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SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

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FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period endedJuly 7, 2001

Commission file number0-24990

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WESTAFF, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction
of incorporation or organization)

94-1266151(I.R.S. employer
identification number)


301 Lennon Lane
Walnut Creek, California 94598-2453
(925) 930-5300(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days Yes /x/  No / /

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

|Class                        |  | Outstanding at August 21, 2001
|---------------------------- |  | ------------------------------
|Common Stock, $.01 par value |  | 15,913,656 shares             

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WESTAFF, INC. AND SUBSIDIARIES    INDEX

|           |  |                                                                                                          |  | Page
|---------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|PART I.    |  | FINANCIAL INFORMATION                                                                                    |  |     
|Item 1.    |  | Financial Statements                                                                                     |  |     
|           |  | Condensed Consolidated Balance Sheets
    July 7, 2001 and October 28, 2000                             |  | 3   
|           |  | Condensed Consolidated Statements of Operations
    12 and 36 weeks ended July 7, 2001 and July 8, 2000 |  | 4   
|           |  | Condensed Consolidated Statements of Cash Flows
    36 weeks ended July 7, 2001 and July 8, 2000        |  | 5   
|           |  | Notes to Condensed Consolidated Financial Statements                                                     |  | 6   
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                    |  | 11  
|PART II.   |  | OTHER INFORMATION                                                                                        |  |     
|Item 1.    |  | Legal Proceedings                                                                                        |  | 18  
|Item 2.    |  | Changes in Securities                                                                                    |  | 19  
|Item 3     |  | Defaults upon Senior Securities                                                                          |  | 19  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                      |  | 19  
|Item 5.    |  | Other Information                                                                                        |  | 19  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                         |  | 20  
|Signatures |  | 21                                                                                                      

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Part I. Financial Information

Item 1. Financial Statements

Westaff, Inc.

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Condensed Consolidated Balance Sheets  (Amounts in thousands except per share amounts)

|                                     |                                                                                                                     | July 7,
2001               |         | October 28,
2000 |       
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ---------------- | ------
|
|ASSETS                               |                                                                                                                     |                            |         |                  |       
|Current assets:                      |                                                                                                                     |                            |         |                  |       
|                                     | Cash and cash equivalents                                                                                           |                            | $       | 6,466            |       
|                                     | Trade accounts receivable, less allowance for doubtful
accounts of $1,793 and $1,634                                |                            |         | 70,454           |       
|                                     | Due from licensees                                                                                                  |                            |         | 1,729            |       
|                                     | Deferred income taxes                                                                                               |                            |         | 7,651            |       
|                                     | Net assets of discontinued operations                                                                               |                            |         | 336              |       
|                                     | Other current assets                                                                                                |                            |         | 6,966            |       
|                                     |                                                                                                                     |                            |         |                  |       
|                                     |                                                                                                                     | Total current assets       |         |                  | 93,602
|Property, plant and equipment, net   |                                                                                                                     |                            | 20,245  |                  |       
|Deferred income taxes                |                                                                                                                     |                            | 4,254   |                  |       
|Intangible assets, net               |                                                                                                                     |                            | 32,872  |                  |       
|Other long-term assets               |                                                                                                                     |                            | 2,103   |                  |       
|                                     |                                                                                                                     |                            |         |                  |       
|                                     |                                                                                                                     | $                          | 153,076 |                  | $     
|                                     |                                                                                                                     |                            |         |                  |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                     |                            |         |                  |       
|Current liabilities:                 |                                                                                                                     |                            |         |                  |       
|                                     | Short-term borrowings                                                                                               |                            | $       | 600              |       
|                                     | Current portion of loans payable                                                                                    |                            |         | 4,286            |       
|                                     | Accounts payable and accrued expenses                                                                               |                            |         | 37,677           |       
|                                     | Income taxes payable                                                                                                |                            |         | 298              |       
|                                     |                                                                                                                     |                            |         |                  |       
|                                     |                                                                                                                     | Total current liabilities  |         |                  | 42,861
|Loans payable                        |                                                                                                                     |                            | 25,714  |                  |       
|Other long-term liabilities          |                                                                                                                     |                            | 12,032  |                  |       
|                                     |                                                                                                                     |                            |         |                  |       
|                                     |                                                                                                                     | Total liabilities          |         |                  | 80,607
|                                     |                                                                                                                     |                            |         |                  |       
|Commitments and contingencies        |                                                                                                                     |                            |         |                  |       
|Stockholders' equity:                |                                                                                                                     |                            |         |                  |       
|                                     | Preferred stock, $.01 par value; authorized and unissued: 1,000 shares                                              |                            |         |                  |       
|                                     | Common stock, $.01 par value; authorized: 25,000 shares; issued: 15,948 shares at July 7, 2001 and October 28, 2000 |                            |         | 159              |       
|                                     | Additional paid-in-capital                                                                                          |                            |         | 36,582           |       
|                                     | Retained earnings                                                                                                   |                            |         | 39,700           |       
|                                     | Accumulated other comprehensive income                                                                              |                            |         | (3,614           | )     
|                                     |                                                                                                                     |                            |         |                  |       
|                                     |                                                                                                                     |                            | 72,827  |                  |       
|                                     | Less treasury stock at cost, 77 shares at July 7, 2001 and 129 shares at October 28, 2000                           |                            |         | 358              |       
|                                     |                                                                                                                     |                            |         |                  |       
|                                     |                                                                                                                     | Total stockholders' equity |         |                  | 72,469
|                                     |                                                                                                                     |                            |         |                  |       
|                                     |                                                                                                                     | $                          | 153,076 |                  | $     
|                                     |                                                                                                                     |                            |         |                  |       

