##### **UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D. C.  20549**

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

| **x**                               |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934.**                                               |
|-------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                          |   | ** **                                                                                                                                  |
|                                |   | **For the quarterly period ended April 14, 2007**                                                                                           |
| ** **                          |   | ** **                                                                                                                                  |
| **o**                               |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |
| ** **                          |   | ** **                                                                                                                                  |
|                                |   | **For the transition period  from                 to** |
| ** **                          |   | ** **                                                                                                                                  |
| **Commission  file number 0-24990** |

**WESTAFF,INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                |   | **94-1266151**          |
|-------------------------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction                               |   | (I.R.S.employer         |
| of incorporation  or organization)                          |   | identification  number) |
|                                                        |   |                    |
| **298  North Wiget Lane**                                   |
| **Walnut  Creek, California 94598-2453**                    |
| (Address of  registrant’s principal executive offices) |
| **(925)  930-5300**                                         |
| (Registrant’s  telephone number)                       |

 

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

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

Large accelerated file  o  Acceleratedfiler  o  Non-acceleratedfiler  x

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

| Class                          |   | Outstanding at  May 24, 2007 |
|--------------------------------|--------|------------------------------|
| Common Stock,  $0.01 par value |   | 16,612,103  shares           |

 

 

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

**INDEX**
| ** **   | ** ** | ** **                                                                                                  | ** ** | PAGE   |
|--------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------|
| **Part I.**  | ** ** | **Financial Information**                                                                                   |       |   |
| ** **   | ** ** | ** **                                                                                                  |       |   |
| Item 1.      |       | Financial Statements  (Unaudited)                                                                           |       | 3      |
|         |       |                                                                                                        |       |   |
|         |       | Condensed  Consolidated Balance Sheets -  April 14, 2007 and October 28, 2006                               |       | 3      |
|         |       |                                                                                                        |       |   |
|         |       | Condensed Consolidated  Statements of Operations -  12 and 24 weeks ended April 14, 2007 and April 15, 2006 |       | 4      |
|         |       |                                                                                                        |       |   |
|         |       | Condensed Consolidated  Statements of Cash Flows -  24 weeks ended April 14, 2007 and April 15, 2006        |       | 5      |
|         |       |                                                                                                        |       |   |
|         |       | Notes to Condensed  Consolidated Financial Statements                                                       |       | 6      |
|         |       |                                                                                                        |       |   |
| Item 2.      |       | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                 |       | 13     |
|         |       |                                                                                                        |       |   |
| Item 3.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                 |       | 23     |
|         |       |                                                                                                        |       |   |
| Item 4.      |       | Controls and Procedures                                                                                     |       | 24     |
|         |       |                                                                                                        |       |   |
| **Part II.** | ** ** | **Other Information**                                                                                       |       | 25     |
|         |       |                                                                                                        |       |   |
| Item 1.      |       | Legal Proceedings                                                                                           |       | 25     |
|         |       |                                                                                                        |       |   |
| Item  1A.    |       | Risk  Factors                                                                                               |       | 25     |
|         |       |                                                                                                        |       |   |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                |       | 32     |
|         |       |                                                                                                        |       |   |
| Item 3.      |       | Defaults Upon  Senior Securities                                                                            |       | 32     |
|         |       |                                                                                                        |       |   |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                                        |       | 32     |
|         |       |                                                                                                        |       |   |
| Item 5.      |       | Other Information                                                                                           |       | 32     |
|         |       |                                                                                                        |       |   |
| Item  6.     |       | Exhibits                                                                                                    |       | 33     |
|         |       |                                                                                                        |       |   |
| Signatures   |       | 34                                                                                                          |

 

----

**Partl.  Financial Information**

**Item1.  Financial Statements**

**Westaff, Inc.**

**CondensedConsolidated Balance Sheets (Unaudited)**
| ** **                                                                                                                                                     | ** ** | **April 14,**                  | ** ** | **October 28,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2007**                            | ** ** | **2006**             | ** ** |
| ** **                                                                                                                                                     | ** ** | **(In thousands, except** | ** ** |
| ** **                                                                                                                                                     | ** ** | **per share amounts)**    | ** ** |
| **ASSETS**                                                                                                                                                     | ** ** | ** **                          | ** ** | ** **           | ** ** |
| Current assets:                                                                                                                                                |       |                                |       |                 |       |
| Cash and cash  equivalents                                                                                                                                     |       | $                                   | 4,346      |                 | $          | 3,545 |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $876 and $811                                                                              |       | 72,921                              |       | 76,267               |       |
| Deferred income  taxes                                                                                                                                         |       | 6,084                               |       | 5,834                |       |
| Prepaid expenses                                                                                                                                               |       | 4,675                               |       | 4,732                |       |
| Other current  assets                                                                                                                                          |       | 2,818                               |       | 4,694                |       |
| Total current  assets                                                                                                                                          |       | 90,844                              |       | 95,072               |       |
|                                                                                                                                                           |       |                                |       |                 |       |
| Property and equipment,  net                                                                                                                                   |       | 15,054                              |       | 15,046               |       |
| Deferred income taxes,  net of current                                                                                                                         |       | 12,456                              |       | 12,404               |       |
| Goodwill                                                                                                                                                       |       | 12,481                              |       | 12,367               |       |
| Intangible assets                                                                                                                                              |       | 3,416                               |       | 3,425                |       |
| Other long-term assets                                                                                                                                         |       | 1,055                               |       | 951                  |       |
| Total Assets                                                                                                                                                   |       | $                                   | 135,306    |                 | $          | 139,265 |   |
|                                                                                                                                                           |       |                                |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                 | ** ** | ** **                          | ** ** | ** **           | ** ** |
| Current liabilities:                                                                                                                                           |       |                                |       |                 |       |
| Borrowing under  revolving credit facilities                                                                                                                   |       | $                                   | 3,048      |                 | $          | 4,790 |   |
| Current portion  of capital lease obligations                                                                                                                  |       | 371                                 |       | 345                  |       |
| Note payable to  related party                                                                                                                                 |       | 2,000                               |       | 2,000                |       |
| Accounts payable                                                                                                                                               |       | 4,397                               |       | 5,245                |       |
| Accrued expenses                                                                                                                                               |       | 37,938                              |       | 39,695               |       |
| Income taxes  payable                                                                                                                                          |       | 818                                 |       | 1,105                |       |
| Total current  liabilities                                                                                                                                     |       | 48,572                              |       | 53,180               |       |
|                                                                                                                                                           |       |                                |       |                 |       |
| Long-term capital lease  obligations                                                                                                                           |       | 654                                 |       | 833                  |       |
| Other long-term  liabilities                                                                                                                                   |       | 19,137                              |       | 19,243               |       |
| Total  Liabilities                                                                                                                                             |       | 68,363                              |       | 73,256               |       |
|                                                                                                                                                           |       |                                |       |                 |       |
| Commitments and  contingencies                                                                                                                                 |       |                                |       |                 |       |
|                                                                                                                                                           |       |                                |       |                 |       |
| Stockholders’ equity:                                                                                                                                     |       |                                |       |                 |       |
| Preferred stock,  $0.01 par value; authorized and unissued: 1,000,000 shares                                                                                   |       | —                              |       | —               |       |
| Common stock, $0.01 par  value; authorized: 25,000,000 shares; issued and outstanding: 16,612,103  shares at April 14, 2007 and 16,561,520 at October 28, 2006 |       | 166                                 |       | 166                  |       |
| Additional  paid-in capital                                                                                                                                    |       | 38,944                              |       | 38,617               |       |
| Retained earnings                                                                                                                                              |       | 27,009                              |       | 27,270               |       |
| Accumulated  other comprehensive income (loss)                                                                                                                 |       | 824                                 |       | (44                  | )          |
| Total  stockholders’ equity                                                                                                                               |       | 66,943                              |       | 66,009               |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                               |       | $                                   | 135,306    |                 | $          | 139,265 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

3

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**Westaff, Inc.**

**CondensedConsolidated Statements of Operations (Unaudited)**
| ** **                                               | ** ** | **12 Weeks Ended**                 | ** ** | **24 Weeks Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **April 14,**                           | ** ** | **April 15,**           | ** ** | **April 14,** | ** ** | **April 15,** | ** ** |
| ** **                                               | ** ** | **2007**                                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Revenue                                                  |       | $                                            | 129,829    |                         | $          | 138,635 |   | $ | 259,779 |   | $ | 277,236 |   |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Costs of  services                                       |       | 106,481                                      |       | 114,559                      |       | 213,513 |   | 229,922 |   |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Gross profit                                             |       | 23,348                                       |       | 24,076                       |       | 46,266 |   | 47,314 |   |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Franchise agents’  share of gross profit            |       | 3,518                                        |       | 4,006                        |       | 7,058 |   | 8,339 |   |
| Selling and  administrative expenses                     |       | 19,676                                       |       | 19,043                       |       | 37,486 |   | 37,000 |   |
| Depreciation and  amortization                           |       | 879                                          |       | 1,174                        |       | 1,794 |   | 2,344 |   |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Operating loss                                           |       | (725                                         | )          | (147                         | )          | (72 | ) | (369 | ) |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Interest expense                                         |       | 268                                          |       | 248                          |       | 587 |   | 557 |   |
| Interest income                                          |       | (60                                          | )          | (31                          | )          | (95 | ) | (49 | ) |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Loss before  income taxes                                |       | (933                                         | )          | (364                         | )          | (564 | ) | (877 | ) |
| Income tax  benefit                                      |       | (269                                         | )          | (98                          | )          | (303 | ) | (215 | ) |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Net loss                                                 |       | $                                            | (664       | )                            | $          | (266 | ) | $ | (261 | ) | $ | (662 | ) |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Loss per share:                                          |       |                                         |       |                         |       |   |   |   |   |
| Basic and diluted                                        |       | $                                            | (0.04      | )                            | $          | (0.02 | ) | $ | (0.02 | ) | $ | (0.04 | ) |
|                                                     |       |                                         |       |                         |       |   |   |   |   |
| Weighted average shares  outstanding - basic and diluted |       | 16,608                                       |       | 16,394                       |       | 16,599 |   | 16,386 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

