the fourth quarter of each fiscal year.

**6.****             Workers’ Compensation**

The Company is responsible forand pays workers’ compensation costs for its temporary and regular employeesand is self-insured for the deductible amount related to workers’ compensationclaims ($500,000 per claim for fiscal 2007 and fiscal 2006).  The Company accrues the estimated costs ofworkers’ compensation claims based upon the expected loss rates within thevarious temporary employment categories provided by the Company.  At least annually, the Company obtains anindependent actuarial valuation of the estimated costs of claims reported butnot settled, and claims incurred but not reported, and adjusts the accrualsbased on the results of the valuations. As of July 7, 2007 and October 28, 2006, workers’ compensationliabilities were approximately $21.8 million and $24.3 million respectively, ofwhich $16.4 million is included in other long-term liabilities on each of therespective balance sheets for obligations that are not expected to be paidwithin one year of the balance sheet date. The current portion of workers’ compensation liabilities is included inaccrued expenses on the balance sheet.

Periodically, the terms of the agreement with theinsurance carrier are renegotiated.  Theinsurance carrier requires the Company to collateralize its recordedobligations through the use of irrevocable letters of credit, surety bonds orcash.  At July 7, 2007, the Company had$35.3 million of letters of credit securing its domestic workers’ compensationobligations.

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**7.****             Earnings Per Share**

The following table sets forth the computation ofbasic and diluted earnings per share: 
|                                                                                                              | ** ** | **12 Weeks Ended**                                          | ** ** | **36 Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                   | ** ** | **July 7,**                                                      | ** ** | **July 8,**             | ** ** | **July 7,** | ** ** | **July 8,** | ** ** |
| ** **                                                                                                   | ** ** | **2007**                                                              | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                   | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net income  (loss)                                                                                           |       | $                                                                     | (2,919     | )                            | $          | 1,182 |   | $ | (3,179 | ) | $ | 520 |   |
|                                                                                                         |       |                                                                  |       |                         |       |   |   |   |   |
| Denominator for  basic and diluted income (loss) per share - weighted average shares                         |       | 16,623                                                                |       | 16,483                       |       | 16,607 |   | 16,419 |   |
|                                                                                                         |       |                                                                  |       |                         |       |   |   |   |   |
| Effect of  dilutive securities: stock options and awards                                                     |       | —                                                                |       | 74                           |       | — |   | 83 |   |
|                                                                                                         |       |                                                                  |       |                         |       |   |   |   |   |
| Denominator for  diluted income (loss) per share - adjusted weighted average shares and  assumed conversions |       | 16,623                                                                |       | 16,557                       |       | 16,607 |   | 16,502 |   |
|                                                                                                         |       |                                                                  |       |                         |       |   |   |   |   |
| Income (loss)  per share                                                                                     |       |                                                                  |       |                         |       |   |   |   |   |
| Basic                                                                                                        |       | $                                                                     | (0.18      | )                            | $          | 0.07 |   | $ | (0.19 | ) | $ | 0.03 |   |
| Diluted                                                                                                      |       | $                                                                     | (0.18      | )                            | $          | 0.07 |   | $ | (0.19 | ) | $ | 0.03 |   |
|                                                                                                         |       |                                                                  |       |                         |       |   |   |   |   |
| Anti-dilutive weighted  shares excluded from diluted earnings per share                                      |       | 157                                                                   |       | 251                          |       | 153 |   | 273 |   |

 

**8.****             Comprehensive Income**

Comprehensiveincome consists of the following: 
|                                   | ** ** | **12 Weeks Ended** | ** ** | **36 Weeks Ended** | ** ** |
|-----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **July 7,**             | ** ** | **July 8,**             | ** ** | **July 7,** | ** ** | **July 8,** | ** ** |
| ** **                        | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands)**      | ** ** |
|                              |       |                         |       |                         |       |   |   |   |   |
| Net income  (loss)                |       | $                            | (2,919     | )                            | $          | 1,182 |   | $ | (3,179 | ) | $ | 520 |   |
| Currency  translation adjustments |       | 285                          |       | 393                          |       | 1,153 |   | 111 |   |
| Comprehensive income  (loss)      |       | $                            | (2,634     | )                            | $          | 1,575 |   | $ | (2,026 | ) | $ | 631 |   |

 

**9.****             Credit Agreement**

The Company has creditfacilities with GE Capital, as primary agent, expiring in May 2009.  The facilities comprise a five-yearsyndicated Multicurrency Credit Agreement consisting of a $55 million U.S.Revolving Loan Commitment and a £2.74 million U.K. Revolving LoanCommitment.  In addition, the Company’sAustralian subsidiary maintains a A$12 million (Australian) facility agreement(the “A$ Facility Agreement”) that expires in May 2009.  Each agreement includes a letter of creditsub-facility.  Letters of credit underthe agreements expire one year from date of issuance, but are automaticallyrenewed for one additional year unless written notice is given to or from theholder. 

On January 2, 2007, theCompany and its lenders executed a Tenth Amendment to its Multicurrency CreditAgreement.  This amendment reduced theinterest rates within the first level of the pricing grid implemented with theEighth Amendment, resets future minimum earnings before interest, taxes,depreciation and amortization (“EBITDA”) covenants and reduced some of thereporting requirements provided minimum borrowing requirements are met. Further,the amendment extended   

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the creditfacility for one additional year to May 2009. The Company was not in compliance with its minimum EBITDA covenant as ofthe end of the fiscal year 2006, and the amendment included a waiver of thiscovenant violation.

In addition, the Companyand its lender executed an amendment to the A$ Facility Agreement on January25, 2007, which extended the Agreement for two additional years to May 2009.

On May 24, 2007,the Company and its lender executed an Eleventh Amendment to the MulticurrencyCredit Agreement, which included a waiver of the Company’s failure to complywith the minimum EBITDA covenant as of the end of the second quarter of fiscal2007, a waiver of a change of control covenant default due to the newcomposition of the Board of Directors and a reset of all future quarterlyEBITDA covenants over the remaining life of the credit facility.

In the thirdquarter of fiscal 2007, the Company was out of compliance with its EBITDAcovenant and was also in violation of the fixed charge coverage covenant.  While the Company is in negotiations toobtain an amendment to the Multicurrency Credit Agreement that will include awaiver on the covenant violations, there can be no assurance that the lenderwill grant a waiver.  For at least thenext three quarters, the Company does not expect to achieve the EBITDAcovenants contained in the Eleventh Amendment. The lender has not determined whether they will reset the covenants forfuture quarters or will continue to manage the covenant compliance on aquarter-to-quarter basis.

Our failure to comply withthe covenants under our credit facilities could result in an event of defaultwhich, if not cured or waived, could trigger prepayment obligations and limitour ability to continue borrowing funds pursuant to the credit facility thatare necessary to our operations.   Inaddition, a change of control is defined as an event of default and also couldtrigger prepayment obligations.  If we wereforced to refinance borrowings under the current facilities, there can be noassurance that such financing would be available in a timely manner or at all,or that such financing would not have a material adverse effect on our businessand financial condition.  Even if suchrefinancing were available, the terms could be less favorable and our resultsof operations and financial condition could be adversely affected by increasedcosts and rates.

**10.****  Related Party Transactions**

The Company has anunsecured subordinated promissory note payable to its former Chairman of theBoard of Directors, Mr. W. Robert Stover, dated May 17, 2002 in the amount of$2.0 million.  The note has a maturitydate of August 18, 2007, and an interest rate equal to an indexed rate ascalculated under the Company’s credit facilities plus seven percent, compoundedmonthly and payable 60 calendar days after the end of each of the Company’sfiscal quarters.  The interest rate ineffect on July 7, 2007 was 15.25%. The Company recorded $71,000 and $213,000 ofinterest expense for the 12 and 36 weeks ended July 7, 2007, respectively.  Payment of principal is contingent on theCompany meeting minimum availability requirements under its creditfacilities.  Additionally, payments ofprincipal or interest are prohibited in the event of any uncured default under thecredit facilities.  The lenders for ourcredit facilities have not authorized our repayment of the note.