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

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Condensed Consolidated Statements of Operations (Unaudited)  (Amounts in thousands except per share amounts)

|                                                                 |                         | 12 Weeks Ended |         | 36 Weeks Ended |  
|---------------------------------------------------------------- | ----------------------- | -------------- | ------- | -------------- | -
|
|Sales of services                                                |                         | $              | 123,123 |                |  
|License fees                                                     |                         |                | 191     |                |  
|                                                                 |                         |                |         |                |  
|Total sales of services and license fees                         |                         |                | 123,314 |                |  
|Costs of services                                                |                         |                | 97,987  |                |  
|                                                                 |                         |                |         |                |  
|Gross profit                                                     |                         |                | 25,327  |                |  
|Franchise agents' share of gross profit                          |                         |                | 3,975   |                |  
|Selling and administrative expenses                              |                         |                | 19,028  |                |  
|Depreciation and amortization                                    |                         |                | 1,778   |                |  
|                                                                 |                         |                |         |                |  
|Operating income from continuing operations                      |                         |                | 546     |                |  
|Interest expense                                                 |                         |                | 470     |                |  
|Interest income                                                  |                         |                | (230    | )              |  
|                                                                 |                         |                |         |                |  
|Income from continuing operations before income taxes            |                         |                | 306     |                |  
|Provision for income taxes                                       |                         |                | 122     |                |  
|                                                                 |                         |                |         |                |  
|Income from continuing operations                                |                         |                | 184     |                |  
|Loss on disposal of discontinued operations, net of income taxes |                         |                |         |                |  
|                                                                 |                         |                |         |                |  
|Net income (loss)                                                |                         | $              | 184     |                | $
|                                                                 |                         |                |         |                |  
|Basic and diluted earnings (loss) per share:                     |                         |                |         |                |  
|                                                                 | Continuing operations   |                | $       | 0.01           |  
|                                                                 |                         |                |         |                |  
|                                                                 | Discontinued operations |                |         |                |  
|                                                                 |                         |                |         |                |  
|                                                                 | Net income              |                | $       | 0.01           |  
|                                                                 |                         |                |         |                |  
|Weighted average shares outstandingbasic                        |                         |                | 15,871  |                |  
|                                                                 |                         |                |         |                |  
|Weigthed average shares outstandingdiluted                      |                         |                | 16,043  |                |  
|                                                                 |                         |                |         |                |  

See
accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

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Condensed Consolidated Statements of Cash Flows (Unaudited)  (Amounts in thousands)

|                                                 |                                                                            | 36 Weeks Ended                            |                                      
|------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------
|
|Cash flows from operating activities             |                                                                            |                                           |                                      
|                                                 | Net income (loss)                                                          |                                           | $                                    
|                                                 | Adjustments to reconcile net income to net cash from operating activities: |                                           |                                      
|                                                 |                                                                            | Loss from discontinued operations         |                                      
|                                                 |                                                                            | Depreciation                              |                                      
|                                                 |                                                                            | Amortization of intangible assets         |                                      
|                                                 |                                                                            | Provision for losses on doubtful accounts |                                      
|                                                 |                                                                            | Income from sale of licensed operations   |                                      
|                                                 |                                                                            | Loss (gain) on disposal of assets         |                                      
|                                                 |                                                                            | Deferred income taxes                     |                                      
|                                                 |                                                                            | Changes in assets and liabilities:        |                                      
|                                                 |                                                                            |                                           | Trade accounts receivable            
|                                                 |                                                                            |                                           | Due from licensees                   
|                                                 |                                                                            |                                           | Other assets                         
|                                                 |                                                                            |                                           | Accounts payable and accrued expenses
|                                                 |                                                                            |                                           | Income taxes payable                 
|                                                 |                                                                            |                                           | Other liabilities                    
|                                                 |                                                                            |                                           |                                      
|Net cash provided by continuing operations       |                                                                            |                                           | 24,033                               
|Net cash provided by discontinued operations     |                                                                            |                                           | 174                                  
|                                                 |                                                                            |                                           |                                      
|Net cash provided by operating activities        |                                                                            |                                           | 24,207                               
|                                                 |                                                                            |                                           |                                      
|Cash flows from investing activities             |                                                                            |                                           |                                      
|                                                 | Capital expenditures                                                       |                                           |                                      
|                                                 | Proceeds from sale of assets                                               |                                           |                                      
|                                                 | Proceeds from sale of licensed operations                                  |                                           |                                      
|                                                 | Investing activities of discontinued operations                            |                                           |                                      
|                                                 | Other, net                                                                 |                                           |                                      
|                                                 |                                                                            |                                           |                                      
|Net cash used in investing activities            |                                                                            |                                           | (3,177                               
|                                                 |                                                                            |                                           |                                      
|Cash flows from financing activies               |                                                                            |                                           |                                      
|                                                 | Net repayments under line of credit agreements                             |                                           |                                      
|                                                 | Principal payments on loans payable                                        |                                           |                                      
|                                                 | Issuance of common stock                                                   |                                           |                                      
|                                                 | Repurchase of common stock                                                 |                                           |                                      
|                                                 | Payment for stock acquisition contingency                                  |                                           |                                      
|                                                 |                                                                            |                                           |                                      
|Net cash used in financing activities            |                                                                            |                                           | (19,778                              
|                                                 |                                                                            |                                           |                                      
|Effect of exchange rate on cash                  |                                                                            |                                           | 6                                    
|                                                 |                                                                            |                                           |                                      
|Net change in cash and cash equivalents          |                                                                            |                                           | 1,258                                
|Cash and cash equivalents at beginning of period |                                                                            |                                           | 5,208                                
|                                                 |                                                                            |                                           |                                      
|Cash and cash equivalents at end of period       |                                                                            | $                                         | 6,466                                
|                                                 |                                                                            |                                           |                                      

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

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Notes to Condensed Consolidated Financial Statements (Unaudited)  (Amounts in thousands except per share amounts)

1.  Basis of Presentation

The accompanying condensed consolidated financial statements of Westaff, Inc. and its domestic and foreign subsidiaries (together, the Company), as of
and for the 12 and 36 week periods ended July 7, 2001 and July 8, 2000 are unaudited. Material intercompany accounts and transactions have been eliminated.

