UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended July 12, 2008
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the quarterly period ended January 24, 2009

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 000-24990

WESTAFF, INC.

(Exact name of registrant 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, including zip code)

(925) 930-5300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value per share

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 o

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

Large accelerated filer o		Accelerated filer o

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

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

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~~March 2512, ~~2008~~2009
Common Stock, $0.01 par value per share		16,~~697~~702,~~010~~651 shares

Table of Contents

WESTAFF, INC.

FORM 10-Q

For the quarterly period ended ~~July~~January 1224, ~~2008~~2009

INDEX

		Page
Part I.	Financial Information	3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets (Unaudited) as of July 12, 2008 and November 3, 2007	3
	Condensed Consolidated Balance Sheets (Unaudited) as of January 24, 2009 and November 1, 2008	3
	Condensed Consolidated Statements of Operations (Unaudited) for the 12 and 36 Weeks Ended July 12, 2008 and July 7, 2007	4
	Condensed Consolidated Statements of Operations (Unaudited) for the 12 Weeks Ended January 24, 2009 and January 26, 2008	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 36 Weeks Ended July 12, 2008 and July 7, 2007	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 12 Weeks Ended January 24, 2009 and January 26,2008	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1618
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2524
Item 4T.	Controls and Procedures	26
Item 4.	Controls and Procedures	25
Part II.	Other Information	2726
Item 1.	Legal Proceedings	2726
Item 1A.	Risk Factors	2827
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3533
Item 3.	Defaults Upon Senior Securities	3533
Item 4.	Submission of Matters to a Vote of Security Holders	3533
Item 5.	Other Information	3533
Item 6.	Exhibits	3534
	Signatures	3635

Table of Contents

Part l. Financial Information

Item 1. Financial Statements (Unaudited)

Westaff, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

	July 12,			November 3,
	January 24, 2009			November 1, 2008
	2008			2007
	(In thousands, except share and per share amounts)
	(In thousands, except
	per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	14,~~841~~325		$	~~3,277~~86
Restricted cash	510,~~017~~014			—5,048
Trade accounts receivable, less allowance for doubtful accounts of $1,246 and $1,274	51,383			76,098
Trade accounts receivable, less allowance for doubtful accounts of $797 and $979	23,240			35,812
Income taxes receivable	241			—
Prepaid expenses	1,859			1,845
Deferred income taxes	—			9,688
Other current assets	4,097			1,733
Prepaid expenses	2,839			4,059
Current assets held for sale	—			13,930
Other current assets	1,154			1,833
Total current assets	43,535			58,454
Total current assets	62,475			94,955
Property and equipment, net	8,518			9,583
Property and equipment, net	11,724			16,186
Intangible assets	3,500			3,504
Deferred income taxes	840			12,076
Other long-term assets	1,250			1,923
Goodwill	1,337			12,628
Long term assets held for sale	—			1,527
Intangible assets	3,509			3,695
Total assets	$	56,803		$	74,991
Other long-term assets	2,020			1,752
Total Assets	$	81,905		$	141,292
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Borrowing under revolving credit facilities	$	3,089		$	6,837
Current portion of capital lease obligations	$	494		$	587
Current portion of capital lease obligations	601			544
Notes payable to related parties	4,799			4,150
Note payable to related party	2,000			2,000
Accounts payable	905			1,431
Accounts payable	2,701			2,226
Accrued expenses	13,057			16,499
Accrued expenses (See Note 8)	23,973			34,147
Short-term portion of workers compensation obligation	8,022			7,975
Short-term portion of workers compensation	8,766			9,897
Income taxes payable	396			379
Income taxes payable	80			113
Current liabilities held for sale	—			8,956
Total current liabilities	4127,~~210~~673			5539,~~764~~977
Long-term capital lease obligations	~~325~~122			~~752~~165
Long-term portion of workers compensation	15,000			16,000
Long-term portion of workers compensation obligation	15,000			15,300
Other long-term liabilities	~~1,465~~310			~~2,881~~805
Total liabilities	58,000			75,397
Long-term liabilities held for sale	—			125
Commitments and contingencies
Total liabilities	43,105			56,372
Commitments and contingencies (Notes 8 and 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; authorized and unissued: 1,000,000 shares
Common stock, $0.01 par value; authorized: 25,000,000 shares; issued and outstanding: 16,697,010 at July 12, 2008 and November 3, 2007	167			167
Common stock, $0.01 par value; authorized: 25,000,000 shares; issued and outstanding:16,697,010 at January 24, 2009 and November 1, 2008	167			167
Additional paid-in capital	39,~~623~~779			39,~~561~~727
Retained earnings (accumulated deficit)	(17,827		)	24,355
Accumulated deficit	(26,248		)	(21,943		)
Accumulated other comprehensive income	~~1,942~~—			~~1,812~~668
Total stockholders’ equity	2313,~~905~~698			6518,~~895~~619
Total Liabilities and Stockholders’ Equity	$	81,905		$	141,292
Total liabilities and stockholders’ equity	$	56,803		$	74,991