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**11.****      Operating Segments**

The Companyoperates in four segments; domestic, United Kingdom, Australia, and NewZealand. The following table summarizes reporting segment data:
| ** **                  | ** ** | **Domestic**            | ** ** | **United**  | ** ** | ** **    | ** ** | **New**     | ** ** | ** ** | ** ** |
|-----------------------------|------------|-------------------------|------------|-------------|------------|---------------|------------|-------------|------------|------------|------------|
| ** **                  | ** ** | **Business Svcs.** | ** ** | **Kingdom** | ** ** | **Australia** | ** ** | **Zealand** | ** ** | **Total**  | ** ** |
| ** **                  | ** ** | **(In thousands)** | ** ** |
| 12 Weeks Ended July 7, 2007 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                     |       | $                       | 99,401     |        | $          | 10,320        |       | $           | 21,445     |       | $          | 1,574 |   | $ | 132,740 |   |
| Operating income (loss)     |       | $                       | (3,047     | )           | $          | (86           | )          | $           | 89         |       | $          | (12 | ) | $ | (3,056 | ) |
|                        |       |                    |       |        |       |          |       |        |       |       |       |
| 12 Weeks Ended July 8, 2006 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                     |       | $                       | 111,438    |        | $          | 9,513         |       | $           | 18,734     |       | $          | 1,174 |   | $ | 140,859 |   |
| Operating income (loss)     |       | $                       | 1,570      |        | $          | 45            |       | $           | (189       | )          | $          | 39 |   | $ | 1,465 |   |
|                        |       |                    |       |        |       |          |       |        |       |       |       |
| 36 Weeks Ended July 7, 2007 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                     |       | $                       | 294,931    |        | $          | 29,298        |       | $           | 63,292     |       | $          | 4,998 |   | $ | 392,519 |   |
| Operating income (loss)     |       | $                       | (3,029     | )           | $          | (463          | )          | $           | 297        |       | $          | 67 |   | $ | (3,128 | ) |
|                        |       |                    |       |        |       |          |       |        |       |       |       |
| 36 Weeks Ended July 8, 2006 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                     |       | $                       | 328,107    |        | $          | 27,432        |       | $           | 58,604     |       | $          | 3,952 |   | $ | 418,095 |   |
| Operating income (loss)     |       | $                       | 945        |        | $          | 371           |       | $           | (346       | )          | $          | 126 |   | $ | 1,096 |   |

 

**12.**  Commitmentsand Contingencies

Inthe ordinary course of its business, the Company is periodically threatenedwith or named as a defendant in various lawsuits.  The principal risks that the Company insuresagainst are workers’ compensation, general liability, automobile liability,property damage, alternative staffing errors and omissions, fiduciary liabilityand fidelity losses.

Duringthe fourth quarter of fiscal 2005, the Company was notified by the CaliforniaEmployment Development Department (“EDD”) that Westaff’s domestic operatingsubsidiaries unemployment tax rates would be increased retroactively for bothcalendar years 2005 and 2004, which would result in additional unemploymenttaxes of approximately $0.9 million.  TheCompany believes that it has properly calculated its unemployment insurance taxand is in compliance with all applicable laws and regulations.  The Company has timely appealed the ruling bythe EDD and is working with its outside counsel to resolve this matter.  The Company believes that it has strong defensesand legal arguments with respect to the unaccrued assessment and, accordingly,has not accrued for that portion of the assessment as of July 7, 2007.

Otherthan the action listed above, the Company is not a party to any materiallitigation.  However, from time to timethe Company has been threatened with, or named as a defendant in, litigationbrought by former franchisees or licensees, and administrative claims andlawsuits brought by employees or former employees.  Management believes the resolution of thesematters will not have a material adverse effect on the Company’s financialstatements.

**13.**  RecentAccounting Pronouncements

**InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109”**

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**(“FIN48”). FIN 48 prescribes a recognition threshold and measurement process forrecording in the financial statements uncertain tax positions taken or expectedto be taken in a tax return in accordance with FASB No. 109, “Accounting forIncome Taxes.”  Tax positions must meet amore-likely-than-not recognition threshold at the effective date to berecognized upon the adoption of FIN 48 and in subsequent periods.  The accounting provisions of FIN 48 will beeffective for the Company beginning in fiscal year 2008.  The Company has not yet completed itsevaluation of the impact of adoption on the Company’s financial position orresults of operations.**

**OnSeptember 13, 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (“SAB108”) (SAB Topic 1N), “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements,” which outlinesthe approach it believes registrants should use to quantify the misstatement ofcurrent year financial statements that results from misstatements of prior yearfinancial statements.  Implementing theapproach outlined in SAB 108 may require the Company to make significantadjustments in its 2007 annual financial statements.  The SAB will change practice by requiringregistrants to use a combination of two approaches, the “rollover” approach,which quantifies a misstatement based on the amount of the error originating inthe current year income statement and the “iron curtain” approach, whichquantifies a misstatement based on the effects of correcting the misstatementexisting in the balance sheet at the end of the current year.  The SAB requires registrants to adjust theirfinancial statements if the new approach results in a conclusion that an erroris material.  SAB 108 is effective forfiscal years ending after November 15, 2006. The Company is required to adopt SAB 108 in the year ending November 3,2007.  Management believes the adoptionof SAB 108 may have a material impact on results of operations but will nothave a material impact on the Company’s financial position.**As of the date of this Form 10-Q,we are aware of a likely adjustment of approximately $800,000 to correct anoverstatement of our deferred tax assets from periods prior to fiscal 2003 thatwill be corrected with our adoption of SAB 108.During the fourth quarter offiscal 2007, we will conduct an analysis of the balance sheet to ensure thereare no further issues prior to concluding that the implementation SAB 108 willnot be material.

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**CautionaryStatement**

This Form 10-Q containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Exceptfor the historical information contained herein, the matters discussed shouldbe considered forward-looking statements and readers are cautioned not to placeundue reliance on those statements. These statements are only predictions, and actual events or results maydiffer materially. The forward-looking statements give our current expectationsor forecasts of future events.  You canidentify these statements by the fact that they do not relate strictly tocurrent facts. They use words such as “will,” “anticipate,” “estimate,” “expect,”“project,” “intend,” “plan,” “believe,” “target,” “forecast,” and other wordsand terms of similar meaning in connection with any discussion of futureoperating or financial performance. These forward-looking statements are made based on information availableas of the date of this report and are subject to a number of risks anduncertainties that could cause the Company’s actual results and financialposition to differ materially from those expressed or implied in theforward-looking statements and to be below the expectations of public marketanalysts and investors. Investors should bear this in mind as they considerforward-looking statements.

These risks and uncertaintiesinclude, but are not limited to, those discussed in Part II, Item 1A “RiskFactors” and elsewhere in this Form 10-Q. You should understand that it is not possible to predict or identify allsuch factors.  Consequently, you shouldnot consider any such list to be a complete set of all potential risks oruncertainties faced by us.

The Company undertakes noobligation to publicly release the results of any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events, except as requiredby applicable laws and regulations.

The following discussion isintended to assist in the understanding and assessment of significant changesand trends related to the results of operations and financial condition ofWestaff, Inc., together with its consolidated subsidiaries.  This discussion and analysis should be readin conjunction with the Company’s Consolidated Financial Statements and Notesincluded elsewhere in this Form 10-Q and in the Company’s Annual Report on Form10-K for the fiscal year ended October 28, 2006.

**Company Overview**

We provide staffing servicesprimarily in suburban and rural markets through a network of Company-owned andfranchise agent offices in the United States, United Kingdom, Australia and NewZealand.  We offer a wide range ofstaffing solutions, temporary and replacement staffing, including permanentplacement, primarily focused on recruiting and placing clerical/administrativeand light industrial personnel.  We haveover 50 years of experience in the staffing industry and annually put more than100,000 people to work through more than 200 field offices in 47 states andthree foreign countries.  Our corporateheadquarters provides support services to the field offices in areas such asmarketing, human resources, risk management, legal, strategic sales,accounting, and information technology.

