##### **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C.  20549**

 

##### **FORM 10-Q/A**

#####  

**Amendment No. 1**

 

| **x**                                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934.** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                     |
| **For the quarterly period ended  April 19, 2008** |
|                                                    |       |                                                                                                     |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom              to              **

 

**Commissionfile number 000-24990**

 

**WESTAFF, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

##### **298 NorthWiget Lane**

##### **WalnutCreek, California  94598-2453**

##### (Address of registrant’sprincipal executive offices, including zip code)

#####  

**(925)930-5300**

(Registrant’s telephone number, including areacode)

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.    Yes x    No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 

| **Class**                     | ** ** | **Outstanding at June 5, 2008** |
|-------------------------------|------------|---------------------------------|
| Common Stock, $0.01 par value |       | 16,697,010 shares               |

 

 

----

 

**EXPLANATORY NOTE**

 

This Amendment No. 1to the Quarterly Report on Form 10-Q of Westaff, Inc. (the“Registrant”) amends the Registrant’s Quarterly Report on Form 10-Q forthe quarterly period ended April 19, 2008 that was originally filed withthe Securities and Exchange Commission on June 9, 2008 (the “OriginalFiling”).  This Amendment No. 1 isbeing filed to make the following changes:

 

·      Part I,Item 1 – Notes to Condensed Consolidated Financial Statements

 

Note 1 — We changed the reclassification table’s “Netloss” from $29 to the correct amount of $(261) for the 24 weeks ended April 14,2007 for the columns labeled “As originally reported as adjusted fordiscontinued operations” and “As reclassified” in order to agree to the amountas presented on the Condensed Consolidated Statements of Operations.

 

Note 4 — We changed the “Operating loss fromdiscontinued operations for the 12 weeks ended April 14, 2007” from $(216)to the correct amount of $(210) to correct a footing error.

 

Note 4 — We changed the Balance sheet of discontinuedoperations as of April 14, 2007 to the balance sheet as of November 3,2007 as is required by the Statement of Financial Accounting Standard No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets”.

 
| ** **                             | ** ** | **From:**                    | ** ** | **To:**                        | ** ** |
|----------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **April 14, 2007** | ** ** | **November 3, 2007** | ** ** |
| Cash and cash equivalents              |       | $                            | 1,722      |                           | $          | 1,335 |   |
| Trade accounts receivable, net         |       | 5,939                        |       | 7,848                          |       |
| Prepaid expenses                       |       | 549                          |       | 484                            |       |
| Property and equipment, net            |       | 959                          |       | 901                            |       |
| Other current assets                   |       | 103                          |       | 64                             |       |
| Assets of discontinued operations      |       | $                            | 9,272      |                           | $          | 10,632 |   |
|                                   |       |                         |       |                           |       |
| Accounts payable                       |       | $                            | 356        |                           | $          | 131 |   |
| Accrued expenses                       |       | 3,102                        |       | 4,177                          |       |
| Other liabilities                      |       | 20                           |       | 17                             |       |
| Liabilities of discontinued operations |       | $                            | 3,478      |                           | $          | 4,325 |   |

 

Note 6 — We removed the table of “Unamortizedintangible assets as of April 19, 2008 and November 3, 2007” and thetable of “Estimated amortization expense for the fiscal years 2008 and 2009”since the information was included in sentence format below the table.

 

Note 7 — We changed the amount of  “Other” from $4,552 to the correct amount of$4,559 to correct a footing error to reconcile the amount of Accrued Expensesto the financial statements.

 

·      Part I, Item 2 – Management’s Discussion andAnalysis of Financial Condition and Results of Operations:  Results of Operations – 24 weeks ended April 19,2008 and April 14, 2007

 

* Selling andadministrative expenses* — We changed the sentence from “Our professional fees increased by $1.6million” to “Our professional fees increased by $1.8 million” to agree to thefinancial statements.

 

*Net interest expense* — We changed the sentence “Net interest expenseincreased by $0.6 million or 58.7% to $1.6 million (previously stated as $1.7million)” to agree to the financial statements.

 

·      Part I, Item 3 – Quantitative and QualitativeDisclosures about Market Risk

 

We changed the following sentences to reconcile to thefinancial statements:

 

“A change of two percentage points in the interestrates would cause a change in interest expense of approximately $0.1 million(previously stated as $0.2 million) on an annual basis.”

 

“For the 24 weeks ended April 19, 2008, ourinternational operations comprised 25.9% of our gross revenue and, as of theend of that period 19.3% (previously stated as 17.0%) of our total assets.”

 

2

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No other changes havebeen made to the Original Filing. This Amendment No. 1 does not amend orupdate any other information set forth in the Original Filing including the informationcontained in the condensed consolidated balance sheets, statements ofoperations and cash flows as of April 19, 2008 and for the 12 and 24 weeks thenended, and the Registrant has not updated disclosures contained therein toreflect any events subsequent to the filing of the Original Filing. ThisAmendment No. 1 consists solely of the preceding cover page, thisexplanatory note, Item 1 (as amended), Item 2 (as amended), Item 3 (asamended), the signature page and the certifications required to be filedas exhibits hereto.

 

3

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**Part l. Financial Information**

**Item 1. Financial Statements**

**Westaff, Inc.**

**Condensed Consolidated Balance Sheets(Unaudited)**

** **
| ** **                                                                                                                                                                                                                       | ** ** | **April 19,**                  | ** ** | **November 3,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **2008**                            | ** ** | **2007**             | ** ** |
| ** **                                                                                                                                                                                                                       | ** ** | **(In thousands, except** | ** ** |
| ** **                                                                                                                                                                                                                       | ** ** | **per share amounts)**    | ** ** |
| **ASSETS**                                                                                                                                                                                                                       |       |                                |       |                 |       |
| Current assets:                                                                                                                                                                                                                  |       |                                |       |                 |       |
| Cash and cash equivalents                                                                                                                                                                                                        |       | $                                   | 7,424      |                 | $          | 3,277 |   |
| Trade accounts receivable, less allowance  for doubtful accounts of $1,414 and $1,019                                                                                                                                            |       | 55,928                              |       | 76,098               |       |
| Deferred income taxes                                                                                                                                                                                                            |       | —                              |       | 9,688                |       |
| Prepaid expenses                                                                                                                                                                                                                 |       | 2,564                               |       | 4,059                |       |
| Other current assets                                                                                                                                                                                                             |       | 1,634                               |       | 1,833                |       |
| Total current assets                                                                                                                                                                                                             |       | 67,550                              |       | 94,955               |       |
| Property and equipment, net                                                                                                                                                                                                      |       | 12,601                              |       | 16,186               |       |
| Deferred income taxes                                                                                                                                                                                                            |       | 1,200                               |       | 12,076               |       |
| Goodwill                                                                                                                                                                                                                         |       | 12,658                              |       | 12,628               |       |
| Intangible assets                                                                                                                                                                                                                |       | 3,685                               |       | 3,695                |       |
| Other long-term assets                                                                                                                                                                                                           |       | 1,876                               |       | 1,752                |       |
| Total Assets                                                                                                                                                                                                                     |       | $                                   | 99,570     |                 | $          | 141,292 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                    |       |                                |       |                 |       |
| Current liabilities:                                                                                                                                                                                                             |       |                                |       |                 |       |
| Borrowing under revolving credit facilities                                                                                                                                                                                      |       | $                                   | 4,393      |                 | $          | 6,837 |   |
| Current portion of capital lease  obligations                                                                                                                                                                                    |       | 582                                 |       | 544                  |       |
| Note payable to related party                                                                                                                                                                                                    |       | 2,000                               |       | 2,000                |       |
| Accounts payable                                                                                                                                                                                                                 |       | 2,550                               |       | 2,226                |       |
| Accrued expenses                                                                                                                                                                                                                 |       | 24,279                              |       | 34,147               |       |
| Short-term portion of workers compensation                                                                                                                                                                                       |       | 9,350                               |       | 9,897                |       |
| Income taxes payable                                                                                                                                                                                                             |       | 89                                  |       | 113                  |       |
| Total current liabilities                                                                                                                                                                                                        |       | 43,243                              |       | 55,764               |       |
| Long-term capital lease obligations                                                                                                                                                                                              |       | 471                                 |       | 752                  |       |
| Long-term portion of workers compensation                                                                                                                                                                                        |       | 15,400                              |       | 16,000               |       |
| Other long-term liabilities                                                                                                                                                                                                      |       | 1,734                               |       | 2,881                |       |
| Total liabilities                                                                                                                                                                                                                |       | 60,848                              |       | 75,397               |       |
| 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: 16,697,010 at  April 19, 2008 and November 3, 2007 |       | 167                                 |       | 167                  |       |
| Additional paid-in capital                                                                                                                                                                                                       |       | 39,574                              |       | 39,561               |       |
| Retained earnings (accumulated deficit)                                                                                                                                                                                          |       | (2,753                              | )          | 24,355               |       |
| Accumulated other comprehensive income                                                                                                                                                                                           |       | 1,734                               |       | 1,812                |       |
| Total stockholders’ equity                                                                                                                                                                                                  |       | 38,722                              |       | 65,895               |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                                                                                  |       | $                                   | 99,570     |                 | $          | 141,292 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**Westaff, Inc.**

**Condensed Consolidated Statements ofOperations (Unaudited)**

 
| ** **                                               | ** ** | **12 Weeks Ended**                                          | ** ** | **24 Weeks Ended** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **April 19,**                                                    | ** ** | **April 14,**           | ** ** | **April 19,** | ** ** | **April 14,** | ** ** |
| ** **                                               | ** ** | **2008**                                                              | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| ** **                                               | ** ** | ** **                                                            | ** ** |
| Revenue                                                  |       | $                                                                     | 102,811    |                         | $          | 120,114 |   | $ | 210,888 |   | $ | 240,801 |   |
| Costs of services                                        |       | 86,531                                                                |       | 99,134                       |       | 176,464 |   | 199,273 |   |
| Gross profit                                             |       | 16,280                                                                |       | 20,980                       |       | 34,424 |   | 41,528 |   |
| Franchise agents’ share of gross profit             |       | 3,361                                                                 |       | 3,518                        |       | 6,757 |   | 7,058 |   |
| Selling and administrative expenses                      |       | 15,527                                                                |       | 16,938                       |       | 30,506 |   | 32,017 |   |
| Restructuring benefit                                    |       | —                                                                |       | —                       |       | (150 | ) | — |   |
| Depreciation and amortization                            |       | 1,875                                                                 |       | 787                          |       | 3,116 |   | 1,645 |   |
|                                                     |       |                                                                  |       |                         |       |   |   |   |   |
| Operating (loss) income from continuing  operations      |       | (4,483                                                                | )          | (263                         | )          | (5,805 | ) | 808 |   |
| Interest expense                                         |       | 902                                                                   |       | 520                          |       | 1,664 |   | 1,091 |   |
| Interest income                                          |       | (40                                                                   | )          | (47                          | )          | (63 | ) | (82 | ) |
|                                                     |       |                                                                  |       |                         |       |   |   |   |   |
| Loss from continuing operations before  income taxes     |       | (5,345                                                                | )          | (736                         | )          | (7,406 | ) | (201 | ) |
| Income tax expense (benefit)                             |       | 20,347                                                                |       | (246                         | )          | 19,724 |   | (230 | ) |
|                                                     |       |                                                                  |       |                         |       |   |   |   |   |
| (Loss) income from continuing operations                 |       | (25,692                                                               | )          | (490                         | )          | (27,130 | ) | 29 |   |
|                                                     |       |                                                                  |       |                         |       |   |   |   |   |
| Discontinued operations:                                 |       |                                                                  |       |                         |       |   |   |   |   |
| Loss from discontinued operations                        |       | (704                                                                  | )          | (174                         | )          | (1,160 | ) | (290 | ) |
| Gain on sale, net of income taxes of $820                |       | 1,183                                                                 |       | —                       |       | 1,183 |   | — |   |
| Total discontinued operations, net of  income taxes      |       | 479                                                                   |       | (174                         | )          | 23 |   | (290 | ) |
| Net loss                                                 |       | $                                                                     | (25,213    | )                            | $          | (664 | ) | $ | (27,107 | ) | $ | (261 | ) |
|                                                     |       |                                                                  |       |                         |       |   |   |   |   |
| Earnings (loss) per share:                               |       |                                                                  |       |                         |       |   |   |   |   |
| Continuing operations - basic and diluted                |       | $                                                                     | (1.54      | )                            | $          | (0.03 | ) | $ | (1.62 | ) | $ | 0.00 |   |
| Discontinued operations - basic and diluted              |       | $                                                                     | 0.03       |                         | $          | (0.01 | ) | $ | 0.00 |   | $ | (0.02 | ) |
| Loss per share:                                          |       |                                                                  |       |                         |       |   |   |   |   |
| Basic and diluted                                        |       | $                                                                     | (1.51      | )                            | $          | (0.04 | ) | $ | (1.62 | ) | $ | (0.02 | ) |
|                                                     |       |                                                                  |       |                         |       |   |   |   |   |
| Weighted average shares outstanding - basic  and diluted |       | 16,697                                                                |       | 16,608                       |       | 16,697 |   | 16,599 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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**Westaff, Inc.**