4

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**Westaff, Inc.**

**CondensedConsolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                       | ** ** | **24 Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                       | ** ** | **April 14,**           | ** ** | **April 15,** | ** ** |
| ** **                                                                       | ** ** | **2007**                     | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**      | ** ** |
| **Cash  flows from operating activities**                                        | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                            | (261       | ) | $ | (662 | ) |
| Adjustments to reconcile net loss to net cash provided  by operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                    |       | 1,794                        |       | 2,344 |   |
| Stock-based compensation                                                         |       | 139                          |       | 136 |   |
| Tax benefits from employee stock plans                                           |       | 12                           |       | — |   |
| Provision for losses on doubtful accounts                                        |       | 173                          |       | 262 |   |
| Amortization of deferred gain on sale-leaseback                                  |       | (344                         | )          | (343 | ) |
| Amortization of debt issuance costs                                              |       | 130                          |       | 176 |   |
| Deferred income taxes                                                            |       | (258                         | )          | — |   |
| Amortization of deferred gain from sales of  affiliate operations                |       | (75                          | )          | (95 | ) |
| Loss on sale or disposal of assets                                               |       | 8                            |       | 12 |   |
| Changes in assets and liabilities:                                               |       |                         |       |   |   |
| Trade accounts receivable                                                        |       | 4,451                        |       | 12,919 |   |
| Other assets                                                                     |       | 1,928                        |       | 1,563 |   |
| Accounts payable and accrued expenses                                            |       | (3,227                       | )          | (2,930 | ) |
| Income taxes payable                                                             |       | (289                         | )          | (474 | ) |
| Other liabilities                                                                |       | 299                          |       | 37 |   |
| Net cash  provided by operating activities                                       |       | 4,480                        |       | 12,945 |   |
|                                                                             |       |                         |       |   |   |
| **Cash  flows from investing activities**                                        | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Capital expenditures                                                             |       | (1,588                       | )          | (2,859 | ) |
| Payments for the purchase of affiliate operations                                |       | (140                         | )          | (1,484 | ) |
| Proceeds from sales of affiliate operations                                      |       | 21                           |       | 22 |   |
| Other, net                                                                       |       | 16                           |       | (292 | ) |
| Net cash used in  investing activities                                           |       | (1,691                       | )          | (4,613 | ) |
|                                                                             |       |                         |       |   |   |
| **Cash  flows from financing activities**                                        | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net repayments under line of credit agreements                                   |       | (2,040                       | )          | (4,545 | ) |
| Principal payments on capital lease obligations                                  |       | (153                         | )          | (148 | ) |
| Payment of debt issuance costs                                                   |       | (65                          | )          | — |   |
| Proceeds from the issuance of common stock                                       |       | 172                          |       | 88 |   |
| Excess tax benefits from stock-based compensation                                |       | 3                            |       | — |   |
| Net cash used in  financing activities                                           |       | (2,083                       | )          | (4,605 | ) |
|                                                                             |       |                         |       |   |   |
| Effect of  exchange rate changes on cash                                         |       | 95                           |       | (59 | ) |
|                                                                             |       |                         |       |   |   |
| Net change in  cash and cash equivalents                                         |       | 801                          |       | 3,668 |   |
| Cash and cash  equivalents at beginning of period                                |       | 3,545                        |       | 3,014 |   |
| Cash and cash  equivalents at end of period                                      |       | $                            | 4,346      |   | $ | 6,682 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

5

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**Westaff, Inc.**

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

**1****      Basisof Presentation**

The accompanying condensed consolidated financialstatements of Westaff, Inc. and its domestic and foreign subsidiaries(together, the “Company”), as of April 14, 2007 and for the 12-week and 24-weekperiods ended April 14, 2007 and April 15, 2006 are unaudited.

The condensed consolidated financial statements, inthe opinion of management, reflect all adjustments, which are of a normalrecurring nature, necessary for a fair presentation of the financial position,results of operations and cash flows for the periods presented.  The condensed consolidated balance sheet asof October 28, 2006 presented herein, has been derived from the audited balancesheet included in the Company’s Annual Report on Form 10-K for the fiscal yearended October 28, 2006.

The Company’s critical accounting policies aredescribed in Item 7 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and in the notes to the consolidatedfinancial statements in the Company’s previously filed Annual Report on Form10-K for the fiscal year ended October 28, 2006. There were no changes to thesepolicies during the 24-week period ended April 14, 2007. Certain financialinformation normally included in annual financial statements prepared inaccordance with accounting principles generally accepted in the United Statesthat is not required for interim reporting purposes has been condensed oromitted. The accompanying condensed consolidated financial statements should beread in conjunction with the financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year ended October 28,2006.

The Company’s fiscal yearis a 52 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 14, 2007 are notnecessarily indicative of the results to be expected for the full fiscal yearor for any future period.

**2.**     Stock-BasedCompensation

*Stock Incentive Plan andEmployee Stock Purchase Plan*.  The Company has a stockincentive plan and an Employee Stock Purchase Plan. Please refer to Note 12 ofthe Company’s financial statements, which are included in the Company’s AnnualReport on Form 10-K for the year ended October 28, 2006, for additionalinformation related to these stock-based compensation plans.

*Stock-based compensation*.  Effective with the beginningof the first quarter of fiscal 2006, the Company adopted Statement of FinancialAccounting Standards No. 123 (revised 2004) “Share-Based Payment” (SFAS 123(R))using the modified prospective method of adoption.

For the 12-week and 24-week periods endedApril 14, 2007 and April 15, 2006, the Company recognized stock-basedcompensation expense as follows:
|                           | ** ** | **12 Weeks Ended** | ** ** | **24 Weeks Ended** | ** ** |
|---------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **April 14,**           | ** ** | **April 15,**           | ** ** | **April 14,** | ** ** | **April 15,** | ** ** |
| ** **                | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**      | ** ** |
| Stock-based  compensation |       | $                            | 97         |                         | $          | 70 |   | $ | 139 |   | $ | 136 |   |
|                           |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

6

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Stock-based compensation expense is includedin selling and administrative expenses.

The determination of the fair value of stockoptions and ESPP shares, using the Black-Scholes model, is affected by theCompany’s stock price as well as assumptions as to the Company’s expected stockprice volatility over the term of the awards, actual and projected employeestock option exercise behavior, the risk-free interest rate, and expecteddividends.

TheCompany estimates the expected term of options granted taking into accounthistorical and expected future exercise, cancellation and forfeiture behavior.The Company estimates the volatility of the common stock by using historicalvolatility over a period equal to the award’s expected term. The risk-freeinterest rates that are used in the valuation models are based upon yields of theU.S. Treasury constant maturities at the time of grant having a term thatapproximates the expected life of the options. Dividend yield is zero as we didnot declare or pay dividends during fiscal 2007 or fiscal 2006, and our currentcredit facilities prohibit payment of dividends.

SFAS No. 123(R) requirescompanies to estimate future expected forfeitures at the date of grant andrevise those estimates in subsequent periods if actual forfeitures differ fromthose estimates. In previous years, the Company had recognized the impact of forfeituresas they occurred. Now, the Company uses historical data to estimate pre-vestingforfeiture rates in determining the amount of stock-based compensation expenseto recognize. During the 12 weeks ended April 14, 2007, the Company revised itsforfeiture rate from 29% to 5% by analyzing historic forfeiture rates andreviewing outstanding unvested option grants. The change in forfeiture rate resulted in an additional $25,000 ofstock-based compensation expense.

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

The fair value of ESPP rights granted duringthe respective periods were estimated using the Black-Scholes option pricingmodel and the following weighted average assumptions:
|                                                 | ** ** | **12 Weeks Ended** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **April 14,**           | ** ** | **April 15,** | ** ** |
| **Employee Stock Purchase Plan** | ** ** | **2007**                     | ** ** | **2006** | ** ** |
|                                            |       |                         |       |   |   |
| Expected life  from grant date (years)          |       | 0.5                          |       | 0.5 |   |
| Expected  volatility                            |       | 0.40                         | %          | 0.26 | % |
| Risk-free  interest rate                        |       | 5.2                          | %          | 4.6 | % |
| Dividend yield                                  |       | None                         |       | None |   |

 

The Company did not grant any stock optionsfor the 12-week periods ending April 14, 2007 and April 15, 2006.

The total compensation cost related tononvested stock options and awards not yet recognized is currently expected tobe a combined total of approximately $0.4 million over the next 2.9 years.

*Stock option activity*. The following table summarizes stock optionactivity for the 24-weeks ended April 14, 2007:

7

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|                                          | ** ** | ** **          | ** ** | **Weighted** | ** ** | **Weighted average** | ** ** | ** **           | ** ** |
|------------------------------------------|------------|---------------------|------------|--------------|------------|---------------------------|------------|----------------------|------------|
| ** **                               | ** ** | ** **          | ** ** | **average**  | ** ** | **remaining**             | ** ** | **Aggregate**        | ** ** |
| ** **                               | ** ** | ** **          | ** ** | **exercise** | ** ** | **contractual**           | ** ** | **intrinsic**        | ** ** |
| ** **                               | ** ** | **Shares**          | ** ** | **price**    | ** ** | **term (years)**     | ** ** | **value**            | ** ** |
| ** **                               | ** ** | **(In 000's)** | ** ** | ** **   | ** ** | ** **                | ** ** | **(In '000's)** | ** ** |
| Options  outstanding at October 28, 2006 |       | 417                 |       | $            | 3.39       |                      |       |                 |       |   |
| Granted                                  |       | 20                  |       | 4.35         |       |                      |       |                 |       |
| Exercised                                |       | (37                 | )          | 3.29         |       |                      |       |                 |       |
| Cancelled                                |       | (8                  | )          | 6.69         |       |                      |       |                 |       |
| Options outstanding at  April 14, 2007   |       | 392                 |       | $            | 3.38       |                      | 6.87       |                 | $          | 877 |   |
|                                          |            |                     |            |              |            |                           |            |                      |            |  |  |

 

The following table summarizes informationabout the weighted average remaining contractual life (in years) and theweighted average exercise prices for stock options both outstanding andexercisable as of April 14, 2007:
|                                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **Number of**           | ** ** | **Remaining**                | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise price range** | ** ** | **Shares**                   | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| ** **                         | ** ** | **(In 000's)**          | ** ** | ** **                   | ** ** | ** ** | ** ** | **(In 000's)** | ** ** | ** ** | ** ** |
|  $ 2.20 to $ 2.56   |       | 37                           |       | 5.50                         |       | $ | 2.39 |   | 37 |   | $ | 2.39 |   |
|  $ 3.15 to $ 3.15   |       | 94                           |       | 5.33                         |       | 3.15 |   | 94 |   | 3.15 |   |
|  $ 3.20 to $ 3.20   |       | 3                            |       | 4.11                         |       | 3.20 |   | 3 |   | 3.20 |   |
|  $ 3.22 to $ 3.22   |       | 200                          |       | 7.98                         |       | 3.22 |   | 80 |   | 3.22 |   |
|  $ 3.50 to $ 16.17  |       | 58                           |       | 6.55                         |       | 4.95 |   | 29 |   | 5.64 |   |
| Totals                             |       | 392                          |       | 6.87                         |       | $ | 3.38 |   | 243 |   | $ | 3.36 |   |

 

Net cash proceeds from the exercise of stockoptions were approximately $8,000 and $29,000 for the 12 weeks ended April 14,2007 and April 15, 2006, respectively.

*Employee stock purchase planactivity*.  Net cash proceeds from shares issued underthe Employee Stock Purchase Plan for the 12 weeks ended April 14, 2007 andApril 15, 2006, were $47,000 and $59,000, respectively.