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

	12 Weeks Ended						~~36 Weeks Ended~~
	July 12,			July 7,			July 12,			July 7,
	January 24, 2009			January 26, 2008
	2008			2007			2008			2007
	(In thousands, except per share amounts)
	(In thousands, except per share amounts)
Revenue	$	51,548		$	81,048
Revenue	$	99,431		$	122,421		$	310,319		$	363,221
Costs of services	42,806			66,515
Costs of services	83,122			101,105			259,587			300,377
Gross profit	8,742			14,533
Gross profit	16,309			21,316			50,732			62,844
Franchise agents’ share of gross profit	2,200			3,397
Franchise agents’ share of gross profit	3,288			4,025			10,046			11,083
Selling and administrative expenses	10,438			12,106
Selling and administrative expenses	14,488			16,912			44,994			48,929
Restructuring expense (benefit)	52			(150		)
Impairment of goodwill and intangibles	11,540			—			11,540			—
Depreciation and amortization	1,118			1,144
Restructuring expense (benefit)	—			2,300			(150		)	2,300
Operating loss from continuing operations	(5,066		)	(1,964		)
Depreciation and amortization	1,015			796			4,131			2,441
Interest expense	593			598
Operating loss from continuing operations	(14,022		)	(2,717		)	(19,829		)	(1,909		)
Interest income	(7		)	(9		)
Interest expense	470			530			2,134			1,620
Loss from continuing operations before income taxes	(5,652		)	(2,553		)
Interest income	(71		)	(40		)	(134		)	(122		)
Income tax benefit	—			(487		)
Loss from continuing operations before income taxes	(14,421		)	(3,207		)	(21,829		)	(3,407		)
Loss from continuing operations	(5,652		)	(2,066		)
Income tax expense (benefit)	464			(361		)	20,188			(591		)
Discontinued operations:
Loss from continuing operations	(14,885		)	(2,846		)	(42,017		)	(2,816		)
Income (loss) from discontinued operations	(400		)	171
Discontinued operations:
Gain on sale, net of income taxes	1,747			—
Loss from discontinued operations	—			(73		)	(1,160		)	(363		)
Total income from discontinued operations, net of income taxes	1,347			171
Gain (loss) on sale, net of income taxes of $722	(188		)	—			995			—
Net loss	$	(4,305	)	$	(1,895	)
Total loss from discontinued operations, net of income taxes	(188		)	(73		)	(165		)	(363		)
(Loss) earnings per share:
Net loss	$	(15,073	)	$	(2,919	)	$	(42,182	)	$	(3,179	)
Continuing operations - basic and diluted	$	(0.34	)	$	(0.12	)
Loss per share:
Discontinued operations - basic and diluted	$	0.08		$	0.01
Continuing operations - basic and diluted	$	(0.89	)	$	(0.17	)	$	(2.52	)	$	(0.17	)
Loss per share:
Discontinued operations - basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Basic and diluted	$	(0.26	)	$	(0.11	)
Loss per share:
Weighted average shares outstanding - basic	16,697			16,697
Basic and diluted	$	(0.90	)	$	(0.18	)	$	(2.53	)	$	(0.19	)
Weighted average shares outstanding - diluted	16,697			16,697
Weighted average shares outstanding - basic and diluted	16,697			16,623			16,697			16,607

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Westaff, Inc.