**Condensed Consolidated Statements of CashFlows (Unaudited)**

 
| ** **                                                                                  | ** ** | **24 Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                  | ** ** | **April 19,**           | ** ** | **April 14,** | ** ** |
| ** **                                                                                  | ** ** | **2008**                     | ** ** | **2007** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands)**      | ** ** |
| **Cash flows from operating activities**                                                    |       |                         |       |   |   |
| Net loss                                                                                    |       | $                            | (27,107    | ) | $ | (261 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:            |       |                         |       |   |   |
| Gain on sale of discontinued operations,  net of income taxes                               |       | (1,183                       | )          | — |   |
| Depreciation and amortization                                                               |       | 3,116                        |       | 1,794 |   |
| Stock-based compensation                                                                    |       | 13                           |       | 139 |   |
| Provision for losses on doubtful accounts                                                   |       | 465                          |       | 173 |   |
| Amortization of deferred gain on  sale-leaseback                                            |       | (344                         | )          | (344 | ) |
| Amortization of debt issuance costs                                                         |       | 480                          |       | 130 |   |
| Deferred income taxes                                                                       |       | 20,512                       |       | (258 | ) |
| Amortization of deferred gain from sales of  affiliate operations                           |       | (618                         | )          | (75 | ) |
| Loss on sale or disposal of assets                                                          |       | 33                           |       | 8 |   |
| Tax benefits from employee stock plans                                                      |       | —                       |       | 12 |   |
| Changes in assets and liabilities:                                                          |       |                         |       |   |   |
| Trade accounts receivable                                                                   |       | 14,812                       |       | 3,489 |   |
| Other assets                                                                                |       | 1,298                        |       | 2,890 |   |
| Accounts payable and accrued expenses                                                       |       | (6,968                       | )          | (3,227 | ) |
| Income taxes payable                                                                        |       | (825                         | )          | (289 | ) |
| Other liabilities                                                                           |       | (838                         | )          | 299 |   |
|                                                                                        |       |                         |       |   |   |
| Net cash provided by operating activities                                                   |       | 2,846                        |       | 4,480 |   |
|                                                                                        |       |                         |       |   |   |
| **Cash flows from investing activities**                                                    |       |                         |       |   |   |
| Capital expenditures                                                                        |       | (171                         | )          | (1,588 | ) |
| Proceeds from sales of affiliate operations                                                 |       | —                       |       | 21 |   |
| Proceeds from sale of discontinued  operations, net of cash acquired by purchaser of $1,104 |       | 5,375                        |       | — |   |
| Expenses relating to sale of discontinued  operations                                       |       | (204                         | )          | — |   |
| Other, net                                                                                  |       | 26                           |       | (124 | ) |
|                                                                                        |       |                         |       |   |   |
| Net cash (used in) provided by investing  activities                                        |       | 5,026                        |       | (1,691 | ) |
|                                                                                        |       |                         |       |   |   |
| **Cash flows from financing activities**                                                    |       |                         |       |   |   |
| Net repayments under line of credit  agreements                                             |       | (2,499                       | )          | (2,040 | ) |
| Principal payments on capital lease  obligations                                            |       | (243                         | )          | (153 | ) |
| Payment of debt issuance costs                                                              |       | (895                         | )          | (65 | ) |
| Proceeds from the issuance of common stock                                                  |       | —                       |       | 172 |   |
| Excess tax benefits from stock-based  compensation                                          |       | —                       |       | 3 |   |
|                                                                                        |       |                         |       |   |   |
| Net cash used in financing activities                                                       |       | (3,637                       | )          | (2,083 | ) |
|                                                                                        |       |                         |       |   |   |
| Effect of exchange rate changes on cash                                                     |       | (88                          | )          | 95 |   |
|                                                                                        |       |                         |       |   |   |
| Net change in cash and cash equivalents                                                     |       | 4,147                        |       | 801 |   |
| Cash and cash equivalents at beginning of  period                                           |       | 3,277                        |       | 3,545 |   |
| Cash and cash equivalents at end of period                                                  |       | $                            | 7,424      |   | $ | 4,346 |   |
|                                                                                        |       |                         |       |   |   |
| **Supplemental dislosures of cash flow  information**                                       | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Interest                                                                                    |       | $                            | 940        |   | $ | 1,996 |   |
| Income taxes paid, net                                                                      |       | 1,043                        |       | 1,189 |   |
| **Supplemental disclosures of non-cash investing  activities**                              |       |                         |       |   |   |
| Receivable proceeds from sale of  discontinued operations                                   |       | 197                          |       | — |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

6

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**Westaff, Inc.**

**Notes toCondensed Consolidated Financial Statements (Unaudited)**

 

**1.****     Company background**

 

Westaff, Inc. (togetherwith its domestic and foreign subsidiaries, the “Company” or “Westaff”)provides staffing services primarily in suburban and rural markets (“secondarymarkets”), and in certain major urban centers (“primary markets”) in the UnitedStates (“US”), Australia and New Zealand. In March 2008, the Company sold its United Kingdom (“UK”)subsidiary operation. TheCompany provides staffing solutions, including permanent placement,replacement, supplemental and on-site temporary programs to businesses andgovernment agencies through its network of Company-owned, franchise agent andlicensed offices. Westaff’s primary focus is on recruiting and placingclerical/administrative and light industrial personnel. Its corporateheadquarters provides support services to the field offices in marketing, humanresources, risk management, legal, strategic sales, accounting, and informationtechnology.

 

**Basis ofPresentation and Going Concern Considerations**

 

The accompanying condensedconsolidated financial statements of Westaff, Inc. and its domestic andforeign subsidiaries, as of April 19, 2008 and for the 12-week and 24-weekperiods ended April 19, 2008 and April 14, 2007 are unaudited.

 

The condensed consolidatedfinancial statements, in the opinion of management, reflect all adjustments,which are of a normal recurring nature, necessary for a fair presentation ofthe financial position, results of operations and cash flows for the periodspresented.  The condensed consolidatedbalance sheet as of November 3, 2007 presented herein, has been derivedfrom the audited balance sheet included in the Company’s Annual Report onForm 10-K for the fiscal year ended November 3, 2007.

 

The Company has a financingagreement through its wholly owned subsidiary with U.S. Bank which provides fora five year revolving credit facility for up to $50.0 million.  The Company is currently in default undercertain covenants of this financing arrangement.  While the Company is negotiating with itslenders for a waiver or forbearance under this default, there can be noassurances that a waiver or forbearance can be obtained.  If such an agreement cannot be obtained onacceptable terms, the Company may be unable to access the funds needed tosupport its liquidity needs.  In thatcase, its business and operating results would be adversely affected and theCompany might be unable to continue its operations as a going concern.

 

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 audited consolidated financial statements included in the Company’spreviously-filed Annual Report on Form 10-K for the fiscal year endedNovember 3, 2007.  Except asdisclosed herein, there were no changes to these policies during the 24-weekperiod ended April 19, 2008. Certain financial information normallyincluded in annual financial statements prepared in accordance with accountingprinciples generally accepted in the United States that is not required forinterim reporting purposes has been condensed or omitted. The accompanyingcondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year endedNovember 3, 2007.

 

The Company’s fiscal year is a52 or 53-week period ending the Saturday nearest the end of October. Forinterim reporting purposes, the first three fiscal quarters comprise 12 weekseach, while the fourth fiscal quarter consists of 16 or 17 weeks. The resultsof operations for the 12-week and 24-week periods ended April 19, 2008 arenot necessarily indicative of the results to be expected for the full fiscalyear or for any future period.

 

On March 31, 2008, the Company sold the Westaff U.K. subsidiary.  The results of operations of the discontinuedoperations are separately stated in the accompanying condensed consolidatedstatements of operations for the 12-week and 24-week periods endedApril 19, 2008 and for the same periods of fiscal 2007. The assets andliabilities of these discontinued operations have not been reclassified in theaccompanying consolidated balance sheets and related notes. The cash flows fromdiscontinued operations are not separately classified in the Company’sconsolidated statements of cash flows.

 

Accounts receivable asoriginally reported on the November 3, 2007 balance sheet have beenincreased by $962,000 to reflect unbilled amounts to customers related toservices performed in the United Kingdom previously included in other currentassets.  The Company’s policy is torecord as trade accounts receivables, the amounts earned for the final week ofthe period but not billed to customers.

 

7

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The Company has included aspart of interest expense certain amounts paid to GE Capital for letters ofcredit issued to the Company’s insurance carrier to secure liabilitiesreflected on the balance sheet. These costs are charged based on a percentageof the outstanding letters of credit. These costs during the fiscal year 2007that were originally classified as selling and administrative expenses havebeen reclassified to interest expense to conform to the fiscal year 2008presentation. The reclassifications had no change to net income or earnings pershare and are shown below:

 
| ** **                                          | ** ** | **12 weeks ended**                                               | ** ** | **24 weeks ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **April 14,**                                                         | ** ** | **April 14,**           | ** ** |
| ** **                                          | ** ** | **2007**                                                                   | ** ** | **2007**                     | ** ** |
| ** **                                          | ** ** | **(In thousands)**                                                         | ** ** |
| ** **                                          | ** ** | **As originally  reported as adjusted for  discontinued  operations** | ** ** | **As  reclassified**         | ** ** | **Change** | ** ** | **As originally  reported as adjusted for  discontinued  operations** | ** ** | **As  reclassified** | ** ** | **Change** | ** ** |
| Selling and administrative expenses                 |       | $                                                                          | 17,190     |                         | $          | 16,938 |   | $ | (252 | ) | $ | 32,521 |   | $ | 32,017 |   | $ | (504 | ) |
|                                                |       |                                                                       |       |                         |       |   |   |   |   |   |   |   |   |
| Operating (loss) income from continuing  operations |       | $                                                                          | (515       | )                            | $          | (263 | ) | $  | 252 |   | $  | 304 |   | $  | 808 |   | $  | 504 |   |
|                                                |       |                                                                       |       |                         |       |   |   |   |   |   |   |   |   |
| Interest expense                                    |       | $                                                                          | 268        |                         | $          | 520 |   | $ | 252 |   | $ | 587 |   | $ | 1,091 |   | $ | 504 |   |
| Net loss                                            |       | $                                                                          | (664       | )                       | $          | (664 | )  | $ | — |   | $ | (261 | ) | $ | (261 | ) | $ | — |   |

 

**2.    Out of period adjustment**

 

During thecurrent fiscal quarter, the Company recorded $880,000 in depreciation expenseand accumulated depreciation, relating to assets purchased prior to fiscal year2004, which should have been depreciated over a 4 year period.  The depreciation expense and accumulateddepreciation, however, were not previously recorded.  The Company reviewed this additional expenseand considered the impact of the adjustment under Staff Accounting BulletinNo. 99 “Materiality”.  The Companyconcluded that reporting the $880,000 as an adjustment to current perioddepreciation expense and accumulated depreciation is not material to thecurrent fiscal year 2008 or prior fiscal years.