**3.****    ****Goodwill**

**The following summarizes the change in goodwill during the periodended April 14, 2007:**
|                                         | ** ** | **Domestic**               | ** ** | ** **    | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|---------------|------------|------------|------------|
| ** **                              | ** ** | **Business Services** | ** ** | **Australia** | ** ** | **Total**  | ** ** |
| ** **                              | ** ** | **(In thousands)**    | ** ** |
| Balance at  October 28, 2006            |       | $                          | 11,369     |          | $          | 998        |       | $ | 12,367 |   |
| Effect of  foreign currency translation |       | —                     |       | 114           |       | 114        |       |
| Balance at April 14,  2007              |       | $                          | 11,369     |          | $          | 1,112      |       | $ | 12,481 |   |

 

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**The Company performs its annual impairment evaluation inthe fourth quarter of each fiscal year.**

**4.**     DiscontinuedOperations

In June 2005, the Company sold its Norway and Denmark operations toPersonalhuset AS, a recruitment and staffing company headquartered in Norway,for approximately $2.7 million. Of the total proceeds, approximately $0.3million is being held in an interest bearing escrow account as security forpotential Westaff Norway pension claims, which the Company currently estimatesto be zero. The escrowed funds, net of any claim payments, are scheduled to beremitted to the Company in June 2007.

**5.****     Workers’ Compensation**

The Company is responsible for and pays workers’ compensation costs forits temporary and regular employees and is self-insured for the deductibleamount related to workers’ compensation claims ($500,000 per claim for fiscal2007 and fiscal 2006.) The Company accrues the estimated costs of workers’compensation claims based upon the expected loss rates within the varioustemporary employment categories provided by 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, andadjusts the accruals based on the results of the valuations. As of April 14,2007 and October 28, 2006, workers’ compensation liabilities were approximately$22.4 million and $24.3 million respectively, of which $16.4 million isincluded in other long-term liabilities on each of the respective balancesheets for obligations that are not expected to be paid within one year of thebalance sheet date. The current portion of workers’ compensation liabilities isincluded in accrued expenses on the balance sheet.

Periodically, the termsof the agreement with the insurance carrier are renegotiated. The insurancecarrier requires the Company to collateralize its recorded obligations throughthe use of irrevocable letters of credit, surety bonds or cash.  At April 14, 2007, the Company had $35.3million of letters of credit securing its domestic workers’ compensationobligations.

**6.**     EarningsPer Share

The following table sets forth the computation ofbasic and diluted earnings per share:
|                                                                            | ** ** | **12 Weeks Ended**                                          | ** ** | **24 Weeks Ended** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                 | ** ** | **April 14,**                                                    | ** ** | **April 15,**           | ** ** | **April 14,** | ** ** | **April 15,** | ** ** |
| ** **                                                                 | ** ** | **2007**                                                              | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                 | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net loss                                                                   |       | $                                                                     | (664       | )                            | $          | (266 | ) | $ | (261 | ) | $ | (662 | ) |
|                                                                       |       |                                                                  |       |                         |       |   |   |   |   |
| Denominator for  basic and diluted loss per share  weighted average shares |       | 16,608                                                                |       | 16,394                       |       | 16,599 |   | 16,386 |   |
|                                                                       |       |                                                                  |       |                         |       |   |   |   |   |
| Loss per share   Basic and diluted                                         |       | $                                                                     | (0.04      | )                            | $          | (0.02 | ) | $ | (0.02 | ) | $ | (0.04 | ) |
|                                                                       |       |                                                                  |       |                         |       |   |   |   |   |
| Anti-dilutive weighted  shares excluded from diluted   earnings per share  |       | 125                                                                   |       | 354                          |       | 259 |   | 348 |   |

 

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**7.****     Comprehensive Income**

Comprehensive income consists of the following:
|                                   | ** ** | **12 Weeks Ended** | ** ** | **24 Weeks Ended** | ** ** |
|-----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **April 14,**           | ** ** | **April 15,**           | ** ** | **April 14,** | ** ** | **April 15,** | ** ** |
| ** **                        | ** ** | **2007**                     | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands)**      | ** ** |
|                              |       |                         |       |                         |       |   |   |   |   |
| Net loss                          |       | $                            | (664       | )                            | $          | (266 | ) | $ | (261 | ) | $ | (662 | ) |
| Currency  translation adjustments |       | 421                          |       | (222                         | )          | 868 |   | (282 | ) |
| Comprehensive income  (loss)      |       | $                            | (243       | )                            | $          | (488 | ) | $ | 607 |   | $ | (944 | ) |

 

**8.****     Credit Agreement**

The Company has creditfacilities with GE Capital, as primary agent, expiring in May 2009. Thefacilities comprise a five-year syndicated Multicurrency Credit Agreementconsisting of a $55 million U.S. Revolving Loan Commitment and a £2.74 millionU.K. Revolving Loan Commitment.  Inaddition, the Company’s Australian subsidiary maintains a $12 millionAustralian dollar facility agreement (the “A$ Facility Agreement”) that expiresin May 2009. Each agreement includes a letter of credit sub-facility. Lettersof credit under the agreements expire one year from date of issuance, but areautomatically renewed for one additional year unless written notice is given toor from the holder.

On January 2, 2007, theCompany and its lenders executed a Tenth Amendment to its Multicurrency CreditAgreement. This amendment reduced the interest rates within the first level ofthe pricing grid implemented with the Eighth Amendment, resets future minimumearnings before interest, taxes, depreciation and amortization (“EBITDA”)covenants and reduced some of the reporting requirements provided minimumborrowing requirements are met. Further, the amendment extended the creditfacility for one additional year to May 2009. The Company was not in compliancewith its minimum EBITDA covenant as of the end of the fiscal year 2006, and theamendment included a waiver of this covenant violation.

In addition, the Company and its lender executed anamendment to the A$ Facility Agreement on January 25, 2007, which extended theAgreement for two additional years to May 2009.

On May 24, 2007, the Companyand its lender executed an Eleventh Amendment to the Multicurrency CreditAgreement, which included a waiver of the Company’s failure to comply with theminimum EBITDA covenant as of the end of the 2nd quarter of fiscal 2007, awaiver of a change of control covenant default due to the new composition ofthe Board of Directors and a reset of all future quarterly EBITDA covenantsover the remaining life of the credit facility.

**9.****     RelatedParty Transactions**

The Company has anunsecured subordinated promissory note payable to its Chairman of the Board ofDirectors dated May 17, 2002 in the amount of $2.0 million. The note has amaturity date of August 18, 2007 and an interest rate equal to an indexed rateas calculated under the Company’s 

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credit facilities plusseven percent, compounded monthly and payable 60 calendar days after the end ofeach of the Company’s fiscal quarters. The interest rate in effect on April 14,2007 was 15.25%. The Company recorded $71,000 and $142,000 of interest expensefor the 12 and 24 weeks ended April 14, 2007, respectively. Payment of interestis contingent on the Company meeting minimum availability requirements underits credit facilities. Additionally, payments of principal or interest areprohibited in the event of any uncured default under the credit facilities.

**10.****  Operating Segments**

The following tablesummarizes reporting segment data:
| ** **                     | ** ** | **Domestic**            | ** ** | **United**  | ** ** | ** **    | ** ** | **New**     | ** ** | ** ** | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------|------------|---------------|------------|-------------|------------|------------|------------|
| ** **                     | ** ** | **Business Svcs.** | ** ** | **Kingdom** | ** ** | **Australia** | ** ** | **Zealand** | ** ** | **Total**  | ** ** |
| ** **                     | ** ** | **(In thousands)** | ** ** |
| 12 Weeks Ended  April 14, 2007 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                        |       | $                       | 98,328     |        | $          | 9,716         |       | $           | 20,135     |       | $          | 1,650 |   | $ | 129,829 |   |
| Operating income  (loss)       |       | $                       | (580       | )           | $          | (210          | )          | $           | 61         |       | $          | 4 |   | $ | (725 | ) |
|                           |       |                    |       |        |       |          |       |        |       |       |       |
| 12 Weeks Ended  April 15, 2006 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                        |       | $                       | 108,885    |        | $          | 9,004         |       | $           | 19,303     |       | $          | 1,443 |   | $ | 138,635 |   |
| Operating income  (loss)       |       | $                       | (38        | )           | $          | 21            |       | $           | (200       | )          | $          | 70 |   | $ | (147 | ) |
|                           |       |                    |       |        |       |          |       |        |       |       |       |
| 24 Weeks Ended  April 14, 2007 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                        |       | $                       | 195,531    |        | $          | 18,978        |       | $           | 41,847     |       | $          | 3,423 |   | $ | 259,779 |   |
| Operating income  (loss)       |       | $                       | 18         |        | $          | (377          | )          | $           | 208        |       | $          | 79 |   | $ | (72 | ) |
|                           |       |                    |       |        |       |          |       |        |       |       |       |
| 24 Weeks Ended  April 15, 2006 |       |                    |       |        |       |          |       |        |       |       |       |
| Revenue                        |       | $                       | 216,669    |        | $          | 17,920        |       | $           | 39,869     |       | $          | 2,778 |   | $ | 277,236 |   |
| Operating income (loss)        |       | $                       | (625       | )           | $          | 326           |       | $           | (157       | )          | $          | 87 |   | $ | (369 | ) |

 

**11.**  Commitmentsand Contingencies

In the ordinary course ofits business, the Company is periodically threatened with or named as adefendant in various lawsuits. The principal risks that the Company insuresagainst are workers’ compensation, general liability, automobile liability,property damage, alternative staffing errors and omissions, fiduciary liabilityand fidelity losses.

During the fourth quarter offiscal 2005, the Company was notified by the California Employment DevelopmentDepartment (“EDD”) that Westaff’s domestic operating subsidiaries unemploymenttax rates would be increased retroactively for both calendar years 2005 and2004, which would result in additional unemployment taxes of approximately $0.9million. The Company believes that it has properly calculated its unemploymentinsurance tax and is in compliance with all applicable laws and regulations.The Company has timely appealed the ruling by the EDD and is working with itsoutside counsel to resolve this matter. The Company believes that it has strongdefenses and legal arguments with respect to the unaccrued assessment and,accordingly, has not accrued for that portion of the assessment as of April 14,2007.

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Other than the action listedabove, the Company is not a party to any material litigation. However, fromtime to time the Company has been threatened with, or named as a defendant in,litigation brought by former franchisees or licensees, and administrativeclaims and lawsuits brought by employees or former employees. Managementbelieves the resolution of these matters will not have a material adverseeffect on the Company’s financial statements.