Condensed Consolidated Statements of Cash Flows ~~(Unaudited)~~

	36 Weeks Ended
	July 12,			July 7,
	2008			2007
	(In thousands)
Cash flows from operating activities
Net loss	$	(42,182	)	$	(3,179	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on sale of discontinued operations, net of income taxes	(995		)	—
Impairment of goodwill and intangibles	11,540			—
Depreciation and amortization	4,337			2,703
Stock-based compensation	63			547
Tax benefits from employee stock plans	—			(88		)
Provision for losses on doubtful accounts	649			721
Amortization of deferred gain on sale-leaseback	(515		)	(515		)
Amortization of debt issuance costs	521			193
Deferred income taxes	20,875			(475		)
Amortization of deferred gain from sales of affiliate operations	(647		)	(110		)
Loss on sale or disposal of assets	109			18
Changes in assets and liabilities:
Trade accounts receivable	19,268			3,063
Other assets	798			2,023
Accounts payable and accrued expenses	(7,851		)	(2,001		)
Income taxes payable	(835		)	(1,110		)
Other liabilities	(1,236		)	1,030
Net cash provided by operating activities	3,899			2,820
Cash flows from investing activities
Capital expenditures	(339		)	(3,194		)
Payments for the purchase of affiliate operations	—			(307		)
Proceeds from sale of discontinued operations, net of cash acquired by purchaser of $1,104	5,375			—
Expenses relating to sale of discontinued operations	(204		)	—
Other, net	113			(11		)
Net cash (used in) provided by investing activities	4,945			(3,512		)
Cash flows from financing activities
Restricted cash under line of credit	(5,017		)	—
Net repayments under line of credit agreements	(3,883		)	(584		)
Principal payments on capital lease obligations	(370		)	(233		)
Payment of debt issuance costs	(979		)	(157		)
Proceeds from the issuance of common stock	—			245
Excess tax benefits from stock based compensation	—			126
Net cash used in financing activities	(10,249		)	(603		)
Effect of exchange rate changes on cash	(31		)	125
Net change in cash and cash equivalents	(1,436		)	(1,170		)
Cash and cash equivalents at beginning of period	3,277			3,545
Cash and cash equivalents at end of period	$	1,841		$	2,375
Supplemental dislosures of cash flow information
Interest	$	2,136		$	1,620
Income taxes paid, net	(10		)	629

(Unaudited)

	12 Weeks Ended
	January 24,			January 26,
	2009			2008
	(In thousands)
Cash flows from operating activities
Net loss	$	(4,305	)	$	(1,895	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization	1,125			1,375
Stock-based compensation	42			74
Provision for losses on doubtful accounts	417			389
Amortization of deferred gain on sale-leaseback	(172		)	(177		)
Amortization of debt issuance costs	123			68
Deferred income taxes	—			(656		)
Gain on sale of discontinued operations, net of income taxes	(1,747		)	—
Amortization of deferred gain from sales of affiliate operations	—			(618		)
Loss on sale or disposal of assets	1			159
Changes in assets and liabilities:
Trade accounts receivable	12,291			3,968
Other assets	(15		)	820
Accounts payable and accrued expenses	(4,230		)	(5,456		)
Income taxes payable	17			13
Other liabilities	(638		)	(1,441		)

Net cash provided by (used in) operating activities	2,909			(3,377		)

Cash flows from investing activities
Capital expenditures	(10		)	(710		)
Proceeds from sale of discontinued operations, net of cash acquired by purchaser of $1,113 and net of cash funded by seller of $2,052	7,553			—
Expenses related to sale of discontinued operations	(533		)	—
Payments received on notes	25			31
Issuance of notes receivable	(39		)	(5		)
Other, net	—			49

Net cash provided by (used in) investing activities	6,996			(635		)

Cash flows from financing activities
Restricted cash under line of credit	(4,966		)	—
Net borrowings (payments) under line of credit agreements	(5,172		)	3,363
Principal payments on capital lease obligations	(136		)	(118		)
Payment of debt issuance costs	(9		)	(2		)
Proceeds from notes payable - related parties	500			—

Net cash provided by (used in) financing activities	(9,783		)	3,243

Effect of exchange rate changes on cash	77			(62		)

Net change in cash and cash equivalents	199			(831		)
Cash and cash equivalents at beginning of period	4,126			3,277
Cash and cash equivalents at end of period	$	4,325		$	2,446

Supplemental disclosures of cash flow information
Cash paid during the quarter for:
Interest	$	200		$	447
Income taxes paid, net	36			23

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Westaff, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. ~~Company~~Basis ~~background~~of Presentation