To complement our serviceofferings, which include temporary staffing, permanent placement, temp-to-hireservices, payroll services and on-location programs, we utilize a number oftools focused on increasing our pool of qualified candidates.  Additionally, we employ a robust, targetedmarketing program as well as a consultative sales process, and both of thesetools assist in our sales efforts to new and existing customers. Managementbelieves all of these tools enhance our competitive edge and position us toeffectively pursue high growth market niches.

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The staffing industry ishighly competitive with generally few barriers to entry, which contributes tosignificant price competition as competitors attempt to maintain or gain marketshare.  On a prospective basis, webelieve our focus on increasing improving the gross margin of temporaryplacements, increasing clerical/administrative sales, improving results fromunderperforming field offices and prudently managing costs will permit us toimprove our operating margins.

It is important to note that our business tends to be seasonal withsales for the first fiscal quarter typically lower than other fiscal quartersdue to it containing traditional holidays as well as customer shutdowns duringthe holiday season.  These shutdowns andpost-holiday season declines in business activity negatively impact ordersreceived from customers, particularly in the light industrial sector.  Demand for staffing services has historicallytended to grow during the second and third fiscal quarters and has beengreatest during the fourth fiscal quarter due largely to customers’ planningcycles.  Furthermore, our fourth fiscalquarter consists of 16 or 17 weeks, while the first, second and third fiscalquarters consist of 12 weeks each.

Domestically, payroll taxes and related benefits fluctuate with thelevel of payroll costs, but tend to represent a smaller percentage of revenueand payroll costs later in our fiscal year as federal and state statutory wagelimits for unemployment and social security taxes are exceeded on a peremployee basis.  Workers’ compensationexpense, which is incurred domestically and in Australia, generally varies withboth the frequency and severity of workplace injury claims reported during aquarter and the estimated future costs of such claims.  Adverse and positive loss development ofprior period claims during a subsequent quarter may also contribute to thevolatility in our estimated workers’ compensation expense.

Our operating results may fluctuate due to a number of factors such as:

·                  seasonality, especially in our lightindustrial business,

·                  wage limits on statutory payroll taxes,

·                  claims experience for workers’ compensation,

·                  demand and competition for our services, and

·                  effects of acquisitions.

In addition, our operating results have also historically tended tofollow seasonal sales trends with the bulk of annual operating profits fallingwithin the third and fourth fiscal quarters

### **Critical Accounting Policies**

The preparation of our financial statements in conformity withgenerally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions affecting the amounts anddisclosures reported within those financial statements.  These estimates are evaluated on an ongoingbasis by management and generally affect revenue recognition, workers’compensation costs, collectibility of accounts receivable, impairment ofgoodwill and intangible assets, contingencies, litigation and incometaxes.  Management’s estimates andassumptions are based on historical experiences and other factors believed tobe reasonable under the circumstances. Actual results under circumstances and conditions different than thoseassumed could result in differences from the estimated amounts in the financialstatements.

Our critical accounting policies aredescribed in Item 7 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and in the notes to the consolidatedfinancial statements in our previously filed Annual Report on Form 10-K for thefiscal year ended October 28, 2006. There were no changes to these policies during the 36-week period endedJuly 7, 2007.

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### **Results of Operations - 12 weeks ended July 7, 2007and July 8, 2006**

Total revenue for the 12 weeks ended July 7, 2007 was $132.7 million, adecrease of 5.8% or $8.1 million over the same period in the prior year.  Domestic revenue decreased by 10.8% or $12.0million, largely due to a 12.6% decrease in temporary billed hours partiallyoffset by a 2.3% increase in average temporary billing rates, changes in seniorfield management and terminating some unprofitable accounts.  Our domestic revenue decline is primarilyattributable to an overall decrease in government agency billings.  We have closed unprofitable branches whichhas the effect of reducing revenue in the short term with the expectation of increasedfuture profitability, although there can be no assurances that profits willincrease.  Within our remaining branches,we have continued to focus our sales efforts on opportunities yielding a highergross margin, which has resulted in decreased sales revenue from lower marginbusiness.  Offsetting a portion of thedomestic revenue decline was an increase in international revenue of 13.3% or$3.9 million, which was positively affected by exchange rate fluctuations inthe other countries in which we operate within as compared to the U.S. dollar.

Costs of services includehourly wages of temporary employees, employer payroll taxes, state unemploymentcosts, workers’ compensation insurance and other employee-relatedcosts.  Costs of services as a percentageof revenue increased from 81.9% in the third quarter of fiscal 2006 to 82.0% infiscal 2007.  The small change in costsof services served to offset a portion of the sales decline noted above andconsequently gross profitdecreased by only 6.1% or $1.6 million over the third quarter of fiscal2006.  The resulting gross profit margindecreased from 18.1% in the third quarter of fiscal 2006 to 18.0% in thecurrent quarter.

Franchise agents’ share ofgross profit represents the net distribution paid to franchise agents basedeither on a percentage of revenue or gross profit generated by the franchiseagents’ operations.  As a percentage ofconsolidated revenue, franchise agents’ share of gross profit increasedslightly, from 2.9% of revenue or $4.1 million in the 2006 fiscal quarter to3.0% or $4.0 million in the current year’s fiscal quarter.  As compared to the third fiscal quarter of2006, we have two fewer franchisees and, additionally, the existing franchisees’gross profits have declined slightly.

Selling and administrative expenses increased $1.0million, or 5.3% for the2007 fiscal quarter as compared to the 2006 quarter.  The increase is primarily due to increases in(a) recruiting costs as competition for qualified temporary employees has increased,(b) employee benefits due to increased healthcare costs and claims experience,(c) professional fees, largely as a result of restructuring activities, and (d)maintenance costs largely related to our business process management system.

Depreciation and amortization decreased $0.2 million primarily as aresult of certain fixed assets becoming fully depreciated by the end of fiscal2006 and remaining in service.  Further,no new business process management system modules were implemented during thequarter.  Upon implementation of futuremodules planned for the fourth quarter of fiscal 2007, we anticipateamortization expense will increase.

The net loss for the third quarter of fiscal 2007 was $2.9 million,which includes $2.3 million of pre-tax restructuring costs, compared to $1.2million of net income in the same quarter of fiscal 2006.

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### **Results of Operations - 36 weeks ended July 7, 2007and July 8, 2006**

Total revenue was $392.5 million during the first 36weeks of fiscal 2007, a decrease of 6.1% or $25.6 million from the same periodin 2006.  Domestic revenue decreased by10.1% or $33.2 million driven largely by a 13.0% decrease in billed hours,partially offset by a 3.4% increase in average temporary billing rates and a12.5% increase in permanent placement revenue. Our domestic revenue decline is primarily attributable to an overalldecrease in government agency billings. Additionally, we have continued to focus our sales efforts onopportunities yielding a higher gross margin, which has resulted in decreasedsales revenue from lower margin business. Offsetting a portion of the domestic revenue decline was an increase ininternational revenue of 8.4% or $7.6 million, which was positively affected byexchange rate fluctuations in the other countries we operate within as comparedto the U.S. dollar.

Costs of services includehourly wages of temporary employees, employer payroll taxes, state unemploymentcosts, workers’ compensation insurance and other employee-relatedcosts.  Costs of services as a percentageof revenue decreased from 82.6% in the first 36 weeks of fiscal 2006 to 82.1%in the first 36 weeks of fiscal 2007, primarily attributable to an overalldecrease in government agency benefits provided to temporary employees.  These cost reductions served to offset aportion of the sales decline noted above and consequently gross profit decreased by 3.6% or $2.6million over the first 36 weeks of fiscal 2006. The resulting gross profit margin increased from 17.4% in the first 36weeks of fiscal 2006 to 17.9% in the current period.

Franchise agents’ share ofgross profit represents the net distribution paid to franchise agents basedeither on a percentage of revenue or gross profit generated by the franchiseagents’ operations.  As a percentage ofconsolidated revenue, franchise agents’ share of gross profit decreasedslightly, from 3.0% of revenue in the first 36 weeks of 2006 to 2.8% in thecurrent year period.  As compared to thefirst 36 weeks of fiscal 2006, we have three fewer franchisees and,additionally, the existing franchisees’ gross profits have declined.