**12.**  RecentAccounting Pronouncements

**InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes arecognition threshold and measurement process for recording in the financialstatements uncertain tax positions taken or expected to be taken in a taxreturn in accordance with SFAS No. 109, “Accounting for Income Taxes.” Taxpositions must meet a more-likely-than-not recognition threshold at theeffective date to be recognized upon the adoption of FIN 48 and in subsequentperiods. The accounting provisions of FIN 48 will be effective for the Companybeginning in fiscal year 2008. The Company has not yet completed its evaluationof the impact of adoption on the Company’s financial position or results ofoperations.**

**13.  Subsequent Event**

**On April 30, 2007, the Company and Ms. Newman entered intoa Transition and Release Agreement (the “Newman Agreement”).  Pursuant to the terms of the NewmanAgreement, Ms. Newman resigned as the Company’s President and Chief ExecutiveOfficer and a member of the Board of Directors effective May 1, 2007. Inconnection with her resignation, Ms. Newman received a lump-sum severancepayment equal to one year of her current base salary in accordance with theterms of her employment agreement, dated March 16, 2005. The lump-sum paymentwas $450,000, less applicable withholding taxes.**

**Ms. Newman is currently serving and will continue to servein a consultant capacity to the Company until September 1, 2007. During thistransition period, Ms. Newman will continue to receive a consulting paymentequivalent to her current salary and cash allowances and the Company will paythe cost of continuing her medical insurance coverage under COBRA. Ms. Newmanwill also be eligible for an additional lump-sum payment of $200,000, lessapplicable withholding taxes, following the completion of the transition period.She will not, however, be eligible for any portion of this additional paymentif she resigns from her consulting position on or before September 1, 2007, orif the consulting arrangement is terminated by the Company for cause.**

**Upon the effectiveness of Ms. Newman’s resignation from herpositions as President, Chief Executive Officer and Board member on May 1,2007, all of her outstanding stock options dated April 7, 2005, August 15, 2000and August 14, 2002 became fully vested and exercisable and all shares ofrestricted stock that she held became fully vested in accordance with heremployment agreement. The exercise period for Ms. Newman’s vested options willexpire 90 days after her service as a consultant is terminated on September 1,2007, or upon such earlier date as may be required under the terms of theapplicable plan(s) under which the options were granted. The acceleration ofthe vesting of all outstanding stock options and restricted stock will resultin the Company accelerating the recognition of $373,000 in stock-basedcompensation expense effective May 1, 2007. This expense would have beenrecognized over the original vesting term of the respective stock options andrestricted stock.**

**The Company has agreed to reimburse Ms. Newman up to an aggregateof $10,000 for reasonable attorneys’ fees and $10,000 for reasonable accountingand tax planning costs she may incur in connection with the Newman Agreementand the transactions contemplated thereby.**

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

### **Cautionary Statement**

This Form 10-Q containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Except for the historical information containedherein, the matters discussed should be considered forward-looking statementsand readers are cautioned not to place undue reliance on those statements.These statements are only predictions, and actual events or results may differmaterially. The forward-looking statements give our current expectations orforecasts of future events. You can identify these statements by the fact thatthey do not relate strictly to current facts. They 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 any discussionof future operating or financial performance. These forward-looking statementsare made based on information available as of the date of this report and aresubject to a number of risks and uncertainties that could cause the Company’sactual results and financial position to differ materially from those expressedor implied in the forward-looking statements and to be below the expectations ofpublic market analysts and investors. Investors should bear this in mind asthey consider forward-looking statements.

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

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

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

**CompanyOverview**

We provide staffing servicesprimarily in suburban and rural markets through a network of Company-owned andfranchise agent offices in the United States, United Kingdom, Australia and NewZealand. We offer a wide range of staffing solutions, including permanentplacement, replacement and temporary staffing, primarily focused on recruitingand placing clerical/administrative and light industrial personnel. We haveover 58 years of experience in the staffing industry and annually put more than100,000 people to work through more than 200 field offices in 47 states andthree foreign countries. Our corporate headquarters provides support servicesto the field offices in areas such as marketing, human resources, riskmanagement, legal, strategic sales, accounting, and information technology.

To complement our serviceofferings, which include temporary staffing, permanent placement, temp-to-hireservices, payroll services and on-location programs; we utilize a number oftools focused on increasing our pool of qualified candidates. Additionally, weemploy a robust, targeted marketing program as well as a consultative salesprocess. Both of these tools assist in our sales efforts to new and existingcustomers. 

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Management believes all ofthese tools enhance our competitive edge and position us to effectively pursuehigh growth market niches.

The staffing industry ishighly competitive with generally few barriers to entry, which contributes tosignificant price competition as competitors attempt to maintain or gain marketshare. While the price competition continues in 2007, we have notedconsolidated margin improvements as compared to the prior year. On aprospective basis, we believe our focus on increasing permanent placementservices, increasing clerical/administrative sales, improving results fromunderperforming field offices and prudently managing costs will permit us tofurther improve our operating margins.

Itis important to note that our business tends to be seasonal with sales for thefirst fiscal quarter typically lower than other fiscal quarters due to itcontaining traditional holidays as well as customer shutdowns during theholiday season. These shutdowns and post-holiday season declines in businessactivity negatively impacts orders received from customers, particularly in thelight industrial sector. Demand for staffing services has historically tendedto grow during the second and third fiscal quarters and has been greatestduring the fourth fiscal quarter due largely to customers’ planning cycles. Furthermore,our fourth fiscal quarter consists of 16 or 17 weeks, while the first, secondand third fiscal quarters consist of 12 weeks each.

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 unemploymentand social security taxes are exceeded on a per employee basis.  Workers’ compensation expense, which isincurred domestically and in Australia, generally varies with both thefrequency and severity of workplace injury claims reported during a quarter andthe estimated future costs of such claims. Adverse and positive lossdevelopment of prior period claims during a subsequent quarter may alsocontribute to the volatility in our estimated workers’ compensation expense.

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

·      seasonality, especially in our light industrial business,

·      wage limits on statutory payroll taxes,

·      claims experience for workers’ compensation,

·      demand and competition for our services, and

·      theeffects of acquisitions.

Inaddition, our operating results have also historically tended to followseasonal sales trends with the bulk of annual operating profits falling withinthe third and fourth fiscal quarters

**Acquisitionof Company Stock**

Wewere advised at our February 28, 2007 Board meeting by our Chairman of theBoard, W. Robert Stover, that an aggregate of 7,933,396 shares (the “PurchasedShares”) of Westaff’s common stock held by Mr. Stover’s affiliates, hischildren and certain other stockholders (collectively, the “Stockholders”) weresold in a private transaction to DelStaff LLC, a Delaware limited liabilitycompany (“DelStaff”). The Board has been further advised that DelStaff hasacquired an additional 329,300 shares (the “Market Shares”) of Westaff’s commonstock on the open market. According to the Schedule 13D filed by DelStaff andcertain of its affiliates with the Securities and Exchange Commission (the “SEC”)on March 13, 2007, as amended (the “Schedule 13D”), the aggregate of8,262,696 shares acquired by DelStaff constitutes approximately 49.7% ofWestaff’s total outstanding common stock. The members of 

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DelStaffare H.I.G. Staffing, 2007, Ltd., Alarian Associates, Inc. and Michael T.Willis. The managers of DelStaff are John R. Black, Michael R. Phillips andMr. Willis.

DelStaffacquired the Purchased Shares in exchange for total consideration of$32,526,923.60, or $4.10 per share, paid in the form of:  (i) eightpercent (8%) promissory notes (the “Promissory Notes”), having an aggregateprincipal amount of $24,395,192.70 (representing 75% of the totalconsideration), executed and delivered by DelStaff in favor of the Stockholders,and (ii) cash in an aggregate amount equal to $8,131,730.90, deposited ina bank account in the name of Mr. Stover, as representative of theStockholders, with Wells Fargo Bank, N.A. (the “Deposit”).

DelStaff’spayment obligations under the Promissory Notes are guaranteed by H.I.G. CapitalPartners III, L.P. (“HIG Capital Partners”). DelStaff has a perfected first andonly lien on the Deposit and other cash collateral deposited in the accountholding the Deposit. In addition, DelStaff has agreed to pay additional cashconsideration for each Purchased Share:  (i) if during the one yearperiod following February 28, 2007, DelStaff sells all or any portion ofthe Purchased Shares for a price, after subtracting all fees, expenses andtaxes arising from such sale, in excess of $4.10 per Purchased Share (the “NetExcess Consideration”) in an amount equal to 20% of the Net ExcessConsideration for each Purchased Share, but not to exceed $0.45 per PurchasedShare (or $3,570,163.20 in the aggregate), and (ii) in an amount equal to$0.35 in cash per Purchased Share (minus any amounts paid, but including anyPurchased Shares sold, pursuant to (i) above) if on the first anniversaryof February 28, 2007, the average of the closing prices of one share ofWestaff common stock during the immediately preceding 200 consecutive tradingdays is equal to or greater than $5.25. DelStaff was not required to pay thisadditional amount in clause (ii) prior to it obtaining control of theBoard as described below.

Accordingto the Schedule 13D, an affiliate of DelStaff acquired the Market Shares (whichwere subsequently transferred to DelStaff) in open market transactions foraggregate cash consideration (including broker’s fees and commissions) of$1,814,443. According to the Schedule 13D, the Deposit and the acquisitions onthe open market were funded from the working capital of HIG Capital Partnersand its affiliates, which have in excess of $430 million in committed capitalunder management. HIG Capital Partners also indicated it has access toshort-term credit facilities. If the Promissory Notes become due and payable,the Schedule 13D stated that it was intended (as of the date of filing of theSchedule 13D) that the aggregate amount of principal and interest due thereonbe funded from the working capital of HIG Capital Partners.

Asstated in the Schedule 13D, DelStaff intends to have its director nomineesconstitute a majority of the Board. In this regard, under the purchaseagreement, as amended, that DelStaff entered into with the Stockholders,DelStaff has the right to require the Stockholders to repurchase all (but notless than all) of the shares purchased from them, in proportion to theirrespective interests therein, if all of the following (referred to herein as the“Representation Event”) does not occur on or before October 30, 2007 (assuch date may be extended as set forth in the purchase agreement):

·  Westaff mustamend its bylaws to increase the number of directors comprising the Board fromfive to nine or such larger number as may be necessary to permit DelStaff’sdirector nominees to constitute a majority of the Board (includingMr. Willis, who will be proposed for election as Chairman of the Boardfollowing the election of such nominees) and fill the newly createddirectorships with DelStaff’s nominees;

·  DelStaff’snominees must be duly elected to, and constitute a majority of, the Board; and

·  we must (ifapplicable) have filed with the SEC and delivered to our stockholders aninformation statement on Schedule 14F-1 in respect of such nomination andelection, pursuant to Section 14(f) of the Exchange Act andRule 14f-1 thereunder.