Westaff, Inc. ~~(together with~~and its ~~domestic and foreign~~ subsidiaries, (the “Company” or “Westaff”) ~~provides~~provide staffing services primarily in suburban and rural markets (“secondary markets”), ~~and~~as well as in the downtown areas of certain major urban centers (“primary markets”) in the United States (“US”)~~, Australia and New Zealand~~. On ~~March~~ November 3110, 2008, the Company sold its former ~~United~~Australia ~~Kingdom operations~~ and ~~related~~New ~~subsidiary. The Company provides~~Zealand ~~staffing~~subsidiaries ~~solutions~~and, ~~including~~in ~~permanent~~the ~~placement,~~second ~~replacement,~~quarter ~~supplemental and~~of ~~on-site~~fiscal ~~temporary~~year ~~programs~~2008, tothe ~~businesses~~Company sold ~~and government agencies through~~ its ~~network~~ offormer ~~Company-owned,~~United ~~franchise~~Kingdom ~~agent~~operations and ~~licensed~~related ~~offices~~subsidiary. ~~Westaff’s~~The ~~primary~~accompanying ~~focus~~condensed isconsolidated financial onstatements ~~recruiting~~of ~~and placing~~Westaff, Inc. ~~clerical/administrative~~ and ~~light~~its ~~industrial~~domestic ~~personnel.~~and ~~Its corporate~~discontinued ~~headquarters~~foreign ~~provides~~subsidiaries ~~support~~as ~~services~~of toJanuary 24, ~~the~~2009 ~~field~~and ~~offices~~for inthe ~~marketing,~~12-week ~~human~~periods ~~resources,~~ended ~~risk management~~January 24, ~~legal,~~2009 ~~strategic~~and ~~sales~~January 26, ~~accounting,~~2008 ~~and~~are ~~information technology~~unaudited.

~~Basis~~The Company provides staffing solutions, including permanent placement, replacement, supplemental and on-site temporary programs to businesses and government agencies through its network of ~~Presentation~~Company-owned and ~~Going~~franchise agent ~~Concern~~offices. Westaff’s ~~Considerations~~primary focus is on recruiting and placing clerical/administrative and light industrial personnel. Its corporate headquarters provides support services to the field offices in marketing, human resources, risk management, legal, strategic sales, accounting, and information technology.

The ~~accompanying~~ condensed consolidated ~~financial~~ financial statements, in the opinion of ~~Westaff~~management, ~~Inc.~~ ~~and~~reflect ~~its~~all ~~domestic~~adjustments, ~~and~~which ~~foreign~~are of ~~subsidiaries~~a normal recurring nature, asnecessary for a fair presentation of ~~July 12~~the financial position, ~~2008~~results of operations and cash flows for the ~~12-week~~periods ~~and~~presented. The ~~36-week~~condensed ~~periods~~consolidated balance sheet as of November 1, 2008 presented herein, has been derived from the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the fiscal year ended ~~July~~November 121, 2008 filed with the Securities and Exchange ~~July~~Commission (the “SEC”) on February 713, ~~2007~~2009 ~~are~~(the ~~unaudited~~“2008 Form 10-K”).

The ~~condensed~~Company’s ~~consolidated~~critical ~~financial~~accounting policies ~~statements,~~are described in ~~the~~Item ~~opinion of management~~7, ~~reflect~~“Management’s ~~all~~Discussion ~~adjustments,~~and ~~which~~Analysis ~~are~~ of Financial aCondition ~~normal~~and ~~recurring~~Results ~~nature,~~of ~~necessary~~Operations” ~~for~~and ain ~~fair~~the ~~presentation~~notes ofto the ~~financial~~audited ~~position,~~consolidated ~~results~~financial ofstatements ~~operations~~included ~~and~~in ~~cash flows for~~ the ~~periods~~2008 ~~presented~~Form 10-K. ~~The~~Except ~~condensed~~as ~~consolidated~~disclosed ~~balance~~herein, ~~sheet~~there aswere no ofchanges ~~November~~to these policies during the 12-week period ended January 324, 2009. Certain ~~2007~~financial ~~presented~~information normally ~~herein,~~included ~~has~~in ~~been~~annual ~~derived~~financial ~~from~~statements ~~the~~prepared ~~audited~~in accordance with ~~consolidated~~accounting ~~balance~~principles ~~sheet~~generally ~~included~~accepted in the ~~Company’s~~United ~~Annual~~States ~~Report~~that onare ~~Form 10-K~~not required for interim reporting purposes have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the ~~fiscal~~audited ~~year~~consolidated financial ~~ended~~statements ~~November 3,~~and ~~2007~~notes thereto included in the 2008 Form 10-K.