Selling and administrative expenses increased $1.5million, or 2.6% for thefirst 36 weeks of fiscal 2007 as compared to the first 36 weeks of fiscal2006.  The increase is primarily due toincreases in (a) recruiting costs as competition for qualified temporaryemployees has increased, (b) employee benefits due to increased healthcarecosts and claims experience, (c) professional fees, largely as a result ofrestructuring activities, and (d) maintenance costs largely related to ourbusiness process management system.

Depreciation and amortization decreased $0.8 million primarily as aresult of certain fixed assets becoming fully depreciated by the end of fiscal2006 and remaining in service.  Further,no new business process management system modules were implemented during thefirst 36 weeks of fiscal 2007.  Uponimplementation of future modules, planned for the fourth quarter of fiscal2007, we anticipate amortization expense will increase.

Net loss for the first 36 weeks of fiscal 2007 was $3.2 million, whichincludes $2.3 million of pre-tax restructuring costs, compared to $0.5 millionof net income in the same period of fiscal 2006.

**Company Restructure**

In the third quarter of fiscal 2007, the Company approved certainrestructuring plans to, among other things, reduce its workforce andconsolidate facilities. Restructuring and asset impairment charges have beenrecorded to align the Company’s cost structure with changing market conditionsand to create a more efficient organization. The Company’s restructuringcharges have been comprised primarily of: (i) severance and termination benefitcosts related to the reduction of our workforce; (ii) lease termination costsand costs associated with permanently vacating certain facilities; and (iii)the write-off of certain international organizational costs as unrecoverableassets. The Company accounted for each of these costs 

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in accordance with FASB No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” or FASB No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.”

In the third quarter of fiscal 2007, we began to make changes to ouroperations that management believes will significantly reduce our costs.  We terminated 25 positions in our field andcorporate offices and we closed 21 branch offices. The customers served by ourclosed offices have been transferred to other offices within the proximity ofthe closed offices. The detail is as follows (in thousands):
|                                    | ** ** | **Paid** | ** ** | **Unpaid** | ** ** | **Non-cash** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------|------------|------------|------------|--------------|------------|-----------|------------|
|                               |       |     |       |       |       |         |       |      |       |
| Severance and termination benefits |       | $        | 652        |       | $          | 899          |       | $         | 373        |   | $ | 1,924 |   |
| Excess facilities                  |       | —   |       | 308        |       | —       |       | 308       |       |
| Unrecoverable assets               |       | 68       |       | —     |       | —       |       | 68        |       |
|                               |       |     |       |       |       |         |       |      |       |
| Total restructuring costs          |       | $        | 720        |       | $          | 1,207        |       | $         | 373        |   | $ | 2,300 |   |

 

The $373,000 non-cash expense relates to the acceleration of optionsand restricted stock awards upon the departure of a specific executive. Theaccrual for future cash payments remaining on the Company’s balance sheet atJuly 7, 2007, is $1,207,000. The unpaid $899,000 in severance and terminationbenefits will be paid in the fourth quarter of fiscal 2007. Of the $308,000 ofunpaid excess facilities, $295,000 will be paid before the end of fiscal 2008.

After the end of the third quarter of fiscal 2007, we made someadditional reductions in our field operations, and we expect to continue to doso. To date in the fourth quarter of fiscal 2007, we have eliminated 86 fieldpositions and reduced the number of our geographic regions from eight to four.We expect that additional restructuring charges in the fourth quarter willrange from a low of $0.6 million to a high of $1.2 million.

Our total net annualized savings from all of our completed and expectedpersonnel changes are expected to range between $3.0 and $3.5 million, butthere can be no assurance that these savings will be realized. Additionally,the company is making changes in non-employee expenses that are estimated toreduce annualized expenses in fiscal 2008 by up to $3.0 million. However, wehave not yet completed these non-personnel changes and our actual savings mayvary considerably from our current estimate and there can be no assurance thatthey will be realized.

**Liquidity and Capital Resources**

We require significant amounts of working capital tooperate our business and to pay expenses relating to employment of temporaryemployees.  Our traditional use of cashis for financing of accounts receivable, particularly during periods ofeconomic upswings and growth, when sales are seasonally high. Temporarypersonnel are typically paid on a weekly basis while payments from customersare generally received 30 to 60 days after billing.

We finance our operations primarily through cashgenerated by our operating activities and borrowings under our revolving creditfacilities.  Net cash provided byoperating activities was $2.8 million for the 36 weeks ended July 7, 2007,compared to $17.6 million for the 36 weeks ended July 8, 2006.  This $14.8 million decrease is primarilyattributable to a decrease in cash provided from managing our accountsreceivables, which provided only $3.1 million of the operating cash flow inthis period as compared to $13.3 million for the same period of fiscal2006.  During fiscal 2006, we consciouslymanaged receivables to improve cash flow and as a result of those efforts,operating cash flow was enhanced.  

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Although we continue to manage these going forward,we believe prospective opportunities for increasing operating cash flow in thismanner will not be as dramatic as they were during the prior year.

Cash used for investing activities was $3.5 millionfor the 36 weeks ended July 7, 2007, as compared to $5.6 million for the 36weeks ended July 8, 2006.  Capitalexpenditures, which are primarily for information system initiatives bothdomestically and internationally, represented the majority of investingactivities for both periods presented. We continue to invest in enhancements and upgrades to our computer-basedtechnologies.  During fiscal 2004, weentered into a license agreement for a domestic business process managementsystem which is being implemented in three phases.  The initial phase, which consisted of thehuman resources system for regular Westaff employees, was successfullyimplemented in July 2005.  Thesecond phase, which includes the core financial systems and the accounts receivablemodule, went live in the beginning of fiscal year 2006.  The final phase, which will include fullyintegrated front office functionality, along with payroll and billing fortemporary associates, is currently scheduled to go live at the end of thefourth quarter of fiscal 2007.  Ourcredit agreement currently allows up to a maximum of $6.0 million in capitalexpenditures for fiscal 2007.  We expectour 2007 expenditures to fall below this maximum.

Cash used for financing activities was $0.6 millionfor the 36 weeks ended July 7, 2007 as compared to $6.1 million for the 36weeks ended July 8, 2006. In both years, the primary cause behind this usagewas repayments under our lines of credit. At the end of the third quarter of fiscal 2006, the only borrowing underour lines of credit was in Australia, a 50% decrease in borrowings at the endof the third quarter of fiscal 2007. Offsetting the Australia repayments was an increase in domesticborrowings of $1.9 million at the end of the third quarter of fiscal 2007.

We have an unsecured subordinated promissory notepayable to our former Chairman of the Board of Directors in the amount of$2.0 million with a maturity date of August 18, 2007, and an interestrate equal to an indexed rate as calculated under our credit facilities plusseven percent (15.25% at July 7, 2007), compounded monthly and payable 60calendar days after the end of each of our fiscal quarters. Payments ofprincipal are prohibited in the event of any default under the senior creditfacilities, or without the senior lender’s approval of such payment. The seniorlender has not approved repayment of this note and we are currently negotiatingterms that would permit us to repay the subordinated note.

We work to balance our worldwide cash needs throughdividends from and loans to our international subsidiaries.  These loans and dividends are limited by thecash availability and needs of each respective subsidiary, restrictions imposedby our senior secured debt facilities and, in some cases, statutory regulationsof the subsidiary.  The U.S. operationscannot directly draw on the excess borrowing availability of the U.K. orAustralian operations; however, we may request dividends from the U.K.  The U.S. can also request repayments on itsintercompany loan to Australia, along with intercompany interest and royalties,although remittances from Australia may be limited by certain covenants underthe terms of the Australia credit facility. Outstanding principal on the intercompany loan to Australia was $4.7million as of July 7, 2007.