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OnApril 30, 2007 and subsequent to DelStaff’s acquisition of theaforementioned shares of our common stock, we entered into a GovernanceAgreement (the “Governance Agreement”) with DelStaff, Mr. Willis andMr. Stover. Pursuant to the terms of the Governance Agreement, the Companyand DelStaff caused their respective officers, directors and employees to:

·       amendour bylaws to expand the size of the Board from five to nine directors and inconnection therewith add one Class I directorship, two Class II directorshipsand one Class III directorship;

·       acceptthe resignation of Patricia M. Newman as Westaff’s President, Chief ExecutiveOfficer and as a Class II director;

·       causethe Board to fill the vacancies resulting from the foregoing actions withMr. Willis, John R. Black, Michael R. Phillips, Gerald E. Wedren and JohnG. Ball (each of whom are DelStaff nominees); and

·       obtainthe resignations of all of the remaining directors of Westaff who weredirectors on the date of the Governance Agreement (i.e., Janet M. Brady, JackD. Samuelson, Ronald D. Stevens and Mr. Stover), reassign the resultingvacancies to become vacancies of one Class I directorship, twoClass II directorships and one Class III directorship, andimmediately thereafter caused the Board to reappoint all of them to the Boardas directors of Westaff, such that following the reappointments the Boardconsisted of the following directors in the following classes: (i) ourClass I directors, whose terms will expire at our 2009 annual meeting ofstockholders, are Messrs. Stevens, Wedren and Ball; (ii) ourClass II directors, whose terms will expire at our 2010 annual meeting ofstockholders, are Ms. Brady and Messrs. Black and Phillips; and(iii) our Class III directors, whose terms will expire at our 2008annual meeting of stockholders, are Messrs. Stover, Willis and Samuelson.

Immediatelyfollowing the completion of the restructuring of the Board as described and asagreed upon by the parties, the Board appointed (or reappointed):(i) Mr. Stover as Chairman of the Board; (ii) Ms. Brady andMessrs. Black and Ball as members of the Compensation Committee of theBoard, with Ms. Brady serving as Chairperson thereof;(iii) Messrs. Stevens, Samuelson and Wedren as members of the AuditCommittee of the Board, with Mr. Stevens serving as Chairperson thereof;and (iv) Ms. Brady and Messrs. Black and Wedren as members ofthe Nominating and Governance Committee of the Board, with Ms. Bradyserving as Chairperson thereof.

Theparties have agreed that each director who is appointed pursuant to theGovernance Agreement will hold office until the annual meeting of Westaff’sstockholders at which the term of the class to which such director has beenappointed expires, and until his or her respective successor is elected andqualified or until his or her earlier death, resignation or removal fromoffice.

TheGovernance Agreement requires, subject to compliance with federal and statesecurities laws and applicable NASDAQ listing requirements, that we andDelStaff cause:

·       the sizeof the Board to remain at nine directors, with three Class I directors,three Class II directors and three Class III directors, and that eachsuch class of directors serve for a term of three years in accordance with ourFourth Amended and Restated Certificate of Incorporation;

·       amajority of the Board to consist of directors who are independent as defined inapplicable NASDAQ listing requirements;

·       nomineesof DelStaff to be elected to fill Board vacancies created upon the cessation ofservice of prior nominees of DelStaff, or to be nominated for election in theevent a prior nominee of DelStaff chooses to not stand for reelection, providedthat replacements of Messrs. Wedren and Ball must be independent asdefined in applicable NASDAQ listing requirements;

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·       Ms. Bradyand Messrs. Samuelson and Stevens to continue to be elected or appointedto the Board as long as they are willing to serve as directors of Westaff, andif any of them are unable to continue service on the Board for any reason,replacement directors to be determined by a majority of the remainingindependent members of the Board, in their sole discretion and in consultationwith the Nominating and Governance Committee, provided that their replacementsmust be independent as defined in applicable NASDAQ listing requirements andnot currently (or during the three years prior to the determination) anofficer, director, employee, partner or consultant of or to DelStaff,Mr. Willis or any of their respective affiliates (as such term is definedin the Governance Agreement), and provided further that the Nominating andCorporate Governance Committee will have the exclusive authority to select andapprove all director candidates that are submitted for approval in accordancewith the foregoing;

·       ifMr. Stover is unable to continue service on the Board for any reason(including due to his resignation as discussed below), a replacement directorto be determined by a majority of the independent members of the Board, intheir sole discretion and in consultation with the Nominating and GovernanceCommittee, provided that the Nominating and Corporate Governance Committee willhave the exclusive authority to select and approve all director candidates thatare submitted for approval in accordance with the foregoing; and

·       Boardcommittees to be composed of members determined in accordance with theGovernance Agreement and subject to certain independence requirements set forththerein.

Ourformer President and Chief Executive Officer, Patricia M. Newman, resigned fromher positions with Westaff on May 1, 2007. Pursuant to the terms of theGovernance Agreement, we and DelStaff caused Mr. Willis to be appointed asour Chief Executive Officer. The terms of any employment or similar arrangementwith Mr. Willis as our Chief Executive Officer will be determined by amajority of our independent directors upon recommendation of our CompensationCommittee.

Pursuantto the terms of the Governance Agreement, immediately after our special meetingof stockholders scheduled to be held on June 29, 2007, Mr. Stoverwill provide us with his resignation as Chairman of the Board, as a directorand as an employee of Westaff, and Mr. Stover and we will execute anddeliver a mutual release of claims. Immediately after Mr. Stover’sresignation, if Mr. Willis is then serving as our Chief Executive Officer,the Board (other than Mr. Willis) will make a determination regardingappointing Mr. Willis as Chairman of the Board, and if so appointedMr. Willis will serve in such capacity until his successor is elected andqualified or until his earlier death, resignation or removal. DelStaff hasagreed that the Representation Event, as it applies to DelStaff’s purchase ofWestaff common stock from the Stockholders as described above, will be deemedto occur at the earlier of (i) immediately after our special meeting ofstockholders, which is scheduled to be held on June 29, 2007, and(ii) the close of business on June 29, 2007.

Withrespect to the performance of our obligations under the Governance Agreement,and notwithstanding anything to the contrary in the Board composition andrelated requirements thereof, the Board is entitled to act in accordance withits fiduciary obligations to us and our stockholders under applicable law andis entitled to take such actions as are necessary to comply with applicablelaw; provided, however that the Board has determined that as of the date of theGovernance Agreement, the transactions contemplated thereby are in the bestinterests of our stockholders.

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Followingthe restructuring of the Board as described above, we and DelStaff have agreedto take or cause to be taken all necessary actions, including calling ourspecial meeting of stockholders scheduled to be held on June 29, 2007, toamend our certificate of incorporation to permit any stockholder thatbeneficially owns twenty percent (20%) or more of the total voting power ofWestaff’s outstanding voting securities to call a special meeting ofstockholders. We and DelStaff currently intend to submit such proposedamendment for stockholder approval at our special meeting of stockholdersscheduled to be held on June 29, 2007.

TheGovernance Agreement will terminate if and when DelStaff, Mr. Willis andtheir respective affiliates collectively cease to beneficially own securitiesrepresenting at least 20% of the outstanding voting securities of Westaff andhave filed a Schedule 13D or Schedule 13G with the SEC reporting such change.The Governance Agreement contains limited representations and warranties of eachof Westaff, DelStaff and Mr. Willis.

Theforegoing summary of the Governance Agreement is qualified in its entirety bythe full text of the Governance Agreement, a complete and accurate copy ofwhich is attached as Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the SEC on May 1, 2007.

### **Critical Accounting Policies**

Thepreparation of our financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions affecting the amounts and disclosures reportedwithin those financial statements. These estimates are evaluated on an ongoingbasis by management and generally affect revenue recognition, workers’compensation costs, collectibility of accounts receivable, impairment ofgoodwill and intangible assets, contingencies, litigation and 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 Item 7 “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and in the notes to the consolidatedfinancial statements in our previously filed Annual Report on Form 10-K for thefiscal year ended October 28, 2006. There were no changes to these policiesduring the 24-week period ended April 14, 2007.

### **Results ofOperations - 12 weeks ended April 14, 2007 and April 15, 2006**

Totalrevenue for the 12 weeks ended April 14, 2007 was $129.8 million, a decrease of6.4% or $8.8 million over the same period in the prior year. Domestic revenuedecreased by 9.7% or $10.6 million, largely due to a 12.9% decrease intemporary billed hours partially offset by a 3.6% increase in average temporarybilling rates and a 21% increase in permanent placement revenue. Our domesticrevenue decline is primarily attributable to an overall softness in thedomestic marketplace, as has also been noted in many of our competitors’quarterly reports. Additionally, we have continued to focus our sales effortson opportunities yielding a higher gross margin, which has resulted indecreased sales revenue from lower margin business. Offsetting a portion of thedomestic revenue decline was an increase in international revenue of 5.9% or$1.8 million, which was positively affected by exchange rate fluctuations inthe other countries we operate within as compared to the U.S. dollar. Inaddition, permanent placement revenue increased 15%, primarily attributable toan increased focus on permanent placement business opportunities.

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Costs of services includehourly wages of temporary employees, employer payroll taxes, state unemploymentcosts, workers’ compensation insurance and other employee-related costs.Costs of services as a percentage of revenue decreased from 82.6% in the secondquarter of fiscal 2006 to 82.0% in fiscal 2007, primarily as a result ofdecreased workers’ compensation costs, decreased state unemployment costs andincreased permanent placement revenue which results in few direct costs. Thesecost reductions served to offset a portion of the sales decline noted above andconsequently gross profitdecreased by only 3.0% or $0.7 million over the second quarter of fiscal 2006. Theresulting gross profit margin increased from 17.4% in the second quarter offiscal 2006 to 18.0% in the current quarter.

Franchise agents’ share ofgross profit represents the net distribution paid to franchise agents basedeither on a percentage of revenue or gross profit generated by the franchiseagents’ operations. As a percentage of consolidated revenue, franchise agents’share of gross profit decreased slightly, from 2.9% of revenue in the 2006fiscal quarter to 2.7% in the current year’s fiscal quarter. As compared to thesecond fiscal quarter of 2006, we have two fewer franchisees and, additionally,the existing franchisees’ gross profits have declined, both of which causedthis expense to decrease.

Selling and administrative expenses increased $0.6million, or 3.3% for the2007 fiscal quarter as compared to the 2006 quarter. The increase is primarilydue to increases in (a) recruiting costs as competition for qualified temporaryemployees has increased, (b) employee benefits due to increased healthcarecosts and claims experience, (c) professional fees, largely as a result ofnegotiating with the new significant shareholder and associates, and (d)maintenance costs largely related to our business process management, or BPM,system. Offsetting a portion of these costs was a $0.8 million decrease insalaries, wages and payroll taxes, due to headcount reductions implemented duringthe third and fourth quarters of fiscal 2006.