In
November 1998, the Company announced its plan to sell its medical business, primarily operating through Western Medical Services, Inc. (Western Medical), a
wholly-owned subsidiary. As a result of this decision, the remaining medical operations are classified as discontinued operations and presented as such in these Condensed Consolidated Financial
Statements and notes thereto.

The
condensed consolidated financial statements, in the opinion of management, reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of
the financial position, results of operations and cash flows for the periods presented.

Certain
financial information which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for
interim reporting purposes, has been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended October 28, 2000.

The
Company's fiscal year is a fifty-two or fifty-three week period ending the Saturday nearest the end of October. For interim reporting purposes, the first three fiscal
quarters comprise twelve weeks each while the fourth fiscal quarter consists of sixteen or seventeen weeks. The results of operations for the 12 and 36 week periods ended July 7, 2001 are not
necessarily indicative of the results to be expected for the full fiscal year or for any future period.

2.  Discontinued Operations

During the fourth quarter of fiscal 1999 the Company completed the sale of its medical business, Western Medical, to Intrepid U.S.A., Inc. (Intrepid)
under an asset purchase agreement. Western Medical provided temporary health care personnel to serve an array of home care and institutional health care needs, including Medicare patients, through a
network of geographically dispersed company-owned, franchise agent and licensed offices.

Under
the terms of the sale, the Company retained the trade and Medicare accounts receivable balances as well as the due from licensee balances. In fiscal 1999 the Company recorded an
after-tax loss on the discontinued operations of $6,611 or $0.42 per share. In fiscal 2000 the Company recorded additional after-tax losses relating to discontinued operations
of $784 or $0.05 per share, primarily due to lower than expected settlements of Medicare cost reports.

Through
the second quarter of fiscal 2001, the Company had received $1,735 in cash proceeds from the sale of its medical operations with an additional $1,000 due from Intrepid on the
balance of the purchase price under a guaranteed promissory note which was in default. In August 2000, Intrepid filed a demand for arbitration seeking compensatory and punitive damages
alleging, among other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. On March 28, 2001, the arbitrator issued an interim decision in which
he stated his intention to award Intrepid $1,085 mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and
accounting fees to

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be determined upon final award. The arbitrator issued a partial final award on May 9, 2001 that included approximately $425 for such fees and expenses. In addition, the arbitrator did not find
fraud and denied Intrepid's claim for punitive damages. The Company was awarded the $1,000 due on the promissory note, plus interest. The Company has been paid for the first principal installment of
$500. The remaining principal installment of $500 which was due on the second anniversary of the closing date in August 2001 has not yet been remitted. The Company has paid the amounts awarded
to the claimant in full, except for certain indemnity claims that may be subject to future determination. Primarily due to the unfavorable arbitration award, the Company recorded an
after-tax loss from discontinued operations of $1,794, or $0.11 per share, in the second quarter of fiscal 2001. The after-tax loss included additional reserves for potential
liabilities, Medicare and other contingencies, as well as
reserves for medical operations' net operating loss carryforwards which the Company believes will expire unused over the next three years.

Summarized
balance sheet data on the discontinued operations, which includes the trade and Medicare accounts receivable and due from licensee balances retained by the Company, is as
follows:

July 7,
2001

October 28,
2000(Unaudited)Current assets (primarily receivables)

$
1,776

$
2,944Current liabilities


(1,439
)

(639
)Noncurrent liabilities


(1
)

(1
)Net assets of discontinued operations

$
336

$
2,304


3.  Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations"
and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after
June 30, 2001. SFAS No. 142 provides that goodwill and intangible assets that have indefinite useful lives no longer be amortized, but instead be evaluated for impairment upon initial
adoption of the Statement, and at least annually thereafter, with impaired assets written down to fair value. Intangible assets with finite useful lives will continue to be amortized over their useful
lives. SFAS 142 is effective for fiscal years beginning after December 15, 2001.

The
Company does not expect the adoption of SFAS No. 141 to have a material effect on its financial position or results of operations. The Company is currently assessing the
impact of adopting SFAS 142, but has not yet determined the effect, if any, on its financial position and results of operations. Although goodwill amortization expense of approximately $1,400
could cease, the Company will be
required to evaluate the viability of the recorded goodwill under the new standards. As a result of this evaluation, it is possible than an impairment charge could be recorded.

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4.  Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

12 Weeks Ended

36 Weeks EndedJuly 7,
2001

July 8,
2000

July 7,
2001

July 8,
2000Income from continuing operations

$
184

$
296

$
1,283

$
4,110Denominator for basic earnings per shareweighted average shares


15,871


15,829


15,852


15,874Effect of dilutive securities:Stock options


172





43


2Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions


16,043


15,829


15,895


15,876Basic earnings per share

$
0.01

$
0.02

$
0.08

$
0.26Diluted earnings per share

$
0.01

$
0.02

$
0.08

$
0.26Anti-dilutive weighted shares excluded from diluted earnings per share


223


627


291


732


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Anti-dilutive weighted shares represent options to purchase shares of common stock which were outstanding but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market price of the common shares during the period, and therefore the effect would be anti-dilutive.