We are responsible for and pay workers’ compensationcosts for our domestic temporary and regular employees and are self-insured forthe $500,000 deductible amount related to workers’ compensation claims.  Typically, each policy year the terms of theagreement with the insurance carrier are renegotiated.  The insurance carrier requires us tocollateralize our obligations through the use of irrevocable standby letters ofcredit, surety bonds or cash.  For our2007 policy year insurance program, we anticipate total cash payments of $4.8million will be paid during fiscal 2007 in equal monthly installments, whichcommenced on November 1, 2006.  Cashpayments for 2007 policy year claims will be paid directly by us.  Through the first 36 weeks of fiscal 2007, wehave made payments of $3.6 million on the 2007 policy year.  As of July 7, 2007, we had outstanding $35.3million of letters of credit to secure all outstanding obligations under ourworkers’ compensation program for all years except 2003, which is fully fundedalthough subject to annual retroactive premium adjustments based on actualclaims activity.  Under 

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certain circumstances including a change ofownership and or senior management, we may be required to increase our lettersof credit by $5.0 million.

We continue to evaluate other opportunities tofurther strengthen our financial position. However, we believe that the borrowing capacity provided under theamended credit agreement, together with cash generated through our operatingperformance, will be sufficient to meet our working capital needs for theforeseeable future.

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

We are exposed tocertain market risks from transactions that are entered into during the normalcourse of business.  Our primary marketrisk exposure relates to interest rate risk. At July 7, 2007, our outstandingdebt under variable-rate interest borrowings was approximately $6.6million.  A change of two percentagepoints in the interest rates would cause a change in interest expense ofapproximately $132,000 on an annual basis. Our exposure to market risk for changes in interest rates is notsignificant with respect to interest income, as our investment portfolio is notmaterial to our consolidated balance sheet. We currently have no plans to hold an investment portfolio that includesderivative financial instruments.

For the first 36 weeks of fiscal 2007, ourinternational operations comprised 24.9% of our revenue and, as of the end ofthat period, 20.5% of our total assets. We are exposed to foreign currency risk primarily due to our investmentsin foreign subsidiaries.  Ourmulticurrency credit facility, which allows our Australian and United Kingdomsubsidiaries to borrow in local currencies, partially mitigates the exchangerate risk resulting from fluctuations in foreign currency denominated netinvestments in these subsidiaries in relation to the U.S. dollar.  We do not currently hold any market risksensitive instruments entered into for hedging risks related to foreigncurrencies.  In addition, we have notentered into any transactions with derivative financial instruments for tradingpurposes.

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### **Item 4. Controls and Procedures**

The Company carried out an evaluation, under the supervisionand with the participation of the Company’s management, including the Company’sChief Executive Officer, who is also performing the functions of the principalfinancial officer on the date of this report, of the effectiveness of thedesign and operations of the Company’s “disclosure controls and procedures” (asdefined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended).  Based on thisevaluation, the Chief Executive Officer (in his dual capacity as the principalexecutive officer and acting principal financial officer) concluded that, as ofJuly 7, 2007 (the end of the period covered by this report), the Company’sdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934, as amended, is accumulated and communicated toour management, including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure, and is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.  There was no change in theCompany’s internal control over financial reporting that occurred during thefiscal period ended July 7, 2007, that has materially affected, or isreasonably likely to materially affect, the Company’s internal controls overfinancial reporting.

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### **PartII.  Other Information**

### **Item1.   Legal Proceedings**

In the ordinary course ofits business, the Company is periodically threatened with or named as adefendant in various lawsuits.  Theprincipal risks that the Company insures against are workers’ compensation,general liability, automobile liability, property damage, alternative staffingerrors and omissions, fiduciary liability and fidelity losses.

During the fourth quarter offiscal 2005, the Company was notified by the California Employment DevelopmentDepartment (“EDD”) that Westaff’s domestic operating subsidiaries unemploymenttax rates would be increased retroactively for both calendar years 2005 and2004, which would result in additional unemployment taxes of approximately $0.9million.  The Company believes that ithas properly calculated its unemployment insurance tax and is in compliancewith all applicable laws and regulations. The Company has timely appealed the ruling by the EDD and is workingwith its outside counsel to resolve this matter.  The Company believes that it has strongdefenses and legal arguments with respect to the unaccrued assessment and,accordingly, has not accrued for that portion of the assessment as of July 7,2007.

Other than the action listedabove, the Company is not a party to any material litigation.  However, from time to time the Company hasbeen threatened with, or named as a defendant in, litigation brought by formerfranchisees or licensees, and administrative claims and lawsuits brought byemployees or former employees. Management believes the resolution of these matters will not have amaterial adverse effect on the Company’s financial statements.

### **Item1A. Risk Factors**

This Form 10-Q contains forward-looking statementsconcerning our future programs, products, expenses, revenue, liquidity and cashneeds as well as our plans and strategies. These forward-looking statements are based on current expectations andwe assume no obligation to update this information, except as required byapplicable laws and regulations.  Any oneof the following risks could harm our operating results or financial conditionand could result in a significant decline in value of an investment in us.  Further, additional risks and uncertaintiesthat have not yet been identified or which we currently believe are immaterialmay also harm our operating results and financial condition.  Numerous factors could cause actual resultsto differ significantly from the results described in these forward-lookingstatements, including the following updated risk factors.

**We have significant working capital requirements and are heavilydependent upon our ability to borrow money to meet these working capitalrequirements.**

We require significant amounts of working capital tooperate our business and to pay expenses relating to employment of temporaryemployees.  Temporary personnel aregenerally paid on a weekly basis while payments from customers are generallyreceived 30 to 60 days after billing. As a result, we must maintain sufficientcash availability to pay temporary personnel prior to receiving payment fromcustomers.  Any lack of access to liquidworking capital would have an immediate, material, and adverse impact on ourbusiness.

We finance our operations primarily throughborrowings under our revolving credit facilities and also through cashgenerated by our operating activities. As of July 7, 2007, our total borrowing capacity was $14.9 millionconsisting of $2.7 million for the domestic operations and $6.1 million for theboth the United Kingdom and Australian operations.

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For the period ending July 7, 2007, our creditfacilities required a minimum adjusted EBITDA of $9.0 million for the trailing13 periods and a fixed charge ratio of 1.25. We did not meet either of those requirements and are working with outlender to obtain an amendment to our credit agreement to waive thoserequirements.  While we believe we willbe granted an amendment and waiver, we are currently in violation of our creditagreement and there is no assurance a waiver will be granted.  While we consider it an unlikely outcome, dueto these violations the lender could assert a default and cease lending to theCompany.

The amount we are entitled to borrow under ourrevolving credit facilities is calculated daily and is dependent on eligibletrade accounts receivable generated from operations, which are affected byfinancial, business, economic and other factors, as well as by the daily timingof cash collections and cash outflows. If we experience a significant and sustained drop in operating profits,or if there are unanticipated reductions in cash inflows or increases in cashoutlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, itmay have a significant adverse effect on our business. Furthermore, ourreceivables may not be adequate to allow for borrowings for other corporatepurposes, such as capital expenditures or growth opportunities, and we would beless able to react to changes in the market or industry conditions.

Our failure to comply with the covenants under ourcredit facilities could result in an event of default which, if not cured orwaived, could trigger prepayment obligations and limit our ability to continueborrowing funds pursuant to the credit facility that are necessary to ouroperations.   In addition, a change ofcontrol is defined as an event of default and also could trigger prepaymentobligations.  If we were forced torefinance borrowings under the current facilities, there can be no assurancethat such financing would be available in a timely manner or at all, or thatsuch financing would not have a material adverse effect on our business andfinancial condition.  Even if suchrefinancing were available, the terms could be less favorable and our resultsof operations and financial condition could be adversely affected by increasedcosts and rates.

We typically experience significant seasonal andother fluctuations in our borrowings and borrowing availability, particularlyin the United States, and have, in the past, been required to aggressivelymanage our cash to ensure adequate funds to meet working capital requirements.Such steps included working to improve collections and adjusting the timing ofcash expenditures, reducing operating expenses where feasible and working togenerate cash from a variety of other sources.