Depreciationand amortization decreased $0.3 million primarily as a result of certain fixedassets becoming fully depreciated by the end of fiscal 2006 and remaining inservice, so there were no depreciation costs for new assets. Further, no newBPM system modules were implemented during the quarter. Upon implementation offuture modules planned for the fourth quarter of fiscal 2007, we anticipateamortization expense will increase.

Netloss for the fiscal quarter increased to $664,000 from a $266,000 loss in thesame quarter of fiscal 2006. The tax benefit recorded in the current quarterincreased due to the current quarter’s pre-tax loss being larger than thepre-tax loss in 2006.

### **Results ofOperations - 24 weeks ended April 14, 2007 and April 15, 2006**

Totalrevenue was $259.8 million during the first 24 weeks of fiscal 2007, a decreaseof 6.3% or $17.5 million from the same period in 2006. Domestic revenuedecreased by 9.8% or $21.1 million driven largely by a 13.2% decrease in billedhours, partially offset by a 3.9% increase in average temporary billing ratesand a 21.8% increase in permanent placement revenue. Our domestic revenuedecline is primarily attributable to an overall softness in the domestic marketplace,as has also been noted in many of our competitors’ quarterly reports. Additionally,we have continued to focus our sales efforts on opportunities yielding a highergross margin, which has resulted in decreased sales revenue from lower marginbusiness. Offsetting a portion of the domestic revenue decline was an increasein international revenue of 6.1% or $3.7 million, which was positively affectedby exchange rate fluctuations in the other countries we operate within ascompared to the U.S. dollar. In addition, permanent placement revenue increased4%, primarily attributable to an increased focus on permanent placementbusiness opportunities.

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Costs of services includehourly wages of temporary employees, employer payroll taxes, state unemploymentcosts, workers’ compensation insurance and other employee-related costs.Costs of services as a percentage of revenue decreased from 82.9% in the first24 weeks of fiscal 2006 to 82.2% in the first 24 weeks of fiscal 2007,primarily as a result of decreased workers’ compensation costs, decreased stateunemployment costs and increased permanent placement revenue which results infew direct costs. These cost reductions served to offset a portion of the salesdecline noted above and consequently gross profit decreased by just 2.2% or $1.0 million over the first 24weeks of fiscal 2006. The resulting gross profit margin increased from 17.1% inthe first 24 weeks of fiscal 2006 to 17.8% in the current period.

Franchise agents’ share ofgross profit represents the net distribution paid to franchise agents basedeither on a percentage of revenue or gross profit generated by the franchiseagents’ operations. As a percentage of consolidated revenue, franchise agents’share of gross profit decreased slightly, from 3.0% of revenue in the first 24weeks of 2006 to 2.7% in the current year period. As compared to the first 24weeks of fiscal 2006, we have three fewer franchisees and, additionally, theexisting franchisees’ gross profits have declined, both of which caused thisexpense to decrease.

Selling and administrative expenses increased $0.5million, or 1.3% for thefirst 24 weeks of 2007 as compared to the first 24 weeks of 2006. The increaseis primarily due to increases in (a) recruiting costs as competition for qualifiedtemporary employees has increased, (b) employee benefits due to increasedhealthcare costs and claims experience, (c) professional fees, largely as aresult of negotiating with the new significant shareholder and associates, and(d) maintenance costs largely related to our BPM system. Offsetting a portionof these costs was a $1.1 million decrease in salaries, wages and payrolltaxes, due to headcount reductions implemented during the third and fourthquarters of fiscal 2006.

Depreciationand amortization decreased $550,000 primarily as a result of certain fixedassets becoming fully depreciated by the end of fiscal 2006 and remaining inservice, so there were no depreciation costs for new assets. Further, no newBPM system modules were implemented during the first 24 weeks of fiscal 2007. Uponimplementation of future modules, planned for the fourth quarter of fiscal2007, we anticipate amortization expense will increase.

Netloss for the first 24 weeks decreased to $261,000 from a $662,000 loss in thesame period of fiscal 2006. The tax benefit recorded in the current 24 weeksincreased due to increased workers’ opportunity tax credits earned to dateduring fiscal 2007.

**Liquidityand Capital Resources**

Werequire significant amounts of working capital to operate our business and topay expenses relating to employment of temporary employees. Our traditional useof cash is for financing of accounts receivable, particularly during periods ofeconomic upswings and growth, when sales are seasonally high. Temporarypersonnel are typically paid on a weekly basis while payments from customersare generally received 30 to 60 days after billing.

Wefinance our operations primarily through cash generated by our operatingactivities and borrowings under our revolving credit facilities. Net cashprovided by operating activities was $4.5 million for the 24 weeks ended April14, 2007, compared to $12.9 million for the 24 weeks ended April 15, 2006. This$8.4 million decrease is primarily attributable to a decrease in cash providedfrom managing our accounts receivables, which provided $4.5 million of theoperating cash flow in this quarter as compared to $12.9 million for the sameperiod of fiscal 2006. During fiscal 2006, we consciously managed receivablesto improve cash flow and as a result of those efforts, operating cash flow wasenhanced. Although we continue to manage these going forward, we believeprospective opportunities for increasing operating cash flow in this mannerwill not be as dramatic as they were during the prior year.

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Cashused for investing activities was $1.7 million for the 24 weeks ended April 14,2007, as compared to $4.6 million for the 24 weeks ended April 15, 2006.Capital expenditures, which are primarily for information system initiativesboth domestically and internationally, represented the majority of investingactivities for both periods presented. We continue to invest in enhancementsand upgrades to our computer-based technologies. During fiscal 2004, we enteredinto a license agreement for a domestic BPM system which is being implementedin three phases. The initial phase, which consisted of the human resourcessystem for regular Westaff employees, was successfully implemented inJuly 2005. The second phase, which includes the core financial systems andthe accounts receivable module, went live in the beginning of fiscal year 2006.The final phase, which will include fully integrated front office functionalityalong with payroll and billing for temporary associates, is currently scheduledto go live at the end of the fourth quarter of fiscal 2007. Our creditagreement currently allows up to a maximum of $6.0 million in capitalexpenditures for fiscal 2007.

Cashused for financing activities was $2.1 million for the 24 weeks ended April 14,2007 as compared to $4.6 million for the 24 weeks ended April 15, 2006. In bothyears, the primary cause behind this usage was repayments under our lines ofcredit. As of the end of the second quarter of fiscal 2007, the only borrowingunder our lines of credit was in Australia, and those borrowings have decreased36% during fiscal 2007.

InMay 2002, we entered into agreements with GE Capital, as primary agent, toprovide senior secured credit facilities that originally expired in May 2007.The credit facility comprised a five-year syndicated Multicurrency CreditAgreement (the “Multicurrency Credit Agreement”) consisting of a $50.0 millionU.S. Revolving Loan Commitment, a £2.74 million U.K. Revolving Loan Commitment(U.S. dollar equivalent of approximately $4.0 million at the date of theagreement), and a $5.0 million term loan, which was repaid during fiscal2003. In addition, a five-year Australian dollar facility agreement (the “A$Facility Agreement”) was executed in May 2002, consisting of an A$12.0million revolving credit facility (U.S. dollar equivalent of approximately $6.0million at the date of the A$ Facility Agreement).

InAugust 2005, the Multicurrency Credit Agreement was amended to allow anadd-back of approximately $1.0 million to the earnings before income taxes,depreciation and amortization, or EBITDA, covenant relating to separation andrestructuring costs incurred or to be incurred during fiscal 2005. Theamendment also allowed the gain from the sale of our Norway and Denmarkoperations of $1.1 million to be included in determining compliance with theEBITDA and fixed charge covenants. Additionally, the amendment increased themaximum capital expenditures allowed for fiscal 2005 from $6.0 million to $8.5million and also increased the letter of credit sub-limit from $35.0 million to$40.0 million.

InMarch 2006, we and our lenders executed an Eighth Amendment to theMulticurrency Credit Agreement. Among other things, the amendment reset minimumEBITDA covenants for fiscal 2006 and beyond, adjusted the fixed charge coverageratio for our second quarter of fiscal 2006, extended the credit facility forone additional year to May 2008 and added an additional pricing grid that willallow us to benefit from reduced interest rates and letter of credit fees uponachieving certain minimum EBITDA targets. Additionally, the amendment increasedthe maximum amount of the U.S. Revolving Loan Commitment by $5.0 million to$55.0 million and increased the letter of credit sub-limit from $40.0 millionto $45.0 million.

InJuly 2006, we and our lenders executed a Ninth Amendment to the MulticurrencyCredit Agreement solely for the purpose of determining the financial covenants.The amendment allows for a one-time add-back adjustment of approximately $0.5million to EBITDA commencing the fiscal quarter ending April 15, 2006, for theseparation and transition charges related to the termination of employment fortwo of our former executives.

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OnJanuary 2, 2007, we and our lenders executed a Tenth Amendment to ourMulticurrency Credit Agreement. Among other things, this amendment reduces theinterest rates if certain financial benchmarks are achieved and resets thefuture minimum EBITDA covenants. The amendment extended the credit facility forone additional year to May 2009. We were not in compliance with its minimumEBITDA covenant as of the end of fiscal 2006, and the amendment included awaiver of this covenant violation.

OnJanuary 25, 2007, we and our lenders executed an amendment to the A$ FacilityAgreement, which extended the agreement for two additional years to May 2009.

OnMay 24, 2007, we and our lenders executed an Eleventh Amendment to ourMulticurrency Credit Agreement, which included a waiver of our failure tocomply with the minimum EBITDA covenant as of the end of the 2nd quarter offiscal 2007, a waiver of a change of control default due to the new compositionof our Board of Directors and reset all future quarterly EBITDA covenants overthe remaining life of the credit facility.

Asof April 14, 2007, we had $3.0 million outstanding under our creditfacilities almost all of which was outstanding under the A$ Facility Agreement.We have combined available borrowing capacity under our credit facilities of$17.1 million consisting of $6.1 million for the U.S., $5.1 million for theU.K. and $5.9 million for Australia.

InFebruary 2004, we completed the sale of our former corporate headquarters’building for cash proceeds of $1.9 million. The proceeds were used to pay downoutstanding borrowings under our revolving credit facilities. We have anoutstanding $0.7 million irrevocable standby letter of credit as a securitydeposit for the December 2002 sale leaseback of the land and buildingshousing our administrative offices.

Wehave an unsecured subordinated promissory note payable to our Chairman of theBoard of Directors in the amount of $2.0 million with a maturity date ofAugust 18, 2007, and an interest rate equal to an indexed rate ascalculated under our credit facilities plus seven percent (15.25% at April 14,2007), compounded monthly and payable 60 calendar days after the end of each ofour fiscal quarters. Payment of interest is contingent on us meeting minimumavailability requirements under our credit facilities. Additionally, paymentsof principal or interest are prohibited in the event of any default under thecredit facilities. The Sixth Amendment to our Multicurrency Credit Agreementprovides for optional prepayment of the note subject to certain borrowingavailability limits on the U.S. revolving loan commitment portion of the creditfacilities.