 

**3.    Adoption of recent pronouncement**

 

During the first quarter offiscal year 2008, the Company adopted the provisions of Financial AccountingStandards Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109”(“FIN 48”) effective November 4, 2007. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes”, and prescribes arecognition threshold and measurement process for financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on de-recognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition.

 

As a result of theimplementation of FIN 48, the Company made a comprehensive review of itsportfolio of uncertain tax positions in accordance with recognition standardsestablished by FIN 48, and concluded that there were no material uncertain taxpositions requiring recognition in our financial statements at adoption or asof April 19, 2008. The Company performed evaluations for the tax yearsended 2007, 2006, 2005 and 2004, which were subject to examination by taxauthorities.  Upon implementation of FIN48, the Company adopted a methodology for recognition of interest and penaltiesaccruals related to unrecognized tax benefits and penalties within itsprovision for income taxes.  The Companyhad no such interest and penalties accrued at April 19, 2008.

 

**4.****            ****Discontinued Operations**

 

In March 2008, the Company sold its United Kingdom (“UK”)subsidiary operation to Fortis Recruitment Group Limited, a recruiting and staffingcompany headquartered in England, for approximately $6.7 million. The Companyrecorded a pre-tax gain of $2.0 million ($1.2 million net of tax).  Cash payments received totaled $6.5 millionand transaction costs totaled $204,000. The sale of the UK subsidiary was an important part of the Company’sstrategy of reviewing existing operations and selectively divesting non-coreassets.

 

8

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In accordance with theprovisions of Statement of Financial Accounting Standard No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets,” the gainrecognized in conjunction with the sale of the UK, as well as the results ofoperations for the current and prior periods, have been reported asdiscontinued operations in the Company’s statements of operations. Summarizedfinancial data on discontinued operations is as follows:

 
| ** **                                           | ** ** | **12 Weeks Ended** | ** ** | **24 Weeks Ended** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **April 19,**           | ** ** | **April 14,**           | ** ** | **April 19,** | ** ** | **April 14,** | ** ** |
| ** **                                           | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(In thousands)**      | ** ** |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Revenue                                              |       | $                            | 6,458      |                         | $          | 9,716 |   | $ | 15,215 |   | $ | 18,978 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Operating loss from discontinued operations          |       | (713                         | )          | (210                         | )          | (1,184 | ) | (377 | ) |
| Plus: Income taxes benefit and net interest  income  |       | 9                            |       | 36                           |       | 24 |   | 87 |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Loss from discontinued operations, net of  tax       |       | (704                         | )          | (174                         | )          | (1,160 | ) | (290 | ) |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Gain on sale of discontinued operations              |       | 2,003                        |       | —                       |       | 2,003 |   | — |   |
| Less: Income taxes                                   |       | 820                          |       | —                       |       | 820 |   | — |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Gain on sale of discontinued operations,  net of tax |       | 1,183                        |       | —                       |       | 1,183 |   | — |   |
|                                                 |       |                         |       |                         |       |   |   |   |   |
| Total discontinued operations, net of  income taxes  |       | $                            | 479        |                         | $          | (174 | ) | $ | 23 |   | $ | (290 | ) |

 
| ** **                             | ** ** | **November 3,  2007** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| Cash and  cash equivalents             |       | $                     | 1,335      |   |
| Trade  accounts receivable, net        |       | 7,848                 |       |
| Prepaid  expenses                      |       | 484                   |       |
| Property and  equipment, net           |       | 901                   |       |
| Other  current assets                  |       | 64                    |       |
| Assets of discontinued operations      |       | $                     | 10,632     |   |
|                                   |       |                  |       |
| Accounts  payable                      |       | $                     | 131        |   |
| Accrued  expenses                      |       | 4,177                 |       |
| Other liabilities                      |       | 17                    |       |
| Liabilities of discontinued operations |       | $                     | 4,325      |   |

 

**5.****             ****Income Taxes and RelatedValuation Allowance**

 

For the second quarter of fiscal 2008, the Company hadan income tax provision from continuing operations of approximately $20.3million on a pre-tax loss from continuing operations of $5.3 million. Theincome tax provision resulted primarily from the establishment of a valuationallowance of $23.2 million in the current quarter against deferred taxassets.  These allowances were recordedagainst the deferred tax assets because the Company has recently reassessed thepotential for their realization in future years.  The Company recorded a valuation allowance inthe current quarter due to cumulative losses in recent periods and revisedprojections indicating continued losses for the remainder of fiscal 2008.  The Company has not set up a valuationallowance against deferred tax assets of $0.8 million from the estimatedfederal net operating loss generated for fiscal 2007 because it believes it canrealize this asset by carrying the net operating loss back to a prior taxperiod.  The Company has not establisheda valuation allowance against its foreign deferred tax assets of $0.4 millionbecause it believes these deferred tax assets are more likely than not of beingrealized.  These foreign deferred taxassets relate to net operating losses in jurisdictions which have notexperienced cumulative losses in recent periods.  As of April 19, 2008 the Company haddeferred tax assets of $24.4 million offset by a valuation allowance of $23.2million, for a net deferred tax asset balance of $1.2 million.  Although it is possible these deferred taxassets could still be realized in the future, the Company believes it is morelikely than not that these deferred tax assets will not be realized in theforeseeable future.  The Company intendsto reevaluate its projections and the valuation allowance position periodically.

 

Absent the valuation allowance recognized, for the 12week period ended April 19, 2008 the Company had an income tax benefitfrom continuing operations of $2.9 million, which represents an effective taxbenefit rate of 53.6%.  The rate benefitwas primarily generated from the generation of Work Opportunity Tax Credits(WOTC), offset by other permanent adjustments.

 

**6.****            ****Goodwill and Intangibles**

 

The Company follows the provisions of SFAS 142 “Goodwill and OtherIntangible Assets.” SFAS 142 provides that goodwill and other intangibleassets with indefinite lives are evaluated for impairment at a reporting unitlevel by applying a fair-value based test. The primary other identifiableintangible assets of the Company with indefinite lives are reacquired franchiserights. The 

 

9

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Company determined its reporting units as its operating segments underSFAS 131 “Disclosures about Segments of an Enterprise and RelatedInformation”.

 

The first step in the impairment test compares the fair value of areporting unit with its carrying value, including goodwill and other nonamortizing intangibles. If the carrying value of a reporting unit exceeds itsfair value, the second step of the impairment test is performed to determinethe amount of any impairment loss by comparing the implied fair value of thereporting unit’s goodwill with the respective carrying value. This test isgenerally performed by the Company during its fourth fiscal quarter or morefrequently if the Company believes impairment indicators are present.

 

During the Company’s second quarter several factors led management toconsider whether its goodwill and other intangibles might be impaired. Thesefactors included three possible indicators of impairment, including: a) adecline in the market capitalization of the company to a level below the bookcarrying value of its equity; 2) the sale of its UK subsidiary below the fairvalue as determined at September 1, 2007; and 3) unexpected revenuedeclines for its US Domestic Reporting Unit through the end of its secondfiscal quarter. As a result of these conditions, the Company performed thefirst step in the impairment test required by SFAS 142 which compares the fairvalue of a reporting unit to its carrying value, including goodwill andintangibles which in this case totaled $11,369,000 assigned to its US DomesticServices Reporting Unit. To perform this test, the Company used assumptionsabout future cash flows and growth rates based upon budgets and long termplans. Such assumptions, including associated discount rates used in theanalysis, are based upon the Company’s assessment of the risks inherent inthose plans and projections. The Company concluded that the fair value of itsUS Domestic Reporting Unit exceeded carrying value and market capitalizationwhich indicated that the Company’s goodwill was not impaired. Therefore theCompany did not perform the second step of the impairment test and no impairmentcharge was recorded in second quarter. The Company intends to seek anindependent valuation of its goodwill during next quarter. Should revenuescontinue to decline in future periods or other indicators suggest that animpairment may have taken place, all or a portion of the recorded goodwill mayneed to be written off in future periods.

 

The following table shows the change togoodwill during the first two quarters of fiscal 2008.

 
| ** **                             | ** ** | **Domestic**               | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | **Business Services** | ** ** | **Australia** | ** ** | **Total**  | ** ** |
| ** **                             | ** ** | **(In thousands)**    | ** ** |
| Balance at November 3, 2007       |       | $                          | 11,369     |          | $          | 1,259      |       | $ | 12,628 |   |
| Effect of foreign currency translation |       | —                     |       | 30            |       | 30         |       |
| Balance at April 19, 2008         |       | $                          | 11,369     |          | $          | 1,289      |       | $ | 12,658 |   |

 

The following table shows the change to thedefinite life intangible assets during the first two quarters ended April 19, 2008.

 
| ** **                                            | ** ** | **Domestic Business Services** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                            | ** ** | **Gross Carrying**                  | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                                            | ** ** | **Amount**                          | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| ** **                                            | ** ** | **(In thousands)**             | ** ** |
| Amortized intangible assets - Non-compete  Agreements |       |                                |       |   |   |   |   |
| Balance at November 3, 2007                      |       | $                                   | 177        |   | $ | (140 | ) | $ | 37 |   |
| Amortization                                          |       | —                              |       | (10 | ) | (10 | ) |
| Balance at April 19, 2008                        |       | 177                                 |       | (150 | ) | 27 |   |
|                                                       |            |                                     |            |  |  |  |  |  |  |  |

 

Total estimated amortization expense forfiscal year 2008 is $20,000 and for fiscal year 2009 is $17,000.  Unamortized intangible assets include franchiserights which as of April 19, 2008 and November 3, 2007 total$3,658,000.