The Company’s ~~primary~~fiscal credit facility is a financing agreement that the Company has (through its wholly-owned subsidiary Westaff (USA), Inc.) with U.S. Bank National Association (“U.S. Bank”), as agent for itself and Wells Fargo Bank, National Association (“Wells Fargo”), as lenders, which provides for a five-year ~~revolving~~ends ~~credit~~on ~~facility (~~the ~~“Financing~~ ~~Agreement”). As~~Saturday ~~discussed~~nearest ~~in Note 9~~ the ~~Company~~ isend ~~currently in default under certain covenants~~ of ~~the Financing Agreement~~ October and ~~has~~consists entered into a Forbearance Agreement with U.S. Bank and Wells Fargo that provides for a forbearance period ending on August 26, 2008. While the Company is negotiating with its lenders for a waiver or continued forbearance in respect of ~~this default,~~either ~~there~~52 ~~can be no assurances that a waiver~~ or ~~continued forbearance can~~53 ~~be obtained~~weeks. IfFor ~~the~~interim ~~Company~~reporting ~~is unable to obtain a waiver or continued forbearance from U.S. Bank on acceptable terms~~purposes, the Company’s ~~may~~first bethree ~~unable~~fiscal toquarters ~~access~~consist ~~the~~of ~~funds~~12 ~~necessary~~weeks ~~for~~each, ~~its~~while ~~liquidity~~the ~~requirements~~Company’s orfourth ~~may~~fiscal bequarter ~~unable~~consists ~~to obtain letters~~ of ~~credit~~16 ~~under~~or ~~the~~17 ~~facility needed~~weeks. The ~~for the~~ Company ~~to obtain workers~~’s ~~compensation insurance. In that case, its business and operating~~ results ~~would~~of beoperations ~~adversely~~for ~~affected, and~~ the ~~Company may be unable to continue~~ ~~its~~12-week ~~operations~~period asended ~~a going concern. In response to the continued default~~January 24, ~~the~~2009 ~~Company~~are ~~secured~~not anecessarily ~~$3.0~~indicative ~~million~~of ~~subordinated~~the ~~loan~~results ~~facility subsequent~~ to ~~the end of the quarter and as described in Note 19. This facility may~~ be ~~used~~expected byfor the Company’s ~~for~~full ~~their~~fiscal ~~working~~year ~~capital~~or ~~and~~for ~~general~~any ~~business purposes~~future period.

~~The~~Discontinued ~~Company’s~~operations ~~critical accounting policies are described in Item 7, “Management’s Discussion~~ and ~~Analysis~~assets ofheld ~~Financial Condition and Results of Operations” and in the notes to the audited consolidated financial statements included in the Company’s previously-filed Annual Report on Form 10-K~~ for ~~the fiscal year ended November 3,~~ 2007. Except as disclosed herein, there were no changes to these policies during the 36-week period ended July 12, 2008. Certain financial information normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States that 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 audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 3, 2007.sale

~~The~~On November 10, 2008, the Company’s ~~fiscal~~sold its ~~year~~former isAustralia aand 52New orZealand ~~53-week period~~subsidiaries ~~ending~~and on March 31, 2008, the ~~Saturday~~Company ~~nearest~~sold ~~the~~its ~~end~~former United Kingdom (U.K.) operations and related subsidiary. See Note 4. In accordance with Statement of ~~October~~Financial Accounting Standards (“SFAS”) No. ~~For~~ 144 ~~interim~~“Accounting ~~reporting~~for ~~purposes~~the Impairment or Disposal of Long-Lived Assets”, the ~~first three~~results ~~fiscal~~of ~~quarters~~operations ~~comprise~~of 12the ~~weeks~~discontinued operations ~~each,~~are ~~while~~separately stated in the ~~fourth~~accompanying ~~fiscal~~consolidated ~~quarter consists~~statements of operations 16for orthe 1712 weeks ended January 24, 2009 and January 26, 2008. The ~~results of~~assets ~~operations~~and liabilities for the ~~12-week~~Company’s former Australia and ~~36-week~~New Zealand ~~periods~~subsidiaries ~~ended~~as ~~July~~of November 121, 2008 are shown in the balance sheet ~~not~~as ~~necessarily~~held ~~indicative~~for ofsale. ~~the~~The ~~results~~cash toflows befrom ~~expected~~discontinued ~~for~~operations are not separately classified in the ~~full~~Company’s ~~fiscal~~condensed consolidated statements of ~~year~~cash orflows for ~~any~~all ~~future~~periods ~~period~~presented.

OnAsset ~~March 31, 2008, the Company sold its United Kingdom operations~~ and ~~related~~ ~~subsidiary. The~~liability ~~results~~balances ~~of operations~~as of ~~the~~November 1, 2008 ~~discontinued~~and ~~operations are separately stated in~~ the ~~accompanying~~ ~~condensed~~statement ~~consolidated statements~~ of operations for the 12-week ~~and~~ ~~36-week~~period ~~periods~~ ended ~~July~~January 1224, 2009 ~~2008~~ and for the same ~~periods~~period of fiscal ~~2007.~~ ~~The~~year ~~assets~~2008 ~~and~~pertaining ~~liabilities~~to ofthe ~~these discontinued operations have not been~~Company’s ~~reclassified~~former inUnited ~~the~~Kingdom, ~~accompanying~~Australia, ~~consolidated balance sheets~~ and ~~related notes. The~~New ~~cash~~Zealand ~~flows~~subsidiaries ~~from discontinued operations~~ are ~~not~~set ~~separately~~forth ~~classified~~ in ~~the Company’s consolidated~~ ~~statements of cash flows~~Note 4.