Wework to balance our worldwide cash needs through dividends from and loans toour international subsidiaries. These loans and dividends are limited by thecash availability and needs of each respective subsidiary, restrictions imposedby our senior secured debt facilities and, in some cases, statutory regulationsof the subsidiary. The U.S. operations cannot directly draw on the excessborrowing availability of the U.K. or Australian operations; however, we mayrequest dividends from the U.K. The U.S. can also request repayments on itsintercompany loan to Australia, along with intercompany interest and royalties,although remittances from Australia may be limited by certain covenants underthe terms of the Australia credit facility. Outstanding principal on theintercompany loan to Australia was $4.5 million as of April 14, 2007.

Weare responsible for and pay workers’ compensation costs for our domestictemporary and regular employees and are self-insured for the $500,000deductible amount related to workers’ compensation claims. Typically, eachpolicy year the terms of the agreement with the insurance carrier arerenegotiated.

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Theinsurance carrier requires us to collateralize our obligations through the useof irrevocable standby letters of credit, surety bonds or cash. In April 2005,our insurance carrier reduced our collateral requirements through thecancellation of a $3.8 million surety bond thereby eliminating any remainingoutstanding surety bond. Currently, we do not believe that surety bonds will beavailable or required in the foreseeable future to secure workers’ compensationobligations.

Duringthe fourth quarter of fiscal 2005, we and our insurance carrier negotiated thereturn of $11.0 million of the fiscal 2005 cash collateral and we issued $11.0million of letters of credit in its place. During the first quarter of fiscal2006, we issued an additional $1.9 million of letters of credit in exchange for$1.2 million in cash, which represented all of the cash remaining in the 2005collateral fund.

Forour 2007 policy year insurance program, we anticipate total cash payments of$4.8 million will be paid during fiscal 2007 in equal monthly installments,which commenced on November 1, 2006. Cash payments for 2007 policy yearclaims will be paid directly by us. Through the first 24 weeks of fiscal 2007,we have made payments of $2.4 million on the 2007 policy year. As of April 14,2007, we had outstanding $35.3 million of letters of credit to secure alloutstanding obligations under our workers’ compensation program for all yearsexcept 2003, which is fully funded although subject to annual retroactivepremium adjustments based on actual claims activity. Under certain circumstancesincluding a change of ownership and or senior management, we may be required toincrease our letters of credit to $40 million. We will also make ongoing cashpayments for claims for all other open policy years (except for 2003 as notedabove).

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

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

We are exposed 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 14, 2007, our outstanding debt under variable-rate interest borrowingswas approximately $5.0 million. A change of two percentage points in theinterest rates would cause a change in interest expense of approximately$101,000 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. We currentlyhave no plans to hold an investment portfolio that includes derivativefinancial instruments.

For the first 24weeks of fiscal 2007, our international operations comprised 24.7% of ourrevenue and, as of the end of that period, 20.0% of our total assets. We areexposed to foreign currency risk primarily due to our investments in foreignsubsidiaries. Our multicurrency credit facility, which allows our Australianand United Kingdom subsidiaries to borrow in local currencies, partiallymitigates the exchange rate risk resulting from fluctuations in foreigncurrency denominated net investments in these subsidiaries in relation to theU.S. dollar. We do not currently hold any market risk sensitive instrumentsentered into for hedging risks related to foreign currencies. In addition, wehave not entered into any transactions with derivative financial instrumentsfor trading purposes.

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

The Company carried outan evaluation, under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operations of the Company’s “disclosurecontrols and procedures” (as defined under Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended). Based on this evaluation, theChief Executive Officer and Chief Financial Officer concluded that, as of April14, 2007 (the end of the period covered by this report), the Company’sdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934, as amended, is accumulated and communicated toour management, including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure, and is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms. There was no change in the Company’s internal control over financialreporting that occurred during the fiscal period ended April 14, 2007, that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal controls over financial reporting.

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### **PartII.   Other Information**

### **Item1.     Legal Proceedings**

In the ordinary course of our business, we areperiodically threatened with or named as a defendant in various lawsuits. Theprincipal risks that we insure against are workers’ compensation, general liability,automobile liability, property damage, alternative staffing errors andomissions, fiduciary liability and fidelity losses.

During the fourth quarter of fiscal 2005, we werenotified by the California Employment Development Department (“EDD”) thatWestaff’s domestic operating subsidiaries unemployment tax rates would beincreased retroactively for both calendar years 2005 and 2004, which wouldresult in additional unemployment taxes of approximately $0.9 million.Management believes that it has properly calculated its unemployment insurancetax and is in compliance with all applicable laws and regulations. We havetimely appealed the ruling by the EDD and are working with our outside counselto resolve this matter. Management believes that it has strong defenses andlegal arguments with respect to the unaccrued assessment and, accordingly, hasnot accrued for that portion of the assessment as of April 14, 2007.

Other than the action listed above, we are notcurrently a party to any material litigation. However, from time to time wehave been threatened with, or named as a defendant in litigation brought byformer franchisees or licensees, and administrative claims and lawsuits broughtby employees or former employees. Management believes the resolution of thesematters will not have a material adverse effect on our financial statements.

### **Item1A. Risk Factors**

This Form 10-Q contains forward-looking statementsconcerning our future programs, products, expenses, revenue, liquidity and cashneeds as well as our plans and strategies. These forward-looking statements arebased on current expectations and we assume no obligation to update thisinformation, except as required by applicable laws and regulations. Any one ofthe following risks could harm our operating results or financial condition andcould result in a significant decline in value of an investment in us. Further,additional risks and uncertainties that have not yet been identified or whichwe currently believe are immaterial may also harm our operating results andfinancial condition. Numerous factors could cause actual results to differsignificantly from the results described in these forward-looking statements,including the following updated risk factors.

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

According to the Schedule 13D filed by DelStaff LLC(“DelStaff”) and certain of its affiliates with the SEC on March 13, 2007, asamended, DelStaff had acquired an aggregate of 8,262,696 shares constitutingapproximately 49.7% of Westaff’s total outstanding common stock. The members ofDelStaff are H.I.G. Staffing, 2007, Ltd., Alarian Associates, Inc. and MichaelT. Willis. As the principal stockholder of Westaff, DelStaff and its affiliateshave the ability to materially influence all matters submitted to thestockholders for approval and to exert significant influence on our managementand affairs. On April 30, 2007, we entered into a Governance Agreement withDelStaff, Mr. Willis and Mr. Stover. Pursuant to the terms of the GovernanceAgreement, on May 9, 2007, we expanded the size of the Board of Directors fromfive to nine directors and appointed the following DelStaff nominees to theBoard: Michael T.

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Willis, John R. Black, Michael R. Phillips, GeraldE. Wedren and John G. Ball. DelStaff also has the ability to strongly influenceany merger, consolidation, sale of substantially all of our assets or otherstrategic decisions affecting us or the market value of the stock. Thisconcentration of stock and voting power could be used by DelStaff to delay orprevent an acquisition of Westaff or other strategic action or result instrategic decisions that could negatively impact the value and liquidity of ouroutstanding stock. Please see “Acquisition of Company Stock” under Part I, Item2 of this Quarterly Report for more information.

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

The staffing industry is highly competitive withlimited barriers to entry and continues to undergo consolidation. We compete inregional and local markets with large full service agencies, specializedtemporary and permanent placement services agencies and small local companies.While some competitors are smaller than us, they may enjoy an advantage indiscrete geographic markets because of a stronger local presence. Other competitorshave greater marketing, financial and other resources than us that, among otherthings, could enable them to attempt to maintain or increase their market shareby reducing prices. Furthermore, in past years there has been an increase inthe number of customers consolidating their staffing services purchases with asingle provider or with a small number of providers. The trend to consolidatestaffing services purchases has in some cases made it more difficult for us toobtain or retain business.

We expect the level of competition to remain high inthe future, and competitive pricing pressures will continue to make itdifficult for us to raise our prices to immediately and fully offset increasedcosts of doing business, including increased labor costs, costs for workers’compensation and, domestically, state unemployment insurance. If we are notable to effectively compete in our targeted markets, our operating margins andother financial results will be harmed and the price of our securities could decline.

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

We require significant amounts of working capital tooperate our business and to pay expenses relating to employment of temporaryemployees. Temporary personnel are generally paid on a weekly basis whilepayments from customers are generally received 30 to 60 days after billing. Asa result, we must maintain sufficient cash availability to pay temporarypersonnel prior to receiving payment from customers.

We finance our operations primarily throughborrowings under our revolving credit facilities and also through cashgenerated by our operating activities. As of April 14, 2007, our totalborrowing capacity was $17.1 million consisting of $6.1 million for thedomestic operations, $5.1 million for the United Kingdom operations and $5.9million for the Australian operations.

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

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The credit facilities contain covenants which, amongother things, require us to maintain a minimum fixed charge coverage ratio andminimum earnings before interest, taxes, depreciation and amortization, orEBITDA. At the end of fiscal 2006, the minimum EBITDA covenant increased to$13.0 million on a trailing thirteen period basis. We failed to comply withthat covenant and were required to obtain a waiver from our lenders, which wedid in conjunction with our Tenth Amendment executed January 2, 2007. On May24, 2007, we executed an Eleventh Amendment, which included a waiver of ourfailure to comply with the minimum EBITDA covenant as of the end of the 2ndquarter of fiscal 2007, a waiver of a change of control covenant default due tothe new composition of our Board of Directors and a reset of all futurequarterly EBITDA covenants over the remaining life of the credit facility.

Any future failure to comply with the covenantsunder our credit facilities could result in an event of default which, if notcured or waived, could trigger prepayment obligations. In addition, a change ofcontrol is defined as an event of default and also could trigger prepaymentobligations. If we were forced to refinance borrowings under the current facilities,there can be no assurance that such financing would be available or that suchfinancing would not have a material adverse effect on our business andfinancial condition. Even if such refinancing were available, the terms couldbe less favorable and our results of operations and financial condition couldbe adversely affected by increased costs and rates.

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

We have historically experienced periods of negativecash flow from operations and investment activities, especially during seasonalpeaks in revenue experienced in the third and fourth fiscal quarters of theyear. In addition, we are required to pledge amounts to secure letters ofcredit that collateralize certain workers’ compensation obligations, and theseamounts may increase in future periods. Any such increase in pledged amounts orsustained negative cash flows would decrease amounts available for workingcapital purposes and could have an adverse effect on our liquidity andfinancial condition.