 

**7.  Accrued Expenses**

 
| ** **                                          | ** ** | **April 19,**      | ** ** | **November 3,** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **2008**                | ** ** | **2007**             | ** ** |
| ** **                                          | ** ** | **(In thousands)** | ** ** |
| ** **                                          | ** ** | ** **              | ** ** |
| Accrued payroll and payroll taxes                   |       | $                       | 12,912     |                 | $          | 16,356 |   |
| Accrued insurance                                   |       | 1,943                   |       | 3,151                |       |
| Checks outstanding in excess of book cash  balances |       | 287                     |       | 4,753                |       |
| Taxes other than income taxes                       |       | 3,164                   |       | 4,120                |       |
| Franchise commisions payable                        |       | 965                     |       | 1,599                |       |
| Restructuring accrual (Note 14)                     |       | 449                     |       | 1,146                |       |
| Other                                               |       | 4,559                   |       | 3,022                |       |
|                                                |       | $                       | 24,279     |                 | $          | 34,147 |   |

 

**8.****             ****Credit Agreements**

 

On February 14, 2008, Westaff (USA), Inc., awholly-owned subsidiary of the Company (the “Borrower”), and the Company, asguarantor, entered into a financing agreement (the “Financing Agreement”) withU.S. Bank National Association (“U.S. Bank”) 

 

10

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and Wells Fargo Bank National Association(collectively the “Banks”) which provides for a new five year $50.0 millionrevolving credit facility.  OnFebruary 28, 2008, the Borrower was advanced credit in the form of lettersof credit issued and loans advanced in an aggregate amount of approximately$29.6 million under the Financing Agreement. The Borrower used the proceeds from the extension of credit to repayamounts outstanding under the then-existing Multicurrency Credit Agreement,dated as of May 17, 2002, among the Company, the Borrower, certain othersubsidiaries of the Company, certain lenders party thereto and General ElectricCapital Corporation, as amended, to replace or cash collateralize letters ofcredit issued under such Multicurrency Credit Agreement, and for workingcapital needs.

 

The Financing Agreement provides for a five-year $50.0million revolving credit facility, which includes a letter of credit sub-limitof $35.0 million. The Company and its following subsidiaries are guarantorsunder the new credit facility: Westaff (USA), Inc., WestaffSupport, Inc., and MediaWorld International (together with the Company,collectively, the “Guarantors”). The maximum borrowing availability under theFinancing Agreement is based upon a percentage of certain eligible billed andunbilled accounts receivables. Borrowings under the Financing Agreement bearinterest, at the Company’s election, at either U.S. Bank’s prime rate or atLIBOR plus an applicable LIBOR rate margin ranging from 1.25% to 2.00%. Adefault rate would apply on all loan obligations in the event of default underthe Credit Documents, at a rate per annum of 2.0% above the applicable interestrate. Interest is payable on a monthly basis. The credit obligations under thefinancing agreement are secured by a first priority security interest in theassets of the Borrower, the Company and the other Guarantors, with certainexceptions set forth in the Financing Agreement and the other Credit Documents.The proceeds of the extensions of credit under the Financing Agreement may beused by the Borrower for any lawful purpose.

 

The financial covenants under the Financing Agreementinclude a Fixed Charge Coverage Ratio (as defined in the Financing Agreement)requirement, measured as of the end of each fiscal quarter, and a minimumliquidity (as defined in the Financing Agreement) measured until the Company’sfinancial statements for the second fiscal quarter are delivered to U.S. Bank.

 

On May 23, 2008, the Company received a notice ofdefault from U.S. Bank stating that (1) an Event of Default (as defined inthe Financing Agreement) had occurred due to the Borrower’s failure to achievea Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for thefiscal period ended April 19, 2008; and (2) as a result of the Eventof Default, effective May 21, 2008, U.S. Bank increased the rate ofinterest to the default rate of interest on the borrowings outstanding underthe Financing Agreement.  Unless waivedby U.S. Bank, the Event of Default gives U.S. Bank the right to prohibitadditional borrowing under the Financing Agreement, accelerate the Company’sindebtedness thereunder, and take other actions as provided for in the FinancingAgreement.

 

The Company is currently in discussions with U.S. Bankin order to seek a waiver or forbearance of the Event of Default.  There can be no assurance that the Companywill be able to obtain a waiver or forbearance or that such a waiver orforbearance would be on terms acceptable to the Company.  If the Company is unable to obtain a waiverfrom U.S. Bank and the Bank elects to pursue remedies under the FinancingAgreement, such as limiting or terminating the Company’s right to borrow underthe agreement, it could have a material adverse effect on the Company’sbusiness, financial condition, results of operations and cash flows.

 

In addition, the Company’s Australian subsidiarymaintains a A$12 million Australian dollar facility agreement (the “A$ FacilityAgreement”) with GE Capital, as primary agent, expiring in May 2009.  The agreement includes a letter of creditsub-facility.

 

During the second quarter, the Company recorded acharge to earnings for the previously capitalized costs associated with theformer credit facility of approximately $0.4 million.

 

**9.****             ****Related Party Transactions**

 

The Company has anunsecured subordinated promissory note in an amount of $2.0 million, datedMay 17, 2002 and payable to the former Chairman of the Board of Directors.The note, matured on August 18, 2007, is now past due and has an interestrate equal to an indexed rate as calculated under the Company’s creditfacilities plus seven percent, compounded monthly and payable 60 calendar daysafter the end of each of the Company’s fiscal quarters. The effective interestrate on April 19, 2008 was 12.25%. Payment of interest is contingent onthe Company meeting minimum availability requirements under its creditfacilities. Additionally, payments of principal or interest are prohibited inthe event of any default under the credit facilities.  Following our default at the end of the thirdquarter of fiscal 2007, the former lender exercised their right to prohibitrepayment of the note at its maturity. U.S. Bank has also exercised their right to prohibit repayment of thenote during the second quarter of fiscal 2008. Accrued and unpaid interest at April 19, 2008 was $234,000,included under Accrued Expenses.

 

11

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**10.****      ****Commitments and Contingencies**

 

In the ordinary course of its business, the Company is periodicallythreatened with or named as a defendant in various lawsuits, including, amongother, litigation brought by former franchisees or licensees, and administrativeclaims and lawsuits brought by employees or former employees, etc. The Companyinsures itself to cover principal risks like workers’ compensation, generalliability, automobile liability, property damage, alternative staffing errorsand omissions, fiduciary liability and fidelity losses.

 

During the fourth quarter of fiscal 2005, the Company was notified bythe California Employment Development Department (“EDD”) that its domesticoperating subsidiaries unemployment tax rates would be increased retroactivelyfor both calendar years 2005 and 2004, which would result in additionalunemployment taxes of approximately $0.9 million together with interest atapplicable statutory rates. Management believes that it has properly calculatedits unemployment insurance tax and is in compliance with all applicable lawsand regulations. The Company has timely appealed the ruling by the EDD and isworking with outside counsel to resolve this matter.  A hearing officer has been assigned to thematter and a confirmation of a hearing date from the EDD is awaited.  Management believes the resolution of thismatter will not have a material adverse effect on the Company’s financialstatements.

 

**11.****      ****Workers’ Compensation**

 

Domestically, the Company is responsible for and pays workers’compensation costs for its temporary and regular employees and is self-insuredfor the deductible amount related to workers’ compensation claims. The Companyaccrues the estimated costs of workers’ compensation claims based upon theexpected loss rates within the various temporary employment categories providedby the Company.  At least annually, theCompany obtains an independent actuarial valuation of the estimated costs ofclaims reported but not settled, and claims incurred but not reported (IBNR),and adjusts the accruals based on the results of the valuations.  The following summarizes the workers’compensation liability as of April 19, 2008 and November 3, 2007:

 
| ** **                            | ** ** | **April 19, 2008** | ** ** | **November 3, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **(In Millions)**       | ** ** |
| Current portion                       |       | $                            | 9.4        |                           | $          | 9.9 |   |
| Long-term portion                     |       | 15.4                         |       | 16.0                           |       |
| Total Liabilities                     |       | $                            | 24.8       |                           | $          | 25.9 |   |
|                                  |       |                         |       |                           |       |
| Self-insurance deductible (per claim) |       | $                            | 0.75       |                           | $          | 0.50 |   |
| Letters of Credit (1)                 |       | $                            | 27.3       |                           | $          | 28.4 |   |

 

As of April 19, 2008 andNovember 3, 2007, the current liabilities include $0.2 and $0.5 millionrespectively, in workers compensation expense related to Australia.

 

----

(1)Theinsurance carrier requires the Company to collateralize its recordedobligations through the use of irrevocable letters of credit, surety bonds orcash.

 

**12.  Stock-Based Compensation**

 

*Stock Incentive Plan and Employee Stock Purchase Plan*.  The Company has a stock incentiveplan and an Employee Stock Purchase Plan. Please refer to Note 14 of the Company’s financial statements, which areincluded in the Company’s Annual Report on Form 10-K for the year ended November 3,2007, for additional information related to these stock-based compensationplans.

 

*Stock-based compensation*.  Effective with the beginning of the first quarter of fiscal2006, the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004) Share-Based Payment (“SFAS 123(R)”) using the modifiedprospective method of adoption.

 

12

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Forthe 12-week and 24-week periods ended April 19, 2008 and April 14,2007, the Company recognized stock-based compensation expense as follows:

 
| ** **               | ** ** | **12 Weeks Ended** | ** ** | **24 Weeks Ended** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **April 19,**           | ** ** | **April 14,**           | ** ** | **April 19,** | ** ** | **April 14,** | ** ** |
| ** **               | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **               | ** ** | **(In thousands)**      | ** ** |
| Stock-based compensation |       | $                            | (87        | )                            | $          | 97 |   | $ | 13 |   | $ | 139 |   |
|                          |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

Stock-basedcompensation expense is included in selling and administrative expenses.

 

Thedetermination of the fair value of stock options, using the Black-Scholesmodel, is affected by the Company’s stock price as well as assumptions as tothe Company’s expected stock price volatility over the term of the awards,actual and projected employee stock option exercise behavior, the risk-freeinterest rate, and expected dividends.

 

The Company estimates the volatility of the common stock by usinghistorical volatility over a period equal to the award’s expected term. Therisk-free interest rates that are used in the valuation models are based uponyields of the U.S. Treasury constant maturities at the time of grant having aterm that approximates the expected life of the options. Dividend yield is zeroas the Company did not declare or pay dividends during fiscal 2008 or fiscal2007, and its current credit facilities prohibit payment of dividends.  The Company does not currently have plans todeclare dividends in future years.

 

SFAS123(R) requires companies to estimate future expected forfeitures at thedate of grant and revise those estimates in subsequent periods if actualforfeitures differ from those estimates. In previous years, the Company hadrecognized the impact of forfeitures as they occurred. Under SFAS 123(R), theCompany uses historical data to estimate pre-vesting forfeiture rates indetermining the amount of stock-based compensation expense to recognize. Duringthe 12 weeks ended April 19, 2008, the Company revised its forfeiture ratefrom 5.0% to 21.9% by analyzing historic forfeiture rates and reviewingoutstanding unvested option grants.  The change in forfeiture rateresulted in an adjustment to reduce $99,000 of stock-based compensationexpense.

 

Allstock-based compensation awards are amortized on a straight-line basis over therequisite service periods of the awards.