~~Accounts~~Going ~~receivable~~concern as originally reported on the November 3, 2007 balance sheet have been increased by $962,000 to reflect unbilled amounts to customers related to services performed in the United Kingdom previously included in other current assets. The Company’s policy is to record as trade accounts receivables the amounts earned for the final week of the period but not billed to customers.considerations

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from this uncertainty. Through January 24, 2009, the Company has experienced significant loss of revenue in its business operations and continues to experience operating losses. Additionally, the Company is in default of certain covenants under its primary credit facility, which is a financing agreement, dated as of February 14, 2008, by and among the Company’s wholly-owned subsidiary Westaff (USA), Inc. (as borrower), the Company (as parent guarantor), U.S. Bank National Association, as a lender, agent and letter of credit issuer (“U.S. Bank”) and Wells Fargo Bank, National Association, as a lender (“Wells Fargo”), as amended (the “Financing Agreement”). The Financing Agreement currently provides for a five-year revolving credit facility. As discussed in Note 8 and 18, the Company is currently in default under certain covenants of the Financing Agreement and, subsequent to the end of the first quarter of fiscal year 2009, on February 18, 2009, the Company entered into a new Third Amended and Restated Forbearance Agreement with U.S. Bank and Wells Fargo that provides for a forbearance period ending on April 7, 2009 (the “Third Amended and Restated Forbearance Agreement”).

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~~The~~Among ~~Company~~other ~~has~~things, ~~included~~pursuant asto ~~part~~the ofThird Amended ~~interest~~and Restated Forbearance Agreement, the Company’s ability to borrow ~~expense~~under ~~certain~~the ~~amounts~~Financing ~~paid~~Agreement (other than forced loans due to GEdraws ~~Capital~~upon ~~for~~the outstanding letters of credit) ~~issued~~was toterminated. Because the Company’s ~~insurance~~no ~~carrier~~longer tohas ~~secure~~any ~~liabilities~~right ~~reflected~~to onborrow under the ~~balance~~Financing ~~sheet.~~Agreement ~~These~~(other ~~costs~~than ~~are~~forced ~~charged~~loans ~~based~~due onto adraws ~~percentage~~upon of the outstanding letters of of credit~~. These~~), ~~costs~~if ~~during~~ the ~~fiscal year~~Company’s ~~2007~~available ~~that~~cash ~~were~~is ~~originally~~insufficient ~~classified~~to assatisfy ~~selling~~the ~~and administrative~~Company’s ~~expenses~~liquidity ~~have~~requirements ~~been~~and ~~reclassified~~the toCompany ~~interest~~is ~~expense~~unable to ~~conform~~find toalternative ~~the~~sources ~~fiscal~~of ~~year~~capital, ~~2008~~the ~~presentation. The reclassifications~~Company ~~had~~may nobe ~~change~~unable to ~~net~~continue ~~income~~its oroperations ~~earnings~~as ~~per~~a ~~share and are shown~~going ~~below:~~concern.

	12 weeks ended									36 weeks ended
	July 7, 2007									July 7, 2007
	(in thousands)
	As originally reported as adjusted for discontinued operations			As reclassified			Change			As originally reported as adjusted for discontinued operations			As reclassified			Change
Selling and administrative expenses	$	17,164		$	16,912		$	(252	)	$	49,684		$	48,929		$	(755	)
Operating (loss) income from continuing operations	$	(2,969	)	$	(2,717	)	$	252		$	(2,664	)	$	(1,909	)	$	755
Interest expense	$	278		$	530		$	252		$	865		$	1,620		$	755
Net loss	$	(2,919	)	$	(2,919	)	$	—		$	(3,179	)	$	(3,179	)	$	—

These liquidity issues raise substantial doubt about whether the Company will continue as a going concern. The Company has been in discussions with its lenders under the Financing Agreement as to the steps it needs to take to resolve this situation, but there can be no assurance that the lenders will continue to forbear from exercising any of their default rights and remedies in response to the Company’s noncompliance with any one or more of the loan covenants. The Company’s ability to continue as a going concern is dependent on the Company’s ability to comply with the loan covenants and the lenders’ willingness to waive any noncompliance with such covenants and/or forbear from exercising any of their default rights and remedies.