We have historically experienced periods of negativecash flow from operations and investment activities, especially during seasonalpeaks in revenue experienced in the third and fourth fiscal quarters of theyear.  In addition, we are required topledge amounts to secure letters of credit that collateralize certain workers’compensation obligations, and these amounts may increase in futureperiods.  Any such increase in pledgedamounts or sustained negative cash flows would decrease amounts available forworking capital purposes and could have an adverse effect on our liquidity andfinancial condition.

**Price competition in the staffing industry continues to be intense, andpricing pressures from both competitors and customers could adversely impactour financial results.**

The staffing industry is highly competitive withlimited barriers to entry and continues to undergo consolidation.  We compete in regional and local markets withlarge full service agencies, specialized temporary and permanent placementservices agencies and small local 

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companies. While some competitors are smaller than us, they may enjoy an advantagein discrete geographic markets because of a stronger local presence.  Other competitors have greater marketing,financial and other resources than us that, among other things, could enablethem to attempt to maintain or increase their market share by reducing prices.  Furthermore, in past years there has been anincrease in the number of customers consolidating their staffing servicespurchases with a single provider or with a small number of providers.  The trend to consolidate staffing servicespurchases has in some cases made it more difficult for us to obtain or retainbusiness.

We expect the level of competition to remain high inthe future, and competitive pricing pressures will continue to make itdifficult for us to raise our prices to immediately and fully offset increasedcosts of doing business, including increased labor costs, costs for workers’compensation and, domestically, state unemployment insurance.  If we are not able to effectively compete inour targeted markets, our operating margins and other financial results will beharmed and the price of our securities could decline.

**We have had significant turnover in our management team and furtherloss of any of our key personnel could harm our business.**

On May 1, 2007, our former Chief Executive Officerresigned from the Company and was replaced by Michael T. Willis.  On June 29, 2007, our Chief Financial Officerresigned from the company.  We hired anew Chief Financial Officer, Dawn M. Jaffray, effective August 7, 2007. Duringthe interim period, where we were without a chief financial officer, we engagedan external consulting firm to provide senior financial management.  Additionally, we hired an interim controllerto manage our accounting operations.  Forthe period ended July 7, 2007, our Chief Executive Officer held the position ofacting principal financial officer.

Our future financial performance is significantlyimpacted by our ability to attract, motivate and retain key managementpersonnel including our Chief Executive Officer and other members of the seniormanagement team.  Competition for qualifiedmanagement personnel is intense and in the event that we experience turnover insenior management positions, we cannot assure you that we will be able torecruit suitable replacements on a timely basis.  We must also successfully integrate all new managementand other key positions within our organization to achieve our operatingobjectives.  Even if we are successful,turnover in key management positions could temporarily harm our financialperformance and results of operations until the new management becomes familiarwith our business.

**One large shareholder with its affiliates controls a significant amountof our outstanding stock thus allowing them to exert significant influence onour management and affairs.**

One shareholder, DelStaff, controls 49.6% of theCompany’s total outstanding stock.  Themembers of DelStaff are H.I.G. Staffing, 2007, Ltd., Alarian Associates, Inc.and Michael T. Willis. As the principal stockholder of Westaff, DelStaff andits affiliates have the ability to materially influence all matters submittedto the stockholders for approval and to exert significant influence on ourmanagement and affairs.  On April 30,2007, we entered into a Governance Agreement with DelStaff, Mr. Willis and Mr.Stover. Pursuant to the terms of the Governance Agreement, on May 9, 2007, weexpanded the size of the Board of Directors from five to nine directors andappointed the following DelStaff nominees to the Board: Michael T. Willis, JohnR. Black, Michael R. Phillips, Gerald E. Wedren and John G. Ball.  DelStaff also has the ability to stronglyinfluence any merger, consolidation, sale of substantially all of our assets orother strategic decisions affecting us or the market value of the stock.  This concentration of stock and voting powercould be used by DelStaff to delay or prevent an acquisition of Westaff orother strategic action or result in strategic decisions that could negativelyimpact the value and liquidity of our outstanding stock.

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**The amount of collateral that we are required to maintain to supportour workers’ compensation obligations could increase, reducing the amount ofcapital that we have available to support and grow our field operations.**

We are contractually obligated to collateralize ourworkers’ compensation obligations under our workers’ compensation programthrough irrevocable letters of credit, surety bonds or cash.  As of July 7, 2007 our aggregate collateralrequirements under these contracts have been secured through $35.3 million ofletters of credit; however, under certain circumstances, such as an inabilityto maintain minimum borrowing availability or a change in ownership and orsenior management, we could be required to increase our letters of credit by $5million.  Further, our workers’compensation program expires November 1, 2008, and as part of the renewal,could be subject to an increase in collateral. These collateral requirements are significant and place pressure on ourliquidity and working capital capacity. We believe that our current sources of liquidity are adequate to satisfyour immediate needs for these obligations; however, our available sources ofcapital are limited.  Depending on futurechanges in collateral requirements, we could be required to seek additionalsources of capital in the future, which may not be available on commerciallyreasonable terms.

**Our reserves for workers’ compensation claims may be inadequate tocover our ultimate liability, and we may incur additional charges if the actualamounts exceed the reserved amounts.**

We maintain reserves to cover our estimatedliabilities for workers’ compensation claims based upon actuarial estimates ofthe future cost of claims and related expenses which have been reported but notsettled, and that have been incurred but not yet reported.  The determination of these reserves is basedon a number of factors, including current and historical claims activity,medical cost trends and developments in existing claims.  Reserves do not represent an exact calculationof liability and are affected by both internal and external events, such asadverse development on existing claims, changes in medical costs, claimshandling procedures, administrative costs, inflation, legal trends andlegislative changes.  Reserves areadjusted as necessary to reflect new claims and existing claims development,and such adjustments are reflected in the results of the periods in which thereserves are adjusted.  While we believeour judgments and estimates are adequate, if our reserves are insufficient tocover our actual losses, an adjustment could be charged to expense that may bematerial to our earnings.

**Workers’ compensation costs for temporary employees may continue torise and reduce margins and require more liquidity.**

In the United States, we are responsible for and payworkers’ compensation costs for our regular and temporary employees.  In recent years, these costs have risensubstantially as a result of increased claims, general economic conditions,increases in healthcare costs and governmental regulations.  In fiscal 2007, the increase in the volume ofclaims has fallen despite an increase in our domestic revenue, yet theincreases in cost per claim have continued. Under our workers’ compensation insurance program, we maintain “peroccurrence” insurance, which only covers claims for a particular event above a$500,000 deductible.  Our workers’compensation insurance policy expires November 1, 2008 and we cannot guaranteethat we will be able to successfully renew such policy.  Further, there are covenants associated withthe continuation of the policy and there can be no guarantee that we willcontinue to meet those covenants going forward. Should our workers’ compensation premium costs continue to increase inthe future, there can be no assurance that we will be able to increase the feescharged to our customers to keep pace with increased costs or if we were unableto obtain insurance on reasonable terms or forced to significantly increase ourdeductible per claim, our results of operations, financial condition andliquidity could be adversely affected.

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**Any significant economic downturn could result in our customers usingfewer staffing services, which could materially adversely affect our business.**

Demand for staffing services is significantlyaffected by the general level of economic activity. As economic activity slows,many customers reduce their utilization of temporary employees beforeundertaking layoffs of their regular full-time employees.  Further, demand for permanent placementservices also slows as the labor pool directly available to our customersincreases, making it easier for them to identify new employees directly.  Typically, we may experience increasedpricing pressures from other staffing companies during periods of economicdownturn, which could have a material adverse effect on our financialcondition.  The domestic economicrecession of 2001 and 2002 did have a material adverse effect on our business.Additionally, in geographic areas where we derive a significant amount ofbusiness, a regional or localized economic downturn could adversely affect ouroperating results and financial position.