 

**13.****       (Loss)earnings per share**

 

Basic loss per share of common stock is computed as loss divided by theweighted average number of common shares outstanding for the period. Dilutedloss per share of common stock is computed as loss divided by the weightedaverage number of common shares and potentially dilutive common stockequivalents outstanding during the period. Diluted loss per share reflects thepotential dilution that could occur from common stock issuances as a result ofstock option exercises. The following table sets forth the computationof basic and diluted (loss) earnings per share:

 
| ** **                                                                  | ** ** | **12 Weeks Ended**                                          | ** ** | **24 Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **April 19,**                                                    | ** ** | **April 14,**           | ** ** | **April 19,** | ** ** | **April 14,** | ** ** |
| ** **                                                                  | ** ** | **2008**                                                              | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
| ** **                                                                  | ** ** | ** **                                                            | ** ** |
| (Loss) income from continuing operations                                    |       | $                                                                     | (25,692    | )                            | $          | (490 | ) | $ | (27,130 | ) | $ | 29 |   |
| (Loss) income from discontinued operations,  net of tax                     |       | 479                                                                   |       | (174                         | )          | 23 |   | (290 | ) |
| Net (loss)                                                                  |       | $                                                                     | (25,213    | )                            | $          | (664 | ) | $ | (27,107 | ) | $ | (261 | ) |
| Denominator for basic and diluted loss per  share - weighted average shares |       | 16,697                                                                |       | 16,608                       |       | 16,697 |   | 16,599 |   |
|                                                                        |       |                                                                  |       |                         |       |   |   |   |   |
| Basic and Diluted earnings per share                                        |       |                                                                  |       |                         |       |   |   |   |   |
| Net income (loss) from continuing  operations                               |       | $                                                                     | (1.54      | )                            | $          | (0.03 | ) | $ | (1.62 | ) | $ | 0.00 |   |
| Net income (loss) from discontinued  operations                             |       | 0.03                                                                  |       | (0.01                        | )          | 0.00 |   | (0.02 | ) |
| Loss per share                                                              |       |                                                                  |       |                         |       |   |   |   |   |
| Basic and diluted                                                           |       | $                                                                     | (1.51      | )                            | $          | (0.04 | ) | $ | (1.62 | ) | $ | (0.02 | ) |
| Anti-dilutive weighted shares excluded from  diluted earnings per share     |       | 397                                                                   |       | 125                          |       | 409 |   | 259 |   |

 

13

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**14.****      ****Company Restructuring**

 

In the third quarter of fiscal 2007, the Company approved arestructuring plan to, among other things, reduce its workforce and consolidatefacilities. Restructuring charges have been recorded to align the Company’scost structure 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 reductionof our workforce; and (ii) lease termination costs and costs associatedwith permanently vacating certain facilities.

 

The Company accounted for each of these costs in accordance withFASB. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” In the third quarter of fiscal 2007, the Company started a seriesof changes to its operations that management believes will significantly reduceits costs. The Company terminated 86 positions at field and corporate officesand closed 26 branch offices. The customers served by these closed offices havebeen transferred to other offices within the proximity of the closed offices.The detail is as follows:

 
| ** **                                                                      | ** ** | **24 weeks ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | **April 19, 2008** | ** ** |
| ** **                                                                      | ** ** | **(In thousands)**      | ** ** |
| ** **                                                                      | ** ** | **Facilities**               | ** ** |
| Restructuring accrual - November 3, 2007                                        |       |                         |       |
| Rent expense under non-cancellable leases reduced  by estimated sublease income |       |                         |       |
|                                                                            | $          | 1,146                        |       |
| Rents paid reduced by sublease income                                           |       | (547                         | )          |
| Restructuring benefit                                                           |       | (150                         | )          |
| Restructuring accrual - April 19, 2008                                          |       | $                            | 449        |   |

 

Duringthe 24 weeks ended April 19, 2008, the Company successfully negotiatedearly termination agreements for eight locations and entered into a subleasefor two locations, the effects of which resulted in a $150,000 reduction inaccrual.  The Company is stillresponsible for lease payments on 14 locations and is actively negotiatingearly terminations, where possible, and sublease opportunities to mitigate itsobligation.  The restructuring accrual,representing rent expense under non-cancellable leases has been reduced by thecurrent estimated future sublease income.

 

**15.****       Comprehensiveloss**

 

Comprehensive lossconsists of the following:

 
| ** **                       | ** ** | **12 Weeks Ended** | ** ** | **24 Weeks Ended** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **April 19,**           | ** ** | **April 14,**           | ** ** | **April 19,** | ** ** | **April 14,** | ** ** |
| ** **                       | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(In thousands)**      | ** ** |
| ** **                       | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Net loss                         |       | $                            | (25,213    | )                            | $          | (664 | ) | $ | (27,107 | ) | $ | (261 | ) |
| Currency translation adjustments |       | (492                         | )          | 421                          |       | (78 | ) | 868 |   |
| Comprehensive loss               |       | $                            | (25,705    | )                            | $          | (243 | ) | $ | (27,185 | ) | $ | 607 |   |

 

14

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**16.  OperatingSegments**

 

The following tablesummarizes reporting segment data:

 
| ** **                                          | ** ** | **Domestic**               | ** ** | ** **    | ** ** | **New**     | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|---------------|------------|-------------|------------|------------|------------|
| ** **                                          | ** ** | **Business Services** | ** ** | **Australia** | ** ** | **Zealand** | ** ** | **Total**  | ** ** |
| ** **                                          | ** ** | **(In thousands)**    | ** ** |
| 12 Weeks Ended April 19, 2008                       |       |                       |       |          |       |        |       |       |       |
| Revenue                                             |       | $                          | 75,245     |          | $          | 25,738      |       | $          | 1,828      |   | $ | 102,811 |   |
| Operating income (loss) from continuing  operations |       | $                          | (4,699     | )             | $          | 182         |       | $          | 34         |   | $ | (4,483 | ) |
|                                                |       |                       |       |          |       |        |       |       |       |
| 12 Weeks Ended April 14, 2007                       |       |                       |       |          |       |        |       |       |       |
| Revenue                                             |       | $                          | 98,329     |          | $          | 20,135      |       | $          | 1,650      |   | $ | 120,114 |   |
| Operating income (loss) from continuing  operations |       | $                          | (328       | )             | $          | 61          |       | $          | 4          |   | $ | (263 | ) |
|                                                |       |                       |       |          |       |        |       |       |       |
| 24 Weeks Ended April 19, 2008                       |       |                       |       |          |       |        |       |       |       |
| Revenue                                             |       | $                          | 156,292    |          | $          | 51,242      |       | $          | 3,354      |   | $ | 210,888 |   |
| Operating income (loss) from continuing  operations |       | $                          | (6,304     | )             | $          | 443         |       | $          | 56         |   | $ | (5,805 | ) |
|                                                |       |                       |       |          |       |        |       |       |       |   |   |   |   |
| 24 Weeks Ended April 14, 2007                       |       |                       |       |          |       |        |       |       |       |
| Revenue                                             |       | $                          | 195,531    |          | $          | 41,847      |       | $          | 3,423      |   | $ | 240,801 |   |
| Operating income from continuing operations         |       | $                          | 521        |          | $          | 208         |       | $          | 79         |   | $ | 808 |   |

 

**17.****      ****Recent Accounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. SFAS 157 applies under other accounting pronouncements thatrequire or permit fair value measurements, the FASB having previously concludedin those accounting pronouncements that fair value is the relevant measurementattribute. Accordingly, SFAS 157 does not require any new fair valuemeasurements. SFAS 157 is effective for fiscal years beginning after November 15,2007.  On November 14, 2007 the FASBpartially deferred the effective date of the standard for certain non-financialassets and liabilities.   In February 2008,the FASB issued Final FASB staff Position, or FSP 157-2.  The FSP which was effective upon issuance,delays the effective date of SFAS 157 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value atleast once a year, to fiscal years beginning after November 15, 2008.  The Company is currently evaluating theimpact, if any, that the adoption of SFAS No. 157 will have on itsoperating income or net earnings.

 

In February 2007, the FASB issued SFAS No. 159, “The FairValue Option for Financial Assets and Financial Liabilities.”  SFAS 159 permits companies to choose to measuremany financial instruments and certain other items at fair value. SFAS 159is effective for fiscal years beginning after November 15, 2007. Companiesare not allowed to adopt SFAS 159 on a retrospective basis unless theychoose early adoption.  The Company isevaluating the impact, if any, the adoption of SFAS 159 will have on itsoperating income or net earnings.

 

In December 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”   SFAS 141(R) requiresall business combinations completed after the effective date to be accountedfor by applying the acquisition method (previously referred to as the purchasemethod). Companies applying this method will have to identify the acquirer,determine the acquisition date and purchase price and recognize at theiracquisition-date fair values the identifiable assets acquired, liabilitiesassumed, and any non-controlling interests in the acquiree. In the case of abargain purchase the acquirer is required to reevaluate the measurements of therecognized assets and liabilities at the acquisition date and recognize a gainon that date if an excess remains. SFAS 141(R) is effective for fiscalperiods beginning after December 15, 2008. The Company is currentlyevaluating the impact of SFAS 141(R).

 

In December 2007, the FASB issued SFAS No. 160, “Non-controllingInterests in Consolidated Financial Statements” (an Amendment of ARB 51).  SFAS 160 establishes accounting and reportingstandards for the non-controlling interest in a subsidiary and for thedeconsolidation of a subsidiary. The statement requires consolidated net incometo be reported at amounts that include the amounts attributable to both theparent and the non-controlling interest. It also requires disclosure on theface of the consolidated statement of income, of the amounts of consolidatednet income attributable to the parent and to the non-controlling interest. Inaddition this statement establishes a single method of accounting for changesin a parent’s ownership 

 

15

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interest in a subsidiary that do not result in deconsolidation andrequires that a parent recognize a gain or loss in net income when a subsidiaryis deconsolidated. SFAS 160 becomes effective for fiscal periods beginningafter December 15, 2008. The Company is currently evaluating the impact ofSFAS 160.

 

**18.****      ****Subsequent Events**

 

Effective May 15, 2008, Dawn M. Jaffray and the Controller eachresigned from their respective positions as Senior Vice President and ChiefFinancial Officer and Vice President and Controller.  The Company subsequently engaged FinancialLeadership Group, LLC to provide interim senior financial personnel while theCompany completes its search for full time replacements for Ms. Jaffrayand the Controller.

 

Effective May 22, 2008, Jeffrey A. Elias resigned from hisposition as Senior Vice President, Corporate Services.  Pursuant to an agreement reached with Mr. Elias,the Company will pay Mr. Elias $125,000 spread over 26 week period andalso pay for his health insurance benefits over that period.

 

On June 6, 2008, the Company announced the appointment of MarkBierman as its Senior Vice President and Chief Information Officer.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion is intended to assist in theunderstanding and assessment of significant changes and trends related to theresults of operations and financial condition of Westaff, Inc., togetherwith its consolidated subsidiaries. This discussion and analysis should be readin conjunction with the condensed consolidated financial statements andnotes theretoincluded elsewhere in this Quarterly Report on Form 10-Q and theaudited consolidated financial statements and notes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended November 3, 2007.

 

References in this Quarterly Report on Form 10-Q to the “Company,”“Westaff,” “we,” “our,” and “us” refer to Westaff, Inc., its predecessorand their respective subsidiaries, unless the context otherwise requires.

 

### **Cautionary Statement Regarding Forward-Looking Statements**

###  

This Quarterly Report on Form 10-Q containsforward-looking statements within the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995. Except for statements that are purelyhistorical, all statements included in this Quarterly Report on Form 10-Qare forward-looking statements, and readers are cautioned not to place unduereliance on those statements. You can also identify these statements by thefact that they do not relate strictly to current facts and use words such as “will,”“anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,”“forecast,” and other words and terms of similar meaning in connection with anydiscussion of future operating or financial performance. The forward-lookingstatements include, without limitation our ability to achieve better people andprocess efficiencies as a result of changes to our operational structure, ourability to enhance the profitability of our accounts through hiringindustry-proven placement consultants, and our ability to reduce selling andadministrative costs.  These statementsare only predictions, and actual events or results may differ materially. Theforward-looking statements provide our current expectations or forecasts offuture events. These forward-looking statements are made based on informationavailable as of the date of this report and are subject to a number of risksand uncertainties that could cause the Company’s actual results and financialposition to differ materially from those expressed or implied inforward-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 uncertainties include, but are notlimited to, those discussed in Part II, Item 1A “Risk Factors” andelsewhere in this Quarterly Report on Form 10-Q. You should understandthat it is not possible to predict or identify all such factors. Consequently,you should not consider any such list to be a complete set of all potentialrisks or uncertainties faced by us.