In response to the continued default, on August 25, 2008, the Company secured a $3.0 million subordinated loan facility with DelStaff, LLC (“DelStaff”), which is the Company’s principal stockholder. As of January 24, 2009, loans in an aggregate principal amount of $2. ~~Out~~7 million, including a $0.2 million facility fee, were outstanding under this facility, the proceeds of ~~period~~which ~~adjustment~~were used by the Company for working capital and general business purposes. On January 29, 2009, the Company was advanced an additional loan in an aggregate principal amount of $500,000 from DelStaff. No additional borrowings are available to the Company under this facility See Note 18.

~~During~~On ~~the~~January 22, 122009, ~~weeks~~The ~~ended~~Travelers Indemnity ~~April 19~~Company (“Travelers”), ~~2008,~~ which is the Company’s ~~recorded~~workers’ ~~$880~~compensation insurance carrier,~~000~~ inagreed ~~depreciation~~to ~~expense~~extend ~~and~~the ~~accumulated~~coverage ~~depreciation,~~period of the Company’s ~~relating~~workers’ tocompensation ~~assets~~insurance, ~~purchased~~which ~~prior~~had been originally set to ~~fiscal~~expire ~~year~~on ~~2004~~February 1, 2009, through April 1, 2009 which ~~should~~required ~~have~~$1.0 million ~~been~~in cash ~~depreciated~~collateral ~~over~~as aof 4November 1, ~~year~~2008 ~~period~~and $0. ~~The~~3 million as of February 28, ~~depreciation~~2009. ~~expense~~The ~~and~~collateral ~~accumulated~~is ~~depreciation,~~included ~~however,~~in ~~were~~other ~~not~~current ~~previously recorded~~assets. The ~~Company~~letter ~~reviewed~~of ~~this additional~~credit ~~expense~~supporting ~~and~~the ~~considered~~workers’ compensation ~~the~~insurance, ~~impact~~which ofhad ~~the~~been ~~adjustment~~originally ~~under~~set ~~Staff Accounting~~to ~~Bulletin~~expire ~~No. 99~~on ~~“Materiality”.~~February 28, ~~The~~2009, ~~Company~~was ~~concluded~~extended ~~that~~to ~~reporting~~April 7, ~~the~~2009 ~~$880,000~~pursuant asto anthe ~~adjustment~~terms toand conditions ~~current~~of ~~period~~the ~~depreciation~~Third ~~expense~~Amended and ~~accumulated~~Restated ~~depreciation~~Forbearance isAgreement. There ~~not~~can ~~material~~be no assurance that the Company will be able to ~~the~~renew or extend its current ~~fiscal~~workers’ ~~year~~compensation ~~2008~~policy or negotiate ~~prior~~a ~~fiscal~~new ~~years~~policy with a new carrier on terms acceptable to the Company.

Among other things, the Company has responded to these issues by reducing its headcount by approximately 60 positions in the corporate and field offices during fiscal year 2008 and 66 positions in the first quarter of fiscal year 2009. This was accomplished by a combination of attrition and a planned reduction in force. Total severance amounts related to headcount reductions recorded in the first quarter of fiscal year 2009 were $0.3 million and are included as part of selling and administrative expenses. ~~Restricted~~ The ~~cash~~Company continues to look and act on additional cost savings measures within the organization while it is exploring alternative financing arrangements and strategic partnering alternatives. See Note 18.

~~During the 12 weeks ended July 12, 2008, the cash proceeds of $5~~2.0 Restricted ~~million from the sale of the U.K. operations was held as collateral for U.S. Bank related to the Financing Agreement, as described in Note 9.~~Cash

4During the 12 weeks ended January 24, 2009, the $5. ~~Adoption~~0 million in cash proceeds from the sale of ~~recent~~the ~~pronouncement~~Company’s former Australia and New Zealand operations and the $5.0 million in cash proceeds from the sale of the Company’s former United Kingdom operations and related subsidiary, totaling $10.0 million, as well as the interest thereon, were held as collateral for U.S. Bank related to the Financing Agreement, as described in Note 8.