5.  Comprehensive Income

Comprehensive income consists of the following:

|                                 |  | 12 Weeks Ended |      | 36 Weeks Ended |  
|-------------------------------- |  | -------------- | ---- | -------------- | -
|
|Net income (loss)                |  | $              | 184  |                | $
|Currency translation adjustments |  |                | (159 | )              |  
|                                 |  |                |      |                |  
|Comprehensive income (loss)      |  | $              | 25   |                | $
|                                 |  |                |      |                |  

6.  Stock Option/Stock Issuance Plan

On May 1, 2001, the Company announced the appointment of Tom D. Seip as President and Chief Executive Officer. As a result of the appointment, W. Robert
Stover relinquished his position as interim President and Chief Executive Officer, but retained his position as Chairman of the Board of Directors. Effective as of the first day of Mr. Seip's
employment, the Company's Board of Directors awarded him incentive and nonqualified stock options to purchase an aggregate of 1,000 shares of the Company's common stock with an exercise price equal to
the fair market value on the date of the grant. The options have varying vesting schedules. Concurrent with the option grants, the Board of Directors approved an amendment and restatement of the
Company's 1996 Stock Option/Stock Issuance Plan, subject to stockholder approval, to increase the number of shares reserved for issuance under the plan by 1,000 shares and to increase the maximum
number of shares, stock appreciation rights and direct stock issuances which may be granted to an individual in any calendar year from 500 to 1,000 shares. The proposed amendment and restatement was
approved by a majority of the Company's stockholders at the May 23, 2001 annual stockholders' meeting.

7.  Loans Payable

The Company's senior secured notes contain covenants which, among other things, require the Company to maintain certain financial ratios. At July 7,
2001 the Company was out of compliance with one of these covenants. The Company has received a waiver from its senior secured note holders with respect to this covenant.

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8.  Operating Segments

|                                            |  | Domestic |         | International |   | Consolidated
|------------------------------------------- |  | -------- | ------- | ------------- | - | ------------
|12 Weeks Ended July 7, 2001                 |  |          |         |               |   |             
|Sales of services and license fees          |  | $        | 103,999 |               | $ | 19,315      
|Operating income from continuing operations |  | $        | 527     |               | $ | 19          
|12 Weeks Ended July 8, 2000                 |  |          |         |               |   |             
|Sales of services and license fees          |  | $        | 128,260 |               | $ | 21,619      
|Operating income from continuing operations |  | $        | 664     |               | $ | 337         
|36 Weeks Ended July 7, 2001                 |  |          |         |               |   |             
|Sales of services and license fees          |  | $        | 328,446 |               | $ | 56,748      
|Operating income from continuing operations |  | $        | 3,136   |               | $ | 330         
|36 Weeks Ended July 8, 2000                 |  |          |         |               |   |             
|Sales of services and license fees          |  | $        | 378,776 |               | $ | 67,923      
|Operating income from continuing operations |  | $        | 7,651   |               | $ | 1,071       

9.  Commitments and Contingencies

The Company is subject to claims and other actions arising in the ordinary course of business. Some of these claims and actions have resulted in lawsuits in
which the Company is a defendant. Most
significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below.

On
March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior Court of the State of California for the County of Los Angeles. The complaint alleges, among
other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. The plaintiff sought to have the court grant a jury trial and award the
plaintiff compensatory and punitive damages and attorneys' fees and other costs. The Company's petition for an order compelling arbitration was granted, the Superior Court lawsuit was stayed and an
arbitration proceeding is pending. The arbitration hearing has been set for the week of December 3, 2001. The Company believes the claim to be without merit and that the outcome of the
arbitration will not have a material adverse effect on its financial position, results of operations or cash flows; however, there can be no assurance that the Company will successfully defend or
prevail in this arbitration proceeding.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the results of operations and
financial condition of Westaff, Inc., together with its consolidated subsidiaries. This discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial
Statements and Notes thereto included herein and with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended October 28, 2000.

In
addition to historical information, this management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the
Company's future operating results and financial position. This notice is intended to take advantage of the "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 with respect
to such forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding sales, gross margin, workers' compensation costs, selling and administrative
expenses, interest expense, income taxes, capital resources, medical operations and credit facilities. Readers are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Actual results may differ materially. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The
forward-looking statements included herein are also subject to a number of other risks and uncertainties that could cause the Company's actual results and financial position to
differ materially from those anticipated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: fluctuation in the economy and financial markets, the
Company's ability to expand operations, the demand for temporary workers, the Company's ability to increase the productivity of existing offices, the effectiveness of management, the risk of losing
key employees, the risks related to franchise and license operations, the effectiveness of the Company's management information systems, the Company's ability to complete the implementation of
existing systems and planned new systems, the variability of employee-related costs, the risk of losing customers, the risk associated with controlling operating expenses, the availability of
temporary workers, financing risks, employer liability risks, the highly competitive industry, the risk of realizing the remaining medical assets in a timely and cost-effective manner, the
risks associated with acquisitions and risks associated with the Euro currency. Due to the foregoing factors, it is possible that in some future period the Company's results of operations may be below
the expectations of public market analysts and investors. In addition, the Company's results of operations have historically been subject to quarterly and seasonal fluctuations. Demand for temporary
staffing is historically highest in the fourth fiscal quarter, due largely to the planning cycles of many of the Company's customers, and typically lower in the first fiscal quarter, due, in part, to
national holidays as well as to plant shutdowns during and after the holiday season. Risks
and uncertainties related to the Company's business are described in detail in the "Factors Affecting Future Operating Results" section of the Company's Annual Report on Form 10-K
for the fiscal year ended October 28, 2000.