**We assume the obligation to make wage, tax, and regulatory payments toour temporary employees and are then exposed to accounts receivable risks fromour customers.**

We generally assume responsibility for and managethe risks associated with our payroll obligations, including liability forpayment of salaries and wages, payroll taxes as well as group healthinsurance.  These obligations are fixedand become a liability of ours, whether or not the associated client wherethese employees have been assigned makes payments required by our serviceagreement, which exposes us to credit risks. We attempt to mitigate this risk by billing on a frequent basis, whichtypically occurs daily or weekly.  Inaddition, we establish an allowance for doubtful accounts for estimated lossesresulting from the inability of our customers to make required and timelypayments.  Further, we carefully monitorthe timeliness of our customers’ payments and impose strict creditstandards.  Finally, the majority of ouraccounts receivable is used to secure our revolving credit facilities, which werely on for liquidity.  If we fail toadequately manage our credit risks associated with accounts receivable, ourfinancial position could be adversely impacted.

**We derive a significant portion of our revenue from franchise agentoperations.**

Franchise agent operations comprise a significantportion of our revenue.  For the first 36weeks of 2007, 25.9% of our total revenue was derived from franchise agentoperations.  In addition, our ten largestfranchise agents for the first 36 weeks of fiscal 2007 (based on sales volume)accounted for 17.0% of our revenue. There can be no assurances that we will be able to attract newfranchisees or that we will be able to retain our existing franchisees.  The loss of one or more of our franchiseagents and any associated loss of customers and sales could have a materialadverse effect on our results of operations.

**We are subject to business risks associated with internationaloperations and fluctuating exchange rates.**

We presently have operations in the United Kingdom,Australia and New Zealand, which comprised 24.9% of our revenue during thefirst 36 weeks of fiscal 2007. Operations in foreign markets are inherently subject to certain risks,including in particular:

·                  different cultures and business practices,

·                  overlapping or differing tax structures,

·                  economic and political uncertainties,

·                  compliance issues associated with accountingand reporting requirements, and

·                  changing, complex or ambiguous foreign lawsand regulations, particularly as they relate to employment.

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All of our sales outside of the United States aredenominated in local currencies and, accordingly, we are subject to risksassociated with fluctuations in exchange rates, which could cause a reductionin our profits.  There can be noassurance that any of these factors will not have a material adverse effect onour business, results of operations, cash flows or financial condition.

**Our success is impacted by our ability to attract and retain qualifiedtemporary and permanent candidates.**

We compete with other staffing services to meet ourcustomers’ needs, and we must continuously attract reliable candidates to meetthe staffing requirements of our customers. Consequently, we must continuouslyevaluate and upgrade our base of available qualified personnel to keep pacewith changing customer needs and emerging technologies.  Furthermore, a substantial number of ourtemporary employees during any given year will terminate their employment withus and accept regular staff employment with our customers.  Competition for individuals with provenskills remains intense, and demand for these individuals is expected to remainstrong for the foreseeable future.  Therecan be no assurance that qualified candidates will continue to be available tous in sufficient numbers and on acceptable terms to us.  The failure to identify, recruit, train andplace candidates as well as retain qualified temporary employees over a longperiod of time could materially adversely affect our business.

**Our service agreements may be terminated on short notice, leaving usvulnerable to loss of a significant amount of customers in a short period oftime.**

Our service agreements are generally cancellablewith little or no notice by the customer to us. As a result, our customers canterminate their agreement with us at any time, making us particularlyvulnerable to a significant decrease in revenue within a short period of timethat could be difficult to quickly replace.

**The cost of unemployment insurance for temporary employees may rise andreduce our margins.**

In the United States, we are responsible for and payunemployment insurance premiums for our temporary and regular employees.  At times, these costs have risen as a resultof increased claims, general economic conditions and governmentregulations.  Should these costs continueto increase, there can be no assurance that we will be able to increase thefees charged to our customers in the future to keep pace with the increasedcosts, and if we do not, our results of operations and liquidity could beadversely affected.

**Our information technology systems are critical to the operations ofour business.**

Our information management systems are essential fordata exchange and operational communications with branches spread across largegeographical distances.  We have replacedkey component hardware and software including backup systems within the pasttwelve months and are currently working towards replacing further keycomponents over the next twelve to eighteen months.  Any interruption, impairment or loss of dataintegrity or malfunction of these systems could severely impact our business,especially our ability to timely and accurately pay employees and billcustomers.  Further, any significantdelay in our plans to replace the remaining key components could adverselyaffect the business.  Issues with eitherwould require that we commit significant additional capital as well asmanagement resources in order to resolve the interruption or delay.

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**We may be exposed to employment-related claims and costs that couldmaterially adversely affect our business.**

We are in the business of employing people andplacing them in the workplace of other businesses on either a temporary orpermanent basis.  As a result, we aresubject to a large number of laws and regulations relating to employment.  The risks related to engaging in suchbusiness include but are not limited to:

·                  claims of discrimination and harassment,

·                  violations of wage and hour laws,

·                  criminal activity,

·                  claims relating to actions by customersincluding property damage and personal injury, misuse of proprietaryinformation and misappropriation of assets, and

·                  immigration related claims.

In addition, some or all of these claims may giverise to litigation, which could be time-consuming to our management team, andtherefore, could have a negative effect on our business. In some instances, wehave agreed to indemnify our customers against some or all of these types ofliabilities.  We have policies andguidelines in place to help reduce our exposure to these risks and havepurchased insurance policies against certain risks in amounts that we currentlybelieve to be adequate.  However, therecan be no assurance that our insurance will be sufficient in amount or scope tocover these types of liabilities or that we will be able to secure insurance coveragefor such risks on affordable terms. Furthermore, there can be no assurance that we will not experience theseissues in the future or that they could have a material adverse effect on ourbusiness.

**The market for our stock may be limited, and the stock price maycontinue to be extremely volatile.**

The average daily trading volume for our commonstock on the NASDAQ Global Market was approximately 30,000 shares from January1, 2007 through July 7, 2007. Accordingly, the market price of our common stock is subject tosignificant fluctuations that have been, and may continue to be, exaggeratedbecause an active trading market has not developed for the stock. We believethat the common stock price has also been negatively affected by the fact thatour stock is thinly traded and also due to the absence of analystcoverage.  The lack of analyst reportsabout our stock may make it difficult for potential investors to make decisionsabout whether to purchase our stock and may make it less likely that investorswill purchase the stock, thus further depressing the stock price.  These negative factors may make it difficultfor stockholders to sell our common stock, which may result in losses forinvestors.

**The compliance costs associated with Section 404 of the Sarbanes-OxleyAct regarding internal control over financial reporting could be substantial,while failure to achieve and maintain compliance could have an adverse effecton our stock price.**

Pursuant to Section 404 of the Sarbanes-Oxley Act of2002 and current SEC regulations and proposed rules, beginning with our AnnualReport for the fiscal year ended November 1, 2008, we expect to be required tofurnish a report by our management on our internal control over financialreporting.  Further, we expect that ourexternal auditors will be required to audit our internal control over financialreporting report and include their attestation on that report in our annualreport on Form 10-K starting from our annual report for the 2009 fiscalyear.  The 

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process of fully documenting and testing ourinternal control procedures in order to satisfy these requirements will resultin increased general and administrative expenses and may shift management timeand attention from profit-generating activities to compliance activities.Furthermore, during the course of our internal control testing, we may identifydeficiencies which we may not be able to remediate in time to meet thereporting deadline under Section 404. Failure to achieve and maintain an effective internal controlenvironment or complete our Section 404 certifications could have a materialadverse effect on our stock price.

**We are involved in an action taken by the California EmploymentDevelopment Department.**

During the fourth quarter of fiscal 2005, we werenotified by the California Employment Development Department, or EDD, that ourdomestic operating subsidiaries unemployment tax rates would be increasedretroactively for both calendar years 2005 and 2004, which would result inadditional unemployment taxes of approximately $0.9 million.  We have timely appealed the ruling by the EDDand are working with our outside counsel to resolve this matter. Although webelieve that we have properly calculated our unemployment insurance tax and arein compliance with all applicable laws and regulations, there can be noassurances this will be settled in our favor.