 

The Company undertakes no obligation to publicly releasethe results of any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events, except as required by applicable laws and regulations.

 

**CompanyOverview**

 

We provide staffing services primarily in suburban andrural markets (“secondary markets”), as well as in the downtown areas ofcertain major urban centers (“primary markets”) in the United States (“US”),Australia and New Zealand through our network of Company-owned, franchise agentand licensed offices. In March 2008, the Company sold its UnitedKingdom (“UK”) subsidiary operation, as described in Note 4 to the financialstatements. Weoffer a wide range of staffing solutions, including permanent placement,replacement, supplemental and on-site temporary programs to businesses andgovernment agencies. Our primary focus is on recruiting and placingclerical/administrative and light industrial personnel.  We have 60 years of experience in thestaffing industry and, as of April 19, 2008, operated through 177 officesin 46 states and two foreign countries. As of April 19, 2008, 64% of theseoffices were Company-owned and operated and 36% were operated by franchiseagents. Our corporate headquarters provides support services to the fieldoffices, in areas such as marketing, human resources, risk management, legal,strategic sales, accounting, and information technology.

 

To complement our service offerings, which includetemporary staffing, permanent placement, temp-to-hire services, payrollservices and on-location programs; we utilize a number of tools focused onincreasing our pool of qualified candidates. Additionally, we employ a robust,targeted marketing program as well as a consultative sales process, and both ofthese tools assist in our sales efforts to new and existing customers.  Management believes all of these toolsenhance our competitive edge and position us to effectively pursue high growthmarket niches.

 

The staffing industry is highly competitive withgenerally few barriers to entry, which contributes to significant pricecompetition as competitors attempt to maintain or gain market share.  On a prospective basis, we believe our focuson increasing clerical and administrative sales, improving results fromunderperforming field offices and prudently managing costs will permit us toimprove our operating margins.

 

17

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Ourbusiness tends to be seasonal with sales for the first fiscal quarter typicallylower than other fiscal quarters due to it containing traditional holidays aswell as varying degrees of customer closures for the holiday season. Theseclosures and post-holiday season declines in business activity negativelyimpact orders received from customers, particularly in the light industrialsector. Demand for staffing services historically tends to grow during thesecond and third fiscal quarters and has historically been greatest during thefourth fiscal quarter due largely to customers’ planning and business cycles.The recent economic downturn in the first half of fiscal 2008 has negativelyimpacted this expected historical growth, reducing demand for temporaryemployees and adversely affecting our sales, particularly during the secondquarter.  We anticipate that we maycontinue to experience weaker demand for temporary employees through theremainder of fiscal 2008.

 

Domestically,payroll taxes and related benefits fluctuate with the level of payroll costs,but tend to represent a smaller percentage of revenue and payroll costs laterin our fiscal year as federal and state statutory wage limits for unemploymentare exceeded on a per employee basis. Workers’ compensation expense, which is incurred domestically and inAustralia, generally varies with both the frequency and severity of workplaceinjury claims reported during a quarter. Adverse and positive loss developmentof prior period claims during a subsequent quarter may also contribute to thevolatility in our estimated workers’ compensation expense.

 

### **CriticalAccounting Policies**

###  

Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake certain estimates and assumptions affecting the amounts and disclosuresreported within those financial statements. These estimates are evaluated on anongoing basis by management and generally affect revenue recognition, workers’compensation costs, collectibility of accounts receivable, impairment ofgoodwill and intangible assets, contingencies, litigation and income taxes.Management’s estimates and assumptions are based on historical experiences andother factors believed to be reasonable under the circumstances. Actual resultsunder circumstances and conditions different than those assumed could result indifferences from the estimated amounts in the financial statements.

 

Our critical accounting policies aredescribed in the notes to the audited consolidated financial statementsincluded in the Company’s previously-filed Annual Report on Form 10-K forthe fiscal year ended November 3, 2007. During the first quarter of fiscal year 2008, we adopted the provisionsof FIN 48 effective November 4, 2007. Please see Note 3 to the condensedconsolidated financial statements included elsewhere in this Quarterly Reporton Form 10-Q. Except for the adoption of the provisions of FIN 48, therewere no changes to these policies during the 24-week period ended April 19,2008.

 

**Executive Overview**

** **

Ourgross revenues for the 12 week period ended April 19, 2008 were $102.8million, a decline of $17.3 million from gross revenues for the same periodlast year, and gross revenues for the 24 week period ended on that date were$210.9 million, a decline of $29.9 million from the prior year.  The decline in revenues was attributable to asoftening economy during the first half of fiscal 2008, our closing of a numberof branch offices in fiscal 2007, the termination of a number of unprofitablecustomer accounts, and the disruption in billing caused by our implementationof a new Pay/Bill system during the first quarter.

 

Ourloss from continuing operations for the 12-week period ended April 19,2008 was $25.7 million compared to a loss of $0.5 million for the same periodlast year. The loss from continuing operations for the 24-week period ended April 19,2008 was $27.1 million compared to income from continuing operations of $0.03million for the same period last year.

 

Wehave made changes in our Domestic operational structure to achieve betterpeople and process efficiencies. We have developed metrics reporting which hasenhanced our ability to more quickly gain insight into performances and taketimely corrective actions.  We arecommitted to enhancing the profitability of our accounts through hiringindustry-proven placement consultants whom we expect will increase marketshare.  We have had some successes inreducing our selling and administrative costs in total, however, as a percentof total revenue we believe that there are additional opportunities forsavings.  Further, we have divestedunprofitable international subsidiaries in order to concentrate on our corebusiness.

 

OnFebruary 28, 2008, we finalized a new five-year $50.0 million creditfacility syndicated through U.S. Bank and Wells Fargo Bank.  The facility is available for generalcorporate purposes, working capital needs and acquisitions. The agreementconsists of a $50.0 million credit facility with a $35.0 million sub-limit forstand-by letters of credit.  Theborrowings are secured based upon a percentage of certain eligible billed andunbilled accounts receivables. This new facility replaced our previousrevolving credit facility with GE Capital and Bank of America, N.A.  We believe the new facility is both morefavorable in its terms and that it will provide us with the financingstructure that will meet both our short-term and long-term financial objectives.  Asof April 19, 2008, the Company was in default with its U.S. Bankcovenants.  Please see Note 8 to thecondensed consolidated financial statements included elsewhere in thisQuarterly Report on Form 10-Q.

 

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Asa result of termination of old financing facility, we have written off $0.4million of previously capitalized costs associated with the former facility inthe second quarter of fiscal 2008.

 

Earnings from discontinuedoperations include the second quarter operating results, net of tax, forWestaff U.K., which was sold on March 31, 2008.  Additionally, earnings from discontinuedoperations for the second quarter of 2008 include $1.2 million gain, net oftax, on the sale of the UK. The loss from discontinued operations totaled $0.7million for the 12 weeks ended April 19, 2008 and a loss of $0.3 millionfor the 12 weeks ended April 14, 2007.

 

**GoingConcern and Credit Agreements**

 

TheCompany has incurred operating losses and negative operating cash flow sincethe second quarter of fiscal 2007, offset by a slight operating income in thefourth quarter of fiscal 2007.  TheCompany may incur additional losses in the future, particularly because ofcurrent soft economic conditions.

 

TheCompany’s operations, even if they perform in accordance with management’sexpectations, may not generate sufficient cash flow to finance the Company’soperations at this level, or to permit the Company to expand its business.  As a result the Company expects to continueto rely on borrowing to finance its operations because equity financing is notlikely to be available.

 

TheCompany has a financing agreement through its wholly owned subsidiary with U.S.Bank which provides for a five year revolving credit facility for up to $50.0million.  The Company is currently indefault under certain covenants of this financing arrangement.  While the Company is negotiating with itslenders for a waiver or forbearance under this default, there can be noassurances that a waiver or forbearance can be obtained.  If such an agreement cannot be obtained onacceptable terms, the Company may be unable to access the funds needed tosupport its liquidity needs.  In thatcase, its business and operating results would be adversely affected and theCompany might be unable to continue its operations as a going concern.

 

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**Results of Operations – 12 weeks ended April 19, 2008 and April 14,2007**

 

***Revenue***

 

Gross revenue from continuing operations declined by$17.3 million or 14.4% to $102.8 million for the 12 weeks ended April 19,2008 as compared to the same period in the prior year. Domestic revenuedeclined by $23.1 million or 23.5% to $75.2 million driven largely by a 26.1%decrease in billed hours. This decrease was a result of lower billings forseveral of our larger customers in the 12 weeks ended April 19, 2008.  Total billings for the top 20 customers inthe second fiscal quarter of 2008 declined by $3.4 million or 15.4% to $18.8million compared to the same period for fiscal 2007.  Our average bill rate on a per hour basis fortemporary services increased 3.8% in the second quarter of fiscal 2008 comparedwith the second quarter of fiscal 2007. 

 

Internationally, gross revenue increased by $5.8 millionor 26.5% to $27.6 million for the 12 weeks ended April 19, 2008 ascompared to the same period in the prior year. The increase was predominantly attributable to Australia primarilyresulting from new business totalling $3.4 million. Australia accountedfor $5.6 million of the increase and New Zealand accounted for $178,000.

 

***Costs of services and grossmargin***

 

Costs of services include hourly wages of temporaryemployees, employer payroll taxes, state unemployment and workers’ compensationcosts and other temporary employee-related costs. Costs of services fromcontinuing operations decreased $12.6 million or 12.7% to $86.5 million for the12 weeks ended April 19, 2008 as compared to the same period in the prioryear.  The larger percentage decrease ingross revenue than in direct costs caused consolidated gross margin percentageto decrease slightly to 15.8% in the 12 weeks ended April 19, 2008compared to 17.4% compared to the same period in the prior year.  Domestic gross margin decreased to 16.9% inthe 12 weeks ended April 19, 2008 compared to 18.0% in the same period inthe prior year.

 

The gross margin in Australia including permanentplacements, in local currency, decreased to 11.9% in the 12 weeks ended April 19,2008 from 14.0% in the same period in the prior year.  This decrease primarily results from adecrease in permanent placement business. The gross margin for temporary laborin Australia, in local currency, increased slightly from 10.8% in the 12 weeksended April 19, 2008 to 11.1% compared to the same period in the prioryear.

 

***Franchise agents’ share of grossprofit***

 

Franchise agents’ share of gross profit represents thenet distribution paid to franchise agents based either on a percentage of thesales or gross profit generated by the franchise agents’ operations. Franchiseagents’ share of gross profit decreased $0.2 million or 4.5% to $3.4 millionwhich was slightly less than the decline in overall franchise owned grossrevenue.  Franchisees generally receive agreater share of permanent placement revenue which declined at a lesser ratethan the overall decline in permanent placement revenue in the second quarterof fiscal 2008.  As a percentage ofconsolidated revenue, franchise agents’ share of gross profit increasedslightly from 2.9% for the fiscal 2007 quarter to 3.3% for the fiscal 2008quarter.  The increase was a result offranchisee revenue not dropping as significantly as the total decline inDomestic revenue.