Overview

The Company provides temporary staffing services primarily in suburban and rural markets ("secondary markets"), as well as in the downtown areas of major urban
centers ("primary markets"), in the United States and selected international markets. Through its network of Company-owned, franchise agent and licensed offices, the Company offers a wide range of
temporary staffing solutions, including replacement, supplemental and on-location programs to businesses and government agencies. The Company has over 50 years of experience in the
staffing industry and operates through over 350 business services offices in 44 states, the District of Columbia and six foreign countries.

11

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The Company differentiates itself from other large temporary staffing companies by primarily focusing on recruiting and placing essential support personnel in secondary markets.
Essential support personnel often fill clerical, light industrial and light technical positions such as word processing, data entry, reception, customer service and telemarketing, warehouse labor,
manufacturing, assembly and lab assistance. These assignments can support either core or non-core functions of the customer's business, but are always "essential" to daily operations.

The
general level of economic activity and unemployment in the United States and the countries in which the Company operates significantly affects demand for the Company's staffing
services. Companies use temporary staffing services to manage personnel costs and staffing needs. When economic activity increases, temporary employees are often added before full-time
employees are hired. During these periods of increased economic activity and generally higher levels of employment, the competition among temporary staffing firms for qualified temporary personnel is
intense. There can be no assurance that during these periods the Company will be able to recruit the temporary personnel necessary to fill its customers' job orders in which case the Company's
business, results of operations, cash flows or financial condition may be adversely affected. As economic activity slows, many companies reduce their utilization of temporary employees before
releasing full-time employees. In addition, the Company may experience less demand for its services and more competitive pricing pressure during periods of economic downturn. Therefore,
any significant economic downturn could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition.

Recent Developments

On May 1, 2001, the Company announced the appointment of Tom D. Seip as President and Chief Executive Officer. As a result of the appointment, W. Robert
Stover relinquished his position as interim President and Chief Executive Officer, but retained his position as Chairman of the Board of Directors. Effective as of the first day of Mr. Seip's
employment, the Company's Board of Directors awarded him incentive and nonqualified stock options to purchase an aggregate of 1,000,000 shares of the Company's common stock with an exercise price
equal to the fair market value on the date of the grant. The options have varying vesting schedules. Concurrent with the option grants, the Board of Directors approved an amendment and restatement of
the Company's 1996 Stock Option/Stock Issuance Plan, subject to stockholder approval, to increase the number of shares reserved for issuance under the plan by 1,000,000 shares and to increase the
maximum number of shares, stock appreciation rights and direct stock issuances which may be granted to an individual in any calendar year from 500,000 to 1,000,000 shares. The proposed amendment and
restatement was approved by a majority of the Company's stockholders at the May 23, 2001 annual stockholders' meeting.

Discontinued Operations

In November 1998, the Company announced its plan to sell its medical business, primarily operating through Western Medical Services, Inc., a
wholly-owned subsidiary of the Company ("Western Medical"). As a result of this decision, the Company has classified its remaining medical operations as discontinued operations and, accordingly, has
segregated the net assets of the discontinued operations in the accompanying Condensed Consolidated Financial Statements and Notes thereto.

During
fiscal 1999 the Company completed the sale of substantially all of the assets of the medical business to Intrepid U.S.A., Inc. (Intrepid) under an asset purchase
agreement. Under the terms of the sale, the Company retained the trade and Medicare accounts receivable and due from licensee balances. During fiscal 1999 the Company recorded an after-tax
loss on the discontinued operations of $6.6 million or $0.42 per share. In fiscal 2000 the Company recorded additional after-tax losses relating

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to discontinued operations of $784,000 or $0.05 per share, primarily due to lower than expected settlements of Medicare cost reports.

Through
the second quarter of fiscal 2001, the Company had received $1.7 million in cash proceeds from the sale of its medical operations with an additional $1.0 million
due from Intrepid on the balance of the purchase price under a guaranteed promissory note which was in default. In August 2000, Intrepid filed a demand for arbitration seeking compensatory and
punitive damages alleging, among other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. On March 28, 2001, the arbitrator issued an interim
decision in which he stated his intention
to award Intrepid $1.1 million mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and accounting fees
to be determined upon final award. The arbitrator issued a partial final award on May 9, 2001 that included approximately $425,000 for such fees and expenses. In addition, the arbitrator did
not find fraud and denied Intrepid's claim for punitive damages. The Company was awarded the $1.0 million due on the promissory note, plus interest. The Company has been paid for the first
principal installment of $500,000. The remaining principal installment of $500,000 which was due on the second anniversary of the closing date in August 2001 has not yet been remitted. The
Company has paid the amounts awarded to the claimant in full, except for certain indemnity claims that may be subject to future determination. Primarily due to the unfavorable arbitration award, the
Company recorded an after-tax loss from discontinued operations of $1.8 million, or $0.11 per share, in the fiscal quarter ended April 14, 2001. The after-tax
loss included additional reserves for potential liabilities, Medicare and other contingencies, as well as reserves for medical operations' net operating loss carryforwards which the Company believes
will expire unused over the next three years.

Recorded
estimated losses on the disposal of the medical operations are based on a number of assumptions. These include the estimated costs and write-offs required to
collect the remaining Medicare accounts receivable and due from licensee balances, estimated costs to be incurred in filing and settling all remaining Medicare cost reports and other estimated legal
and incidental costs. Should actual costs incurred differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods. Currently, the Company
believes it has adequately reserved for the reasonable outcome of future events; however, there can be no assurance these reserves are sufficient pending the actual outcome of these events.