**We are a defendant in a variety of litigation and other actions fromtime to time, which may have a material adverse effect on our business,financial condition and results of operations.**

We are regularly involved in a variety of litigationarising out of our business and, in recent years, have paid significant amountsas a result of adverse arbitration awards. We do not have insurance for some of these claims, and there can be noassurance that the insurance coverage we have will cover all claims that may beasserted against us.  Should the ultimatejudgments or settlements not be covered by insurance or exceed our insurancecoverage, they could have a material adverse effect on our results of operations,financial position and cash flows.  Therecan also be no assurance that we will be able to obtain appropriate andsufficient types or levels of insurance in the future or that adequatereplacement policies will be available on acceptable terms, if at all.

### **Item2.   Unregistered Sales of EquitySecurities and Use of Proceeds**

Not applicable.

### **Item3.   Defaults Upon Senior Securities**

Not applicable.

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### **Item4.   Submission of Matters to a Vote ofSecurity Holders**

Our Annual Meeting ofStockholders was held on April 18, 2007. The following table summarizes the proposals submitted to a vote of thestockholders and the results of the voting:
| Matter Submitted for Vote:            | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain or  Withhold** | ** ** |
|------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------------------------|------------|
| Election of One  Class II Director (Patricia Newman) |       | 8,460,017 |       | 0           |       | 18,175                        |       |

 

The terms of W. RobertStover and Janet M. Brady as Class III directors, and the terms of Ronald D.Stevens and Jack D. Samuelson as Class I directors continued after that meetingof stockholders.

Effective May 1, 2007,Patricia Newman resigned from the Board of Directors.

A Special Meeting ofStockholders was held on June 29, 2007. The following table summarizes the proposals submitted to a vote of thestockholders and the results of the voting:
| Matter Submitted for Vote:                                                                           | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain or  Withhold** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------------------------|------------|
| Ratification of  Election of Directors:                                                                             |       |       |       |        |       |                          |       |
| Gerald Wedren (Class I)                                                                                             |       | 11,679,328 |       | 0           |       | 757,810                       |       |
| John Ball (Class I)                                                                                                 |       | 11,680,828 |       | 0           |       | 756,310                       |       |
| John Black (Class II)                                                                                               |       | 11,639,278 |       | 0           |       | 797,860                       |       |
| Michael Phillips (Class II)                                                                                         |       | 11,680,828 |       | 0           |       | 756,310                       |       |
| Michael Willis (Class III)                                                                                          |       | 11,680,578 |       | 0           |       | 756,560                       |       |
| Amend Certificate of  Incorporation to Allow Call of Special Meetings by Beneficial Holders of 20%  of Voting Power |       | 11,627,421 |       | 808,327     |       | 1,390                         |       |

 

The term of Janet M. Bradyas Class III directors, and the terms of Ronald D. Stevens and Jack D.Samuelson as Class I directors continued after that meeting ofstockholders.  Effective June 29, 2007,Mr. Stover resigned from the Board of Directors.

The vacancy on the Boardcreated by Mr. Stover’s resignation was filled by the appointment of Walter W.Macauley effective July 25, 2007.

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### **Item5.   Other Information**

No events.

**Item6.   Exhibits**

Set forth below is a list of the exhibits included as part of thisQuarterly Report:
| 3.2     |   | Amendments to the Company’s Amended and Restated  Bylaws adopted by the Company’s Board of Directors on April 12, 2007.  (Incorporated hereby by reference to the exhibit with the same number filed  with the Company’s Current Report on Form 8-K dated April 18, 2007.)             |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.1    |   | Governance Agreement executed on April 30, 2007 by  and among Westaff, Inc., DelStaff, LLC, Michael T. Willis and W. Robert  Stover. (Incorporated herein by reference to the exhibit with the same number  filed with the Company’s Current Report on Form 8-K dated May 1, 2007.)              |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.3.9  |   | Transition and Release Agreement entered into as of  April 30, 2007 by and among Westaff Support, Inc. and Westaff, Inc. and Patricia  M. Newman.                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.3.11 |   | Retention Agreement entered into on May 10, 2007 by  and between Westaff, Inc., Westaff Support, Inc. and Westaff (USA), Inc. and  John P. Sanders.                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.3.13 |   | Retention Agreement entered into on April 30, 2007  by and between Westaff, Inc., Westaff (USA), Inc. and Westaff Support, Inc.  and Jeffrey A. Elias.                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.3.14 |   | Retention Agreement entered into on April 30, 2007  by and between Peter Eric Person and Westaff, Inc., Westaff (USA), Inc. and  Westaff Support, Inc.                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.3.15 |   | Executive Employment Agreement dated June 1, 2007  between Westaff Support, Inc., Westaff (USA), Inc. and Westaff, Inc. and  Michael T. Willis. (Incorporated herein by reference to the exhibit with the  same number filed with the Company’s Current Report on Form 8-K dated July 6,  2007.) |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 10.8.20 |   | Eleventh Amendment to the Multicurrency Credit  Agreement, dated May 24, 2007. (Incorporated herein by reference to the  exhibit with the same number filed with the Company’s Current Report on Form  8-K dated June 5, 2007.)                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 31.1    |   | Certification of the Chief Executive Officer and  acting principal financial officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                  |
| 32.1    |   | Certification of the Chief Executive Officer and  acting principal financial officer pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                        |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                 | WESTAFF, INC.                                                     |
|-----------------|-------------------------------------------------------------------|
|            |                                                              |
|            |                                                              |
| August 21, 2007 |                                                              |   /s/ Michael T. Willis |   |
| Date            |    Michael T. Willis                               |
|            |     Chief Executive Officer                   |
|            |     and acting principal  financial officer * |
|                 |                                                                   |  |  |  |

 

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* Mr. Willis is performing the functions of the principal financialofficer on the date of this filing. 

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**EXHIBIT INDEX**
| Exhibit  No. | ** ** | **Description of Document**                                                                                                                                                                                                                                                                           |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       | ** **                                                                                                                                                                                                                                                                                            |
| 3.2          |       | Amendments to the Company’s Amended and Restated  Bylaws adopted by the Company’s Board of Directors on April 12, 2007.  (Incorporated hereby by reference to the exhibit with the same number filed  with the Company’s Current Report on Form 8-K dated April 18, 2007.)             |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 10.1         |       | Governance Agreement executed on April 30, 2007 by  and among Westaff, Inc., DelStaff, LLC, Michael T. Willis and W. Robert  Stover. (Incorporated herein by reference to the exhibit with the same number  filed with the Company’s Current Report on Form 8-K dated May 1, 2007.)              |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 10.3.9       |       | Transition and Release Agreement entered into as of  April 30, 2007 by and among Westaff Support, Inc. and Westaff, Inc. and  Patricia M. Newman.                                                                                                                                                     |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 10.3.11      |       | Retention Agreement entered into on May 10, 2007 by  and between Westaff, Inc., Westaff Support, Inc. and Westaff (USA), Inc. and  John P. Sanders.                                                                                                                                                   |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 10.3.13      |       | Retention Agreement entered into on April 30, 2007  by and between Westaff, Inc., Westaff (USA), Inc. and Westaff Support, Inc.  and Jeffrey A. Elias.                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 10.3.14      |       | Retention Agreement entered into on April 30, 2007  by and between Peter Eric Person and Westaff, Inc., Westaff (USA), Inc. and  Westaff Support, Inc.                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 10.3.15      |       | Executive Employment Agreement dated June 1, 2007  between Westaff Support, Inc., Westaff (USA), Inc. and Westaff, Inc. and  Michael T. Willis. (Incorporated herein by reference to the exhibit with the  same number filed with the Company’s Current Report on Form 8-K dated July 6,  2007.) |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 10.8.20      |       | Eleventh Amendment to the Multicurrency Credit  Agreement, dated May 24, 2007. (Incorporated herein by reference to the  exhibit with the same number filed with the Company’s Current Report on Form  8-K dated June 5, 2007.)                                                                  |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 31.1         |       | Certification of the Chief Executive Officer and  acting principal financial officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                  |
| 32.1         |       | Certification of the Chief Executive Officer and  acting principal financial officer pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                        |

 

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