 

***Selling and administrativeexpenses***

 

Selling and administrative expenses decreased $1.4million or 8.3% to $15.5 million for the 12 weeks ended April 19, 2008 ascompared to the same period in the prior year. This decrease is primarily attributable todecreased salary and related costs of $1.5 million, as a result of decreasedheadcount following the restructuring in the third quarter of fiscal 2007.  We achieved cost savings in Domesticoperations in the areas of facilities, advertising and promotion and suppliestotaling $0.7 million as we consciously looked at opportunities to reducespending in light of the significant decline in gross revenue.  In addition, we incurred lower communicationsand services costs, largely due to improvements made in our information systemsinfrastructure.   We achieved a $0.2million reduction in bad debt expense due to management closely monitoring slowpaying customers in light of the slow down in the Domestic economy andmanagement being more proactive in reserving for those amounts in the earlystages of identifying concerns.

 

Ourprofessional fees increased by $1.0 million in the second quarter of fiscal2008 over the second quarter of fiscal 2007. Several factors caused the increase including additional unanticipatedaccounting fees for our fiscal 2007 audit, together with continued costsincurred towards our required compliance with the provisions ofSarbanes-Oxley.  We also incurredsignificant post system implementation costs associated with the conversion ofour Pay-Bill system.

 

Asa percentage of revenue, selling and administrative expenses were 15.1% for the12 weeks ended April 19, 2008, compared to 14.1% for same period in theprior year. The increase as a percent of sales is primarily due to thedecreased level of sales as total selling and administrative costs declined forthe 12 weeks ended April 19, 2008 as compared to the same period in theprior year.

 

20

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***Depreciation and amortization***

 

Depreciationand amortization increased $1.1 million or 138.2% to $1.9 million for thesecond quarter of fiscal 2008, as compared to fiscal 2007.  This increase is primarily attributable to anout of period adjustment as discussed in Note 2 of $0.9 million in the secondquarter of fiscal 2008, resulting in additional depreciation that should havebeen depreciated in prior periods.  Inaddition, the increase was caused by the new Pay-Bill system implementationcosts, which were previously capitalized during pre-launch stages and now areamortized to income concurrent with the launch of the system in the firstquarter of fiscal 2008.

 

***Net interest expense***

 

Netinterest expense increased by $0.4 million or 82.2% to $0.9 million for the 12weeks ended April 19, 2008 as compared to the first 12 weeks of fiscal2007.  The increase is primarilyattributable to the early termination of our credit facility with GeneralElectric Capital Corporation inthe second quarter of fiscal 2008, resulting in additional amortization expenseof $0.4 million from the write-off of deferred debt issue costs.

 

***Income taxes***

 

Forthe 12 weeks ended April 19, 2008, we recorded a consolidated income taxexpense on continuing operations of $20.3 million on pre-tax loss of $5.3million.  The difference between thecurrent quarter tax provision of $20.3 million and the prior year quarter’s taxbenefit of $0.2 million relates primarily to the establishment of a valuation allowanceagainst a significant portion of the Company’s deferred tax assets in thequarter.  The Company recorded avaluation allowance in the current quarter due to cumulative losses in recentperiods and revised projections indicating continued losses for the remainderof fiscal 2008.  Although it is possiblethese deferred tax assets could still be realized in the future, the Companybelieves that it is more likely than not that these deferred tax assets willnot be realized in the foreseeable future.  The Company Intends to reevaluate in positionwith respect to the valuation allowance periodically.

 

***Net loss***

 

Theresult of the aforementioned items was a loss from continuing operations forthe second quarter of fiscal 2008 of $25.7 million, or $1.54 per share, ascompared with net loss of $0.5 million, or $0.03 per share for the secondquarter of fiscal 2007.

 

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**Results of Operations – 24 weeks ended April 19, 2008 and April 14,2007**

 

***Revenue***

 

Gross revenue from continuing operations declined by$29.9 million or 12.4% to $210.9 million for the 24 weeks ended April 19,2008 as compared to the same period in the prior year. Domestic revenuedeclined by $39.2 million or 20.1% to $156.3 million driven largely by a 22.3%decrease in billed hours. This decrease was a result of lower billings forseveral of our larger customers.  Totalbillings for the top 20 customers in the 24 weeks ended April 19, 2008declined by $4.6 million or 10.2% to $40.5 million compared to the same periodfor fiscal 2007.  Our average bill rateon a per hour basis for temporary services increased 3.0% in the 24 weeks endedfiscal 2008 compared with the same period in the prior year.  

 

Internationally, gross revenue increased by $9.3 millionor 20.6% to $54.6 million for the 24 week ended April 19, 2008 as comparedto the same period in the prior year.  $9.4million of this increase was attributed to Australia, offset by a $69,000decrease attributed to New Zealand.

 

***Costs of services and grossmargin***

 

Costs of services include hourly wages of temporaryemployees, employer payroll taxes, state unemployment and workers’ compensationcosts and other temporary employee-related costs. Costs of services fromcontinuing operations decreased $22.8 million or 11.4% to $176.5 million forthe 24 weeks ended April 19, 2008 as compared to the same period in theprior year.  The larger percentagedecrease in gross revenue than in direct costs caused consolidated gross marginpercentage to decrease slightly to 16.3% in the 24 weeks ended April 19,2008 from 17.2% compared to the same period in the prior year.  Domestic gross margin increased slightly to17.4% in the 24 weeks ended April 19, 2008 from 17.8% compared to the sameperiod in the prior year.

 

The gross margin in Australia, in local currency,decreased to 12.1% in the 24 weeks ended April 19, 2008 from 13.6 %compared to the same period in the prior year.

 

***Franchise agents’ share of grossprofit***

 

Franchise agents’ share of gross profit represents thenet distribution paid to franchise agents based either on a percentage of thesales or gross profit generated by the franchise agents’ operations. Franchiseagents’ share of gross profit decreased $0.3 million or 4.3% to $6.8 millionwhich was slightly greater than the decline in overall franchise owned grossrevenue.  Franchisees generally receive agreater share of permanent placement revenue which declined as a lesser ratethan the overall decline in permanent placement revenue in the first 24 weeksof fiscal 2008.  As a percentage ofconsolidated revenue, franchise agents’ share of gross profit increasedslightly from 2.9% for the fiscal 2007 quarters to 3.2% for the fiscal 2008quarters.  The increase was a result offranchisee revenue not dropping as significantly as the total decline inDomestic revenue.

 

***Selling and administrativeexpenses***

 

Selling and administrative expenses decreased $1.5million or 4.7% to $30.5 million for the 24 weeks ended April 19, 2008 ascompared to the same period in the prior year. This decrease is primarily attributable todecreased salary and related costs of $2.1 million, as a result of decreasedheadcount following the restructuring in the third quarter of fiscal 2007. Weexperienced a decrease of $2.2 million of salary and related costs in ourDomestic operations which were offset by an increase internationally ofapproximately $0.1 million.

 

Weachieved cost savings in Domestic operations in the areas of facilities,advertising and promotion and supplies totaling $1.2 million as we consciouslylooked at opportunities to reduce spending in light of the significant declinein gross revenue.  In addition, weincurred lower communications and services costs, largely due to improvementsmade in our information systems infrastructure.   These reductions were offset by an increasein bad debt expense from less than $0.2 million in the first 24 weeks of fiscal2007 to $0.3 million in the first 24 weeks of fiscal 2008.  Management is also closely monitoring slowpaying customers in light of the slow down in the Domestic economy and is moreproactive in reserving for those amounts in the early stages of identifyingconcerns.

 

Ourprofessional fees increased by $1.8 million in the first 24 weeks of fiscal2008 over the first 24 weeks of fiscal 2007. Several factors caused the increase including additional unanticipatedaccounting fees for our fiscal 2007 audit together with continued costsincurred towards our required compliance with the provisions ofSarbanes-Oxley.  We also incurredsignificant post system implementation costs associated with the conversion ofour Pay-Bill system which went live during the first quarter of 2008.

 

Wealso benefited from the recognition of $0.6 million of previously deferred gainin the first quarter of fiscal 2008 related as a result of the termination ofour guarantee on a bank note payable related to sale of one of our franchiselocations during fiscal 2005.

 

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Asa percentage of revenue, selling and administrative expenses were 14.45% forthe 24 weeks ended April 19, 2008, compared to 13.3% for the second fiscalquarter of 2007. The increase as a percent of sales is primarily due to thedecreased level of sales as total selling and administrative costs declined forthe 24 weeks ended April 19, 2008 as compared to the same period in theprior year.

 

***Restructuring benefit***

 

Werecorded restructuring charges in the third and fourth quarter of fiscal 2007related to reduction in force and closure of several branch offices.  In connection with the closure we recorded anexpense in the third and fourth quarter for severance payments and an estimatefor lease termination costs calculated for the remainder of the lease termreduced by an estimate for sublease income. During the 24 weeks ended April 19, 2008, the Company successfullynegotiated early termination agreements for eight locations and entered into asublease for two locations, the effects of which resulted in a $150,000reduction in accrual.  The Company isstill responsible for lease payments on 14 locations and is activelynegotiating early terminations, where possible, and sublease opportunities tomitigate its obligation.  Therestructuring accrual, representing rent expense under non-cancellable leaseshas been reduced by the current estimated future sublease income.

 

***Depreciation and amortization***

 

Depreciationand amortization increased $1.5 million or 89.4% to $3.1 million for the 24 weeks ended April 19, 2008 ascompared to the same period in the prior year.  This increase is primarily attributable to anout of period adjustment as discussed in Note 2 of $0.9 million in the secondquarter of fiscal 2008, resulting in additional depreciation that should havebeen depreciated in prior periods.  Inaddition, the increase was caused by the new Pay-Bill system implementationcosts, which were previously capitalized during pre-launch stages and now areamortized to income concurrent with the launch of the system in the firstquarter of fiscal 2008.

 

***Net interest expense***

 

Netinterest expense increased by $0.6 million or 58.7% to $1.6 million for thefirst 24 weeks of fiscal 2008 as compared to the first 24 weeks of fiscal2007.  The increase is primarilyattributable to the early termination of our credit facility with GeneralElectric Capital Corporation inthe second quarter of fiscal 2008, resulting in additional amortization expenseof $0.4 million from the write-off of deferred debt issue costs.

 

***Income taxes***

 

Forthe 24 weeks ended April 19, 2008, we recorded a consolidated income taxexpense on continuing operations of $19.7 million on a pre-tax loss of $7.4million.  The difference between the yearto date tax provision of $19.7 million and the prior period year to datebenefit of $0.2 million relates primarily to the establishment of a valuationallowance against a significant portion of the Company’s deferred tax assets inthe current quarter.  The Companyrecorded a valuation allowance in the current quarter due to cumulative lossesin recent periods and revised projections indicating continued losses for theremainder of fiscal 2008.  Although it ispossible these deferred tax assets could still be realized in the future, theCompany believes that is it more likely than not that these deferred tax assetswill not be realized in the foreseeable future. The Company intends to reevaluate its position with respect to thevaluation allowance periodically.

 

 

***Net loss***

 

Theresult of the aforementioned items was a net loss for the first 24 weeks offiscal 2008 of $27.1 million, or $1.62 per share, as compared with net loss of$0.3 million, or $0.00 per share in the same period of fiscal 2007.

 

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**Liquidity and Capital Resources**

 

We require significantamounts of working capital to operate our business and to pay expenses relatingto employment of temporary employees. Our traditional use of cash is forfinancing of accounts receivable, particularly during periods of economicupswings and growth, when sales are seasonally high. Temporary personnel aretypically paid on a weekly basis while payments from customers are generallyreceived 30 to 60 days after billing.