Results of Continuing Operations

Fiscal Quarter Ended July 7, 2001 compared to Fiscal Quarter Ended July 8, 2000

Sales of Services.Sales of services decreased $26.0 million, or 17.4%, for the fiscal quarter ended
July 7, 2001 as compared to the fiscal quarter ended July 8, 2000. Average billing rates per hour increased 3.9% for the fiscal 2001 quarter as compared to the fiscal 2000 quarter, while
billed hours declined 21.1%. Sales of services decreased 18.6% for domestic business services and 10.7% for international business services. Economic conditions in the United States continue to
adversely affect domestic sales of services across the majority of the Company's geographic regions, with decreasing demand for staffing services and strong competitive pressures on pricing.
Contingent upon the duration and extent of the economic slowdown, the Company currently estimates that its sales decline will continue through at least the remainder of fiscal 2001, and possibly
beyond. Unfavorable currency translation rates continue to impact international sales of services as reported. Excluding the effect of these rate fluctuations, international sales of services declined
1.2% for the quarter ended July 7, 2001 as compared to the fiscal 2000 quarter.

License Fees.License fees are charged to licensed offices based either on a percentage of sales or of gross profit
generated by the licensed offices. License fees decreased $549,000 or 74.2%, for the fiscal quarter ended July 7, 2001 as compared to the fiscal quarter ended July 8, 2000. During the

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fourth quarter of fiscal 2000, the Company purchased the operations of one of its licensees, two licensees converted to the Company's franchise agent program and two licensees closed operations. In
the second quarter of fiscal 2001, two licensees purchased the Company's interest in their licensed operations. Currently, the Company has four remaining licensees and consequently expects license fee
revenue to significantly decline on a quarterly comparable basis for the remainder of fiscal 2001 and the first two quarters of fiscal 2002. The Company currently does not anticipate actively pursuing
new entrants to the license program.

Costs of Services.Costs of services include hourly wages of temporary employees, employer payroll taxes, state
unemployment and workers' compensation insurance and other employee-related costs. Costs of services decreased $20.9 million, or 17.6%, for the fiscal quarter ended July 7, 2001 as
compared to the fiscal quarter ended July 8, 2000. Gross margin decreased from 20.7% in the third quarter of fiscal 2000 to 20.5% in the third quarter of fiscal 2001 primarily due to lower
license fees. The Company will continue its efforts to improve gross margin where feasible; however, with the current economic slowdown and competitive pressures on pricing, the opportunities
available to increase gross margin continue to be limited.

Workers'
compensation costs were 3.7% of direct labor for the third quarter of fiscal 2001 and 3.6% for the third quarter of fiscal 2000. These costs tend to vary depending upon the
mix of business between clerical staffing and light industrial staffing, and recent upward trends in the Company's actuarially estimated ultimate costs for all open policy years have resulted in an
increase in the Company's workers' compensation accruals for these costs. The Company currently estimates that the accrual rates for workers' compensation costs will be in the range of 3.5% to 4.5% of
direct labor for the remainder of fiscal 2001. The Company continues to monitor accrual rates to ensure that they remain appropriate in light of loss trends; however, there can be no assurance that
the Company's programs to control workers' compensation costs will be effective or that loss development trends will not require additional increases in workers' compensation accruals in future
periods.

Franchise Agents' Share of Gross Profit.Franchise agents' share of gross profit represents the net distribution paid
to franchise agents based either on a percentage of sales or of gross profit generated by the franchise agents' operation. Franchise agents' share of gross profit was $4.0 million for the third
quarter of fiscal 2001 as compared to $4.1 million for the third quarter of fiscal 2000. As a percentage of sales of services and license fees, franchise agents' share of gross profit was 3.2%
and 2.7% for the third quarters of fiscal 2001 and fiscal 2000, respectively, reflecting a change in the relative mix of sales of services from company-owned, franchise and international business
services.

Selling and Administrative Expenses Including Depreciation and Amortization.Selling and administrative expenses
decreased $5.1 million, or 19.5%, for the third quarter of fiscal 2001 as compared to the third quarter of fiscal 2000. As a percentage of sales of services and license fees, selling and
administrative expenses decreased from 17.3% for the third quarter of fiscal 2000 to 16.9% for the third quarter of fiscal 2001. Selling and administrative expenses for the third quarter of fiscal
2000 include $1.3 million in pre-tax charges as a result of the Company's March 2000 terminated recapitalization transaction. Absent these charges, the fiscal 2000 quarter
selling and administrative expense would have been 16.4% of sales of services and license fees. The resulting 0.5% relative increase in the current fiscal quarter is primarily the result of declining
sales outpacing the extent that the Company reduced selling and administrative expenditures.

The
Company is closely monitoring all of its operating expenses in an on-going effort to reduce costs where possible, and has implemented a number of
cost-containment initiatives, including the closure or consolidation of non-performing offices and staff reductions, to reduce the impact of the sales decline on its
profitability. However, there can be no assurance that material cost savings which have been, or will be, identified or implemented will be adequate to improve operating income levels in future
periods.

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Interest Expense.Interest expense decreased $132,000, or 21.9%, for the third quarter of fiscal 2001 as compared to
the third quarter of fiscal 2000 due to lower debt levels under the Company's senior secured credit facilities.

Provision for Income Taxes.The provision for income taxes for the third quarter of fiscal 2001 was $122,000 as
compared to $193,000 for the third quarter of fiscal 2000. This decrease was due primarily to the decrease in income from continuing operations before income taxes of $183,000. The effective income
tax rate was 40.0% for the third quarter of fiscal 2001 and 39.5% for the third quarter of fiscal 2000.