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

We are contractually obligated to collateralize ourworkers’ compensation obligations under our workers’ compensation programthrough irrevocable letters of credit, surety bonds or cash. As of April 14,2007 our aggregate collateral requirements under these contracts have beensecured through $35.3 million of letters of credit; however, under certaincircumstances, such as an inability to maintain minimum borrowing availabilityor a change in ownership and or senior management, we could be required toincrease our letters of credit by $5 million. Further, our workers’compensation program expires November 1, 2008, and as part of the renewal,could be subject to an increase in collateral. These collateral requirementsare significant and place pressure on our liquidity and working capitalcapacity. We believe that our current sources of liquidity are adequate to satisfyour immediate needs for these obligations; however, our available sources ofcapital are limited. Depending on future changes in collateral requirements, wecould be required to seek additional sources of capital in the future, whichmay not be available on commercially reasonable terms.

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

We maintain reserves to cover our estimatedliabilities for workers’ compensation claims based upon actuarial estimates ofthe future cost of claims and related expenses which have been reported but notsettled, and that have been incurred but not yet reported. The determination ofthese reserves is based on a number of factors, including current andhistorical claims activity, medical cost trends and developments in existingclaims. Reserves do not represent an exact calculation of liability and areaffected by both internal and external events, such as adverse development onexisting claims, changes in medical costs, claims handling procedures,administrative costs, inflation, legal trends and legislative changes. Reservesare adjusted as necessary to reflect new claims and existing claims development,and such adjustments are reflected in the results of the periods in which thereserves are adjusted. While we believe our judgments and estimates areadequate, if our reserves are insufficient to cover our actual losses, anadjustment could be charged to expense that may be material to our earnings.

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

In the United States, we are responsible for and payworkers’ compensation costs for our regular and temporary employees. In recentyears, these costs have risen substantially as a result of increased claims,general economic conditions, increases in healthcare costs and governmentalregulations. In fiscal 2006, the increase in the volume of claims has fallendespite an increase in our domestic revenue, yet the increases in cost perclaim have continued. Under our workers’ compensation insurance program, wemaintain “per occurrence” insurance, which only covers claims for a particularevent above a $500,000 deductible. Our workers’ compensation insurance policyexpires November 1, 2008 and we cannot guarantee that we will be able tosuccessfully renew such policy. Further, there are covenants associated withthe continuation of the policy and there can be no guarantee that we willcontinue to meet those covenants going forward. Should our workers’compensation premium costs continue to increase in the future, there can be noassurance that we will be able to increase the fees charged to our customers tokeep pace with increased costs or if we were unable to obtain insurance onreasonable terms or forced to significantly increase our deductible per claim,our results of operations, financial condition and liquidity could be adverselyaffected.

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

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

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

We generally assume responsibility for and managethe risks associated with our payroll obligations, including liability forpayment of salaries and wages, payroll taxes as well as group health insurance.These obligations are fixed and become a liability of ours, whether or not theassociated client where these employees have been assigned makes paymentsrequired by our service agreement, which exposes us to credit risks. We attemptto mitigate this risk by billing on a frequent basis, which typically occursdaily or weekly. In addition, we establish an allowance for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired and timely payments. Further, we carefully monitor the timeliness ofour customers’ payments and impose strict credit standards. Finally, themajority of our accounts receivable is used to secure our revolving creditfacilities, which we rely on for liquidity. If we fail to adequately manage ourcredit risks associated with accounts receivable, our financial position couldbe adversely impacted.

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

Franchise agent operations comprise a significantportion of our revenue. For the first 24 weeks of 2007, 25.4% of our totalrevenue was derived from franchise agent operations. In addition, our tenlargest franchise agents for the first 24 weeks of fiscal 2007 (based on salesvolume) accounted for 16.6% of our revenue. There can be no assurances that wewill be able to attract new franchisees or that we will be able to retain ourexisting franchisees. The loss of one or more of our franchise agents and anyassociated loss of customers and sales could have a material adverse effect onour results of operations.

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

We presently have operations in the United Kingdom,Australia and New Zealand, which comprised 24.7% of our revenue during thefirst 24 weeks of fiscal 2007. Operations in foreign markets are inherentlysubject to certain risks, including in particular:

·                  different cultures and business practices,

·                  overlapping or differing tax structures,

·                  economic and political uncertainties,

·                  compliance issues associated with accountingand reporting requirements, and

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

All of our sales outside of the United States aredenominated in local currencies and, accordingly, we are subject to risksassociated with fluctuations in exchange rates, which could cause a reductionin our profits. There can be no assurance that any of these factors will nothave a material adverse effect on our business, results of operations, cashflows or financial condition.

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**The loss of any of our key personnel could harm our business.**

Our future financial performance is significantlyimpacted by our ability to attract, motivate and retain key managementpersonnel including our Chief Executive Officer and other members of the seniormanagement team. Competition for qualified management personnel is verycompetitive and in the event that we experience turnover in senior managementpositions, we cannot assure you that we will be able to recruit suitablereplacements on a timely basis. We must also successfully integrate all newmanagement and other key positions within our organization to achieve ouroperating objectives. Even if we are successful, turnover in key managementpositions could temporarily harm our financial performance and results ofoperations until the new management becomes familiar with our business.

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

We compete with other staffing services to meet ourcustomers’ needs, and we must continuously attract reliable candidates to meetthe staffing requirements of our customers. Consequently, we must continuouslyevaluate and upgrade our base of available qualified personnel to keep pacewith changing customer needs and emerging technologies. Furthermore, asubstantial number of our temporary employees during any given year willterminate their employment with us and accept regular staff employment with ourcustomers. Competition for individuals with proven skills remains intense, anddemand for these individuals is expected to remain strong for the foreseeablefuture. There can be no assurance that qualified candidates will continue to beavailable to us in sufficient numbers and on acceptable terms to us. Thefailure to identify, recruit, train and place candidates as well as retainqualified temporary employees over a long period of time could materiallyadversely affect our business.

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

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

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

In the United States, we are responsible for and payunemployment insurance premiums for our temporary and regular employees. Attimes, these costs have risen as a result of increased claims, general economicconditions and government regulations. Should these costs continue to increase,there can be no assurance that we will be able to increase the fees charged toour customers in the future to keep pace with the increased costs, and if we donot, our results of operations and liquidity could be adversely affected.

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

Our information management systems are essential fordata exchange and operational communications with branches spread across largegeographical distances. We have replaced key component hardware and softwareincluding backup systems within the past twelve months and are currentlyworking towards replacing further key components over the next twelve toeighteen months. Any interruption, impairment or loss of data integrity ormalfunction of these systems could severely impact our business, especially ourability to timely and accurately pay employees and bill customers. Further, anysignificant delay in our plans to replace the remaining key components couldadversely affect the business. Issues with either would require that we commitsignificant additional capital as well as management resources in order toresolve the interruption or delay.

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

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

·                  claims of discrimination and harassment,

·                  violations of wage and hour laws,

·                  criminal activity,

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

·                  immigration related claims.

In addition, some or all of these claims may giverise to litigation, which could be time-consuming to our management team, andtherefore, could have a negative effect on our business. In some instances, wehave agreed to indemnify our customers against some or all of these types ofliabilities. We have policies and guidelines in place to help reduce ourexposure to these risks and have purchased insurance policies against certainrisks in amounts that we currently believe to be adequate. However, there canbe no assurance that our insurance will be sufficient in amount or scope tocover these types of liabilities or that we will be able to secure insurancecoverage for such risks on affordable terms. Furthermore, there can be noassurance that we will not experience these issues in the future or that theycould have a material adverse effect on our business.

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

The average daily trading volume for our commonstock on the NASDAQ Global Market was approximately 34,000 shares from January1, 2007 through April 14, 2007. Accordingly, the market price of our commonstock is subject to significant fluctuations that have been, and may continueto be, exaggerated because an active trading market has not developed for thestock. We believe that the common stock price has also been negatively affectedby the fact that our stock is thinly traded and also due to the absence ofanalyst coverage. The lack of analyst reports about our stock may make itdifficult for potential investors to make decisions about whether to purchaseour stock and may make it less likely that investors will purchase the stock,thus further depressing the stock price. These negative factors may make itdifficult for stockholders to sell our common stock, which may result in lossesfor investors.

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

Pursuant to Section 404 of the Sarbanes-Oxley Act of2002 and current SEC regulations and proposed rules, beginning with our AnnualReport for the fiscal year ended November 1, 2008, we expect to be required tofurnish a report by our management on our internal control over financialreporting. Further, we expect that our external auditors will be required toaudit our

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internal control over financial reporting report andinclude their attestation on that report in our annual report on Form 10-Kstarting from our annual report for the 2009 fiscal year. The process of fullydocumenting and testing our internal control procedures in order to satisfythese requirements will result in increased general and administrative expensesand may shift management time and attention from profit-generating activitiesto compliance activities. Furthermore, during the course of our internalcontrol testing, we may identify deficiencies which we may not be able toremediate in time to meet the reporting deadline under Section 404. Failure toachieve and maintain an effective internal control environment or complete ourSection 404 certifications could have a material adverse effect on our stockprice.

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

During the fourth quarter of fiscal 2005, we werenotified by the California Employment Development Department, or EDD, that ourdomestic operating subsidiaries unemployment tax rates would be increasedretroactively for both calendar years 2005 and 2004, which would result inadditional unemployment taxes of approximately $0.9 million. We have timelyappealed the ruling by the EDD and are working with our outside counsel toresolve this matter. Although we believe that we have properly calculated ourunemployment insurance tax and are in compliance with all applicable laws andregulations, there can be no assurances this will be settled in our favor.

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

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

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

Not applicable.

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

Not applicable.

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

None.

### **Item5.   Other Information**

No events.

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**Item6.   Exhibits**

Set forth below is a list of the exhibits included as part of thisQuarterly Report:

| 10.1 | Addendum to  Employment Contract executed on April 12, 2007 between Westaff Support, Inc.  and Eric Person. (Incorporated herein by reference to the exhibit with the  same number filed with the Company’s Current Report on Form 8-K dated April  12, 2007.) |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 | Certification of  the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                           |
| 31.2 | Certification of  the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                           |
| 32.1 | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             |
| 32.2 | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             |

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|              | WESTAFF, INC.                                                 |                      |
|--------------|---------------------------------------------------------------|---------------------------|
|         |                                                          |                      |
|         |                                                          |                      |
| May 29, 2007 |                                                          |  /s/ John P. Sanders |   |   |
| Date         |  John P. Sanders                                         |                      |
|         | Senior Vice President, Chief Financial Officer and  Treasurer |
|              |                                                               |                           |  |  |  |  |

 

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                                                                                        |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                               |
| 10.1        |       | Addendum to Employment Contract executed on April  12, 2007 between Westaff Support, Inc. and Eric Person. (Incorporated herein  by reference to the exhibit with the same number filed with the Company’s  Current Report on Form 8-K dated April 12, 2007.) |
|        |       |                                                                                                                                                                                                                                                               |
| 31.1        |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                               |
| 31.2        |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                               |
| 32.1        |       | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                            |
|        |       |                                                                                                                                                                                                                                                               |
| 32.2        |       | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                            |

 

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