 

We finance our operationsprimarily through cash generated by our operating activities and borrowingsunder our revolving credit facilities. Net cash provided from operations was$2.8 million for the 24 weeks ended April 19, 2008, compared to cashprovided of $4.5 million for the same period in the prior year. This $1.7million decrease is primarily a result of a net loss of $27.1 million comparedwith a net loss of $0.3 million for the same period in the prior year, offsetby the change in deferred income taxes. Additionally, UK subsidiary operations were sold effective March 31,2008 resulting in a gain, net of tax, of $1.2 million.  Collections of accounts receivable was thelargest significant source of cash providing $14.8 million during the 24 weeksended April 19, 2008 as compared to $3.5 million for the same period inthe prior year.

 

We saw a decrease in ourdomestic days sales outstanding, measured by dividing our ending net accountsreceivable balance by total sales multiplied by the number of days in thefiscal quarter, (DSO) to 44.1 days at April 19, 2008 compared to 46.2 daysat April 14, 2007.  This decreasewas offset slightly by our Australian DSO increasing to 49.4 days at April 192008 compared to 47.7 days at April 14, 2007.  New Zealand accounts receivable are not asignificant driver of our consolidated DSO.

 

Cash provided by investingactivities was $5.0 million in the 24 weeks ended April 19, 2008, ascompared to cash used for investing activities of $1.7 million for the sameperiod in the prior year.  Capitalexpenditures, which are primarily for information system initiatives bothdomestically and internationally, represented the majority of this decrease from$1.6 million in the 24 weeks ended April 14, 2007 compared to $0.2 million inthe 24 weeks ended April 19, 2008.  Asnoted above in Discontinued Operations, effective March 31, 2008 theCompany sold its UK subsidiary operations for net proceeds of approximately$5.4 million.

 

Cash used for financingactivities was $3.6 million in 24 weeks ended April 19, 2008 compared withcash used for financing activities of $2.1 million for the same period in theprior year.  We paid down our line ofcredit by $2.5 million primarily as a result of our increase in accountsreceivable collections.

 

On February 14, 2008,Westaff (USA), Inc., a wholly-owned subsidiary of the Company (the “Borrower”),and the Company, as guarantor, entered into a financing agreement (the “FinancingAgreement”) with U.S. Bank National Association (“U.S. Bank”) and Wells FargoBank National Association (collectively the “Banks”) which provides for a newfive year $50.0 million revolving credit facility.  On February 28, 2008, the Borrower wasadvanced credit in the form of letters of credit issued and loans advanced inan aggregate amount of approximately $29.6 million under the FinancingAgreement.  The Borrower used theproceeds from the extension of credit to repay amounts outstanding under thethen-existing Multicurrency Credit Agreement, dated as of May 17, 2002,among the Company, the Borrower, certain other subsidiaries of the Company,certain lenders party thereto and General Electric Capital Corporation, asamended, to replace or cash collateralize letters of credit issued under suchMulticurrency Credit Agreement, and for working capital needs.

 

The Financing Agreementprovides for a five-year $50.0 million revolving credit facility, whichincludes a letter of credit sub-limit of $35.0 million. The Company and itsfollowing subsidiaries are guarantors under the new credit facility: Westaff(USA), Inc., Westaff Support, Inc., and MediaWorld International(together with the Company, collectively, the “Guarantors”). The maximumborrowing availability under the Financing Agreement is based upon a percentageof certain eligible billed and unbilled accounts receivables. Borrowings underthe Financing Agreement bear interest, at the Company’s election, at eitherU.S. Bank’s prime rate or at LIBOR plus an applicable LIBOR rate margin rangingfrom 1.25% to 2.00%. A default rate would apply on all loan obligations in theevent of default under the Credit Documents, at a rate per annum of 2.0% abovethe applicable interest rate. Interest is payable on a monthly basis. Thecredit obligations under the financing agreement are secured by a firstpriority security interest in the assets of the Borrower, the Company and theother Guarantors, with certain exceptions set forth in the Financing Agreementand the other Credit Documents. The proceeds of the extensions of credit underthe Financing Agreement may be used by the Borrower for any lawful purpose.

 

The financial covenantsunder the Financing Agreement include a Fixed Charge Coverage Ratio (as definedin the Financing Agreement) requirement, measured as of the end of each fiscalquarter, and a minimum liquidity (as defined in the Financing Agreement)measured until the Company’s financial statements for the second fiscal quarterare delivered to U.S. Bank.

 

On May 23, 2008, theCompany received a notice of default from U.S. Bank stating that (1) anEvent of Default (as defined in the Financing Agreement) had occurred due tothe Borrower’s failure to achieve a Fixed Charge Coverage Ratio (as defined inthe Financing Agreement) for the fiscal period ended April 19, 2008; and (2) asa result of the Event of Default, effective May 21, 2008, 

 

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U.S. Bank increased the rateof interest to the default rate of interest on the borrowings outstanding underthe Financing Agreement.  Unless waivedby U.S. Bank, the Event of Default gives U.S. Bank the right to prohibitadditional borrowing under the Financing Agreement, accelerate the Company’sindebtedness thereunder, and take other actions as provided for in theFinancing Agreement.

 

The Company is currently indiscussions with U.S. Bank in order to seek a waiver or forbearance of theEvent of Default.  There can be noassurance that the Company will be able to obtain a waiver or forbearance orthat such a waiver or forbearance would be on terms acceptable to the Company.  If the Company is unable to obtain a waiverfrom U.S. Bank and the Bank elects to pursue remedies under the FinancingAgreement, such as limiting or terminating the Company’s right to borrow underthe agreement, it could have a material adverse effect on the Company’sbusiness, financial condition, results of operations and cash flows.

 

In addition, the Company’sAustralian subsidiary maintains a A$12 million Australian dollar facilityagreement (the “A$ Facility Agreement”) with GE Capital, as primary agent,expiring in May 2009.  The agreementincludes a letter of credit sub-facility.

 

During the second quarter,the Company recorded a charge to earnings for the previously capitalized costsassociated with the former credit facility of approximately $0.4 million.

 

The Company has anunsecured subordinated promissory note in an amount of $2.0 million, dated May 17,2002 and payable to the former Chairman of the Board of Directors. The note,matured on August 18, 2007, is now past due and has an interest rate equalto an indexed rate as calculated under the Company’s credit facilities plusseven percent, compounded monthly and payable 60 calendar days after the end ofeach of the Company’s fiscal quarters. The effective interest rate on April 19,2008 was 12.25%. Payment of interest is contingent on the Company meeting minimumavailability requirements under its credit facilities. Additionally, paymentsof principal or interest are prohibited in the event of any default under thecredit facilities.  Following our defaultat the end of the third quarter of fiscal 2007, the former lender exercisedtheir right to prohibit repayment of the note at its maturity.  U.S. Bank has also exercised their right toprohibit repayment of the note during the second quarter of fiscal 2008.  Accrued and unpaid interest at April 19,2008 was $234,000.

 

We work to balance ourworldwide cash needs through dividends from and loans to our internationalsubsidiaries. These loans and dividends are limited by the cash availabilityand needs of each respective subsidiary, restrictions imposed by our seniorsecured debt facilities and, in some cases, statutory regulations of thesubsidiary. The U.S. operations cannot directly draw on the excess borrowingavailability of the Australian operations; however, we may request repaymentson its intercompany loan to Australia, along with intercompany interest androyalties, although remittances from Australia may be limited by certaincovenants under the terms of the Australia credit facility. Outstandingprincipal on the intercompany loan to Australia was approximately $5.1 millionas of April 19, 2008.  An additional$1.5 million was outstanding from New Zealand to the U.S.

 

We are responsible for andpay workers’ compensation costs for our domestic temporary and regularemployees and are self-insured for the $750,000 deductible amount related toworkers’ compensation claims for fiscal 2008 claims. Typically, each policyyear the terms of the agreement with the insurance carrier are renegotiated.The insurance carrier requires us to collateralize our obligations through theuse of irrevocable standby letters of credit, surety bonds or cash.

 

For our 2008 policy yearinsurance program, we anticipate total cash premium payments of $4.2 millionwill be paid during fiscal 2008 in equal monthly installments, which commencedon November 1, 2007, as compared to $4.8 million paid during fiscal 2007.Cash payments for 2008 policy year claims will be paid directly by us up to ourdeductible which was increased from $500,000 per claim to $750,000 per claimfor fiscal 2008 claims. As of April 19, 2008, we had outstanding $27.3million of letters of credit to secure all estimated outstanding obligationsunder our workers’ compensation program for all years except 2003, which isfully funded although subject to annual retroactive premium adjustments basedon actual claims activity. We will also make ongoing cash payments for claimsfor all other open policy years (except for 2003 as noted above).

 

We calculate the estimatedliabilities associated with these programs based on our estimate of theultimate costs to settle known claims as well as claims incurred but not yetreported to us (“IBNR claims”) as of the balance sheet date. Our estimatedliabilities are not discounted and are based on information provided by ourinsurance brokers, insurers and actuary, combined with our judgment regarding anumber of assumptions and factors, including the frequency and severity ofclaims, claims development history, case jurisdiction, applicable legislationand our claims settlement practices. We maintain stop-loss coverage with thirdparty insurers to limit our total exposure for each of these programs.Significant judgment is required to estimate IBNR amounts as parties have yetto assert such claims. If actual claims trends, including the severity orfrequency of claims, differ from our estimates, our financial results could beimpacted.  We continue to evaluate otheropportunities to further strengthen our financial position. However, we believethat our current financing provides us with sufficient borrowing capacity,together with cash generated through our operating performance, to meet ourworking capital needs for the foreseeable future.  As of April 19, 2008, the Company was indefault with its U.S. Bank covenants. Please see Note 8 to the condensed consolidated financial statementsincluded elsewhere in this Quarterly Report on Form 10-Q.

 

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**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

We are exposed to certainmarket risks from transactions that are entered into during the normal courseof business. Our primary market risk exposure relates to interest rate risk. AtApril 19, 2008, our outstanding debt under variable-rate interestborrowings was approximately $6.4 million. A change of two percentage points inthe interest rates would cause a change in interest expense of approximately$0.1 million on an annual basis. Our exposure to market risk for changes ininterest rates is not significant with respect to interest income, as ourinvestment portfolio is not material to our consolidated balance sheet. Wecurrently have no plans to hold an investment portfolio that includesderivative financial instruments.

 

For the 24 weeks ended April 19, 2008,our international operations comprised 25.9% of our gross revenue and, as ofthe end of that period, 19.3% of our total assets. We are exposed to foreigncurrency risk primarily due to our investments in foreign subsidiaries.  The Company’s Australian subsidiary maintainsa A$12 million Australian dollar facility agreement, which allows ourAustralian subsidiary to borrow in local currency and partially mitigates theexchange rate risk resulting from fluctuations in foreign currency denominatednet investments in these subsidiaries in relation to the U.S. dollar. We do notcurrently hold any market risk sensitive instruments entered into for hedgingrisks related to foreign currencies. In addition, we have not entered into anytransactions with derivative financial instruments for trading purposes.

 

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|               |   | WESTAFF, INC. |
|---------------|--------|---------------|
|          |   |          |   |
|          |   |          |   |
| July  2, 2008 |   |          |   | /s/  Michael T. Willis |   |
| Date          |   |          |   | Michael  T. Willis |   |
|          |   |          | Chief Executive  Officer  and acting principal financial officer* |

 

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* Mr. Willisis also acting as the Registrant’s principal financial officer as of the dateof this filing.

 

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