36 Week Period Ended July 7, 2001 compared to 36 Week Period Ended July 8, 2000

Sales of Services.Sales of services decreased $60.2 million, or 13.6%, for the 36 weeks ended July 7,
2001 as compared to the same period in fiscal 2000. The decrease resulted from a 16.9% decrease in billed hours partially offset by a 4.6% increase in average billing rates per hour. Sales of services
decreased 13.0% for domestic business services and 16.5% for international business services. Excluding the effect of foreign currency rate fluctuations, sales of services decreased 4.6% for
international business
services. The decrease in sales of services for the 36 week period ended July 7, 2001 as compared to the fiscal 2000 period is reflective of the economic factors noted above in the quarterly
discussion.

License Fees.License fees decreased $1.3 million or 54.8%, for the 36 week period ended July 7, 2001 as
compared to the 36 week period ended July 8, 2000. As noted above in the quarterly discussion, the number of licensed operations has decreased and the Company currently is not actively
promoting the license program.

Costs of Services.Costs of services decreased $47.1 million, or 13.3%, for the 36 week period ended
July 7, 2001 as compared to the same period in fiscal 2000. Gross margin decreased from 20.9% in the fiscal 2000 period to 20.5% for the same period in fiscal 2001 due to a combination of lower
license fees, pricing pressures caused by the slowing economy and higher workers' compensation rates. Workers' compensation costs were 4.0% of payroll for the 36 week period ended July 7, 2001
and 3.4% for the 36 week period ended July 8, 2000.

Franchise Agents' Share of Gross Profit.Franchise agents' share of gross profit decreased $569,000 or 4.8% for the 36
weeks ended July 7, 2001 as compared to the 36 weeks ended July 8, 2000, due to declines in franchise sales and gross profits. As a percentage of sales of services and license fees,
franchise agents' share of gross profit increased from 2.6% during the fiscal 2000 period to 2.9% for the fiscal 2001 period due to the change in the relative mix of sales of services from
company-owned, franchise and international business services.

Selling and Administrative Expenses Including Depreciation and Amortization.Selling and administrative expenses
decreased $8.6 million, or 11.8%, for the 36 weeks ended July 7, 2001 as compared to the 36 weeks ended July 8, 2000. As noted in the quarterly discussion above, two licensees
purchased the Company's interest in their licensed operations in the second quarter of fiscal 2001 and, included in fiscal 2001 selling and administrative expenses, is $2.1 million in
pre-tax income from these sales. Additionally, selling and administrative expenses for the fiscal 2000 period includes $1.9 million in pre-tax charges as a result of the
Company's terminated recapitalization. Absent these anomalies, selling and administrative expenses for the fiscal 2001 period were 17.2% of sales of services and license fees as compared to 15.9% for
the same period in fiscal 2000. This relative increase is primarily due to declining sales volumes outpacing the effect of reductions in selling and administrative expenses instituted during the
period.

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Interest Expense.Interest expense decreased $275,000, or 12.8%, for the 36 weeks ended July 7, 2001 as compared
to the 36 weeks ended July 8, 2000 as a result of the Company's reduction in debt levels.

Provision for Income Taxes.The provision for income taxes was $855,000 for the fiscal 2001 period as compared to
$2.7 million for the same period in fiscal 2000, reflecting a decrease in pre-tax income from continuing operations of $4.7 million. The effective income tax rate for the 36
weeks ended July 7, 2001 was 40.0% as compared to 39.5% for the same period in fiscal 2000.

Liquidity and Capital Resources

Historically, the Company has financed its operations through cash generated by operating activities and through various forms of debt and equity financings
and bank lines of credit. The Company's principal use of cash is for financing of accounts receivable particularly during periods of growth and, in relatively recent years, for management information
system initiatives. Temporary personnel are generally paid on a weekly basis while payments from customers are generally received 30 to 60 days after billing. As a result of seasonal
fluctuations, accounts receivable balances are historically higher in the fourth fiscal quarter and are generally at their lowest during the first fiscal quarter.

Net
cash provided by operating activities was $24.2 million for the 36 weeks ended July 7, 2001 and $14.2 million for the 36 weeks ended July 8, 2000. The
increase in cash from operating activities is primarily due to decreases in accounts receivable balances as a result of collections, partially offset by lower net income, decreases in accounts payable
and accrued expenses and the recorded income from the sale of the Company's investment in two of its licensed operations.

Net
cash used in investing activities was $3.2 million for the 36 weeks ended July 7, 2001 as compared to $1.5 million for the same period in fiscal 2000. Net
cash used in investing activities for both comparable periods was primarily expended on management information systems capital expenditures. The Company has taken steps to reduce planned capital
expenditures for the remainder of fiscal 2001 and anticipates that total capital expenditures for the year will not exceed $4.5 million. Included in net cash from investing activities for the
36 weeks ended July 8, 2000 is $1.0 million in proceeds from the sale of two buildings at the Company's headquarters.

The
Company reduced borrowings by a net $19.9 million during the 36 weeks ended July 7, 2001. The Company's ability to reduce its debt levels is primarily attributable
to net cash provided by operating activities. The Company's senior secured credit facilities currently consist of a $90.0 million five-year revolving line of credit after having
repaid a six-year term loan in the amount of $10.0 million. The Company has senior secured notes outstanding totaling $30.0 million, payable in seven equal annual
installments beginning in the year 2002. Additionally, effective November 1, 2000, the Company obtained an $11.8 million financial guarantee bond, expiring November 1, 2001, to
secure a portion of its workers' compensation premium and deductible obligations.

The
Company's debt facilities contain covenants which, among other things, require the Company to maintain certain financial ratios. At July 7, 2001 the Company was out of
compliance with one of these covenants with respect to the senior secured notes. The Company has received a waiver from its senior secured note holders.

Direct
advances under the revolving credit agreement are limited by outstanding irrevocable standby letters of credit up to a maximum amount of $20.0 million. Total advances
are also limited under formulas based on earnings before interest, taxes, depreciation and amortization (EBITDA) and total debt to total capitalization. At July 7, 2001 the Company had $600,000
outstanding for direct advances and $11.8 million outstanding for letters of credit. There was no additional borrowing capacity available under the revolving credit facility. The Company's
management is currently in negotiations

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with its bank group for a new credit facility which would replace the existing revolving credit facility and provide for working capital and other general corporate purposes, refinancing of balances
outstanding under the Company's existing revolving line of credit, and issuance of standby letters of credit for the Company's workers' compensation program. Management anticipates that the new
agreement will be in place by the end of the fiscal year; however, there can be no assurance that a new agreement will be completed by that date.

Management
believes that cash from operations and borrowing capacity under the proposed new credit facility will be sufficient to meet anticipated needs for working capital and
capital expenditures at least through the next twelve months.

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Part II. Other Information

Item 1. Legal Proceedings

On March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior Court of the State of California for the County of Los Angeles,
Central District. The defendants named in the case are Westaff, Inc., W. Robert Stover, Michael K. Phippen, Paul A. Norberg, Jack D. Samuelson, Gilbert L. Sheffield, Mike Ehresman and Does
1-10.

The
complaint alleges, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. The plaintiff sought to
have the court grant a jury trial, and award the plaintiff compensatory and punitive damages and attorneys' fees and other costs.The Company's petition
for an order compelling arbitration was granted, the Superior Court lawsuit has been stayed, a demand for arbitration was made and an arbitration proceeding is pending. Discovery is
on-going. A preliminary hearing conference call with the arbitrators was held on May 21, 2001. The arbitration hearing has been set for the week of December 3, 2001.

On
or about August 18, 2000, Intrepid U.S.A., Inc. filed a demand for arbitration with the American Arbitration Association in San Francisco, California. The defendants
named in the demand are Westaff (USA), Inc., Western Medical Services, Inc. and two other subsidiary corporations that were involved in the operation of the Company's medical business.

The
demand alleges, among other things, that the defendants made misrepresentations and otherwise breached the asset purchase agreement for the sale of substantially all the assets of
the Company's medical business. The defendants filed an answering statement, counterclaim and demand against guarantors, denying all liability and seeking payment for the accelerated
$1.0 million balance of the purchase price and other charges due to the Company. The petitioner filed a reply in which it expanded its damages claim. Discovery proceedings were conducted and an
arbitration hearing was held. The arbitrator issued an interim award dated March 28, 2001 and a partial final award dated May 9, 2001. The arbitrator denied all claims not expressly
granted or otherwise reserved for future determination.

The
arbitrator found that the Company is entitled to payment by the claimant of the principal and interest due under and pursuant to the terms of the promissory note for the
$1.0 million balance of the purchase price. The Company has been paid for the first principal installment of $500,000. The remaining principal installment of $500,000 which was due on the
second anniversary of the closing date in August 2001, has not yet been remitted. The Company will pursue collection efforts as necessary.

The
arbitrator awarded the claimant the sum of $1,085,375 as damages for certain alleged breaches by the Company of the asset purchase agreement. He found that the claimant, as the
prevailing party, was entitled to the costs of the arbitration proceeding, including attorneys' fees, accounting expenses, administrative fees and expenses that amounted to approximately $425,000.

The
Company has paid the amounts awarded to the claimant pursuant to the award in full, except for certain indemnity claims reserved for future determination as to which the
arbitrator has retained jurisdiction. The indemnity claims relate to pending litigation and arbitration matters brought against the claimant by two former affiliates of the Company's medical
subsidiary.

Except
as disclosed above, the Company is not currently a party to any material litigation. However, from time to time the Company has been threatened with, or named as a defendant
in, lawsuits, including countersuits brought by former franchise agents or licensees, and administrative claims and lawsuits brought by employees or former employees. Management believes that these
lawsuits are routine litigation that is incidental to the Company's business.

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Item 2. Changes in Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

At July 7, 2001 the Company was out of compliance with one of the financial covenants with respect to its senior secured notes. The Company has received
a waiver from its senior secured note holders.

Item 4. Submission of Matters to a Vote of Security Holders



Votes For

14,466,894Votes Withheld

510,977




Votes For

14,955,383Votes Against

21,916Votes Abstaining

572Broker Non-Votes

0




Votes For

11,589,355Votes Against

1,269,297Votes Abstaining

142,922Broker Non-Votes

0


Item 5. Other Information

Not applicable.

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Item 6. Exhibits and Reports on Form 8-K



| |  | 10.3.6   |  | Employment Agreement among Westaff Support, Inc., the Company and Tom D. Seip effective May 1, 2001
| |  | -------- |  | ---------------------------------------------------------------------------------------------------
| |  | 10.3.6.1 |  | Notice of Grant of Stock Option (Incentive) with Exhibit A, Stock Option Agreement                 
| |  | 10.3.6.2 |  | Notice of Grant of Stock Option (Non-Statutory) with Exhibit A, Stock Option Agreement             
| |  | 10.3.6.3 |  | Notice of Grant of Stock Option (Non-Statutory) with Exhibit A, Stock Option Agreement             





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Signatures

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

|                    |  |  |  | WESTAFF, INC.                                                                          
|------------------- |  |  |  | ---------------------------------------------------------------------------------------
|August 21, 2001Date |  |  |  | /s/DIRK A. SODESTROMDirk A. Sodestrom Senior Vice President and
Chief Financial Officer

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