3. Adoption of Recent Pronouncement

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

As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48~~, and concluded that there were no material uncertain tax positions requiring recognition in our financial statements at adoption or as of July 12, 2008~~. The Company performed evaluations for the tax years ended 2008, 2007, 2006, 2005 and 2004, which were subject to examination by tax authorities~~. Upon implementation~~, ofas ~~FIN~~well ~~48,~~as the ~~Company~~tax positions ~~adopted~~presented ain ~~methodology~~the ~~for~~current ~~recognition~~fiscal ~~of interest~~year ~~and~~financial ~~penalties~~statements. During ~~accruals~~the ~~related~~current tofiscal ~~unrecognized~~year ~~tax~~the ~~benefits and~~Company ~~penalties~~determined ~~within~~it ~~its~~had ~~provision~~$0.9 ~~for~~million ~~income~~of ~~taxes~~uncertain tax positions. ~~The~~Of ~~Company~~this ~~had~~amount, no$0.3 ~~such~~million ~~interest~~was ~~and~~recorded as ~~penalties~~a ~~accrued~~liability atin ~~July~~its financial statements as of January 1224, ~~2008~~2009.

5. Discontinued Operations

In March 2008, the Company sold its former United Kingdom operations and related subsidiary to Fortis Recruitment Group Limited, a recruiting and staffing company headquartered in England, for approximately $6.7 million. The Company recorded a pre-tax gain of $2.0 million ($1.2 million net of tax). Cash payments received totaled $6.5 million and transaction costs totaled $0.2 million. During the 12 weeks ended July 12, 2008, the Company reduced the gain on the sale by about $0.3 million ($0.2 million net of tax) as a result of an amendment to the original sales agreement to forgive Fortis Recruitment Group Limited of various payables and royalties due to Westaff in lieu of agreeing to any working capital adjustments.

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InUpon ~~accordance~~implementation ~~with the provisions~~ of ~~Statement~~FIN ~~of Financial Accounting Standard No. 144~~48, ~~“Accounting~~ ~~for Impairment or Disposal of Long-Lived Assets,”~~ the ~~gain~~Company ~~recognized~~adopted ~~in conjunction~~a ~~with~~methodology ~~the~~for ~~sale~~recognition of ~~the~~interest ~~UK,~~and aspenalties accruals ~~well~~related asto ~~the~~unrecognized ~~results~~tax ofbenefits ~~operations for the current~~ and ~~prior~~penalties ~~periods,~~within ~~have~~its provision ~~been~~for ~~reported~~income astaxes. The ~~discontinued~~Company had ~~operations~~no ~~in the~~such ~~Company’s~~interest ~~statements~~and ofpenalties ~~operations.~~accrued ~~Summarized~~at ~~financial~~January 24, ~~data~~2009 onas ~~discontinued~~any ~~operations~~amounts isare ~~as follows:~~immaterial.

	12 Weeks Ended						36 Weeks Ended
	July 12,			July 7,			July 12,			July 7,
	2008			2007			2008			2007
	(In thousands)
Revenue	$	—		$	10,320		$	15,215		$	29,298
Operating loss from discontinued operations	—			(86		)	(1,184		)	(463		)
Plus: Income taxes and net interest income	—			13			24			100
Loss from discontinued operations, net of tax	—			(73		)	(1,160		)	(363		)
Gain (loss) on sale of discontinued operations	(286		)	—			1,717			—
Less: Income taxes (benefit)	(98		)	—			722			—
Gain (loss) on sale of discontinued operations, net of tax	(188		)	—			995			—
Total loss from discontinued operations, net of income taxes	$	(188	)	$	(73	)	$	(165	)	$	(363	)

4. Discontinued Operations

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

In March 2008, the Company sold its former United Kingdom operations and related subsidiary to Fortis Recruitment Group Limited, a recruiting and staffing company headquartered in England, for cash payments of $6.3 million, net of transaction costs of $0.2 million. The Company recorded a pre-tax gain of $1.7 million ($0.4 million net of tax). In accordance with FASB Statement No. 144, the Company has reflected the results of its former United Kingdom operations as discontinued operations for all periods presented on the consolidated statement of operations.

On November 10, 2008, the Company sold its former Australia and New Zealand subsidiaries to Humanis Blue Pty Ltd, an Australian staffing company (“Humanis”), for A$19 million (Australian dollars) (or $12.8 million US dollars). Of this amount, A$3 million, (or $1.9 million US dollars) is payable in the form of a deferred payment due one year after closing and is included in other current assets on the balance sheet. As part of the agreement, the sale proceeds received were net of the amount outstanding on the former Australian GE Capital debt facility totaling A$7.8 million (or $5.2 million US dollars). Cash payments received totaled A$7.6 million converted to approximately $5. ~~Income~~0 ~~Taxes~~million US dollars. In connection with the final GE Capital settlement, the Company overpaid the debt by A$0.6 million (or $0.4 million US dollars) which has been recorded in other current assets and ~~Related~~that amount was refunded to the ~~Valuation~~Company ~~Allowance~~on February 10, 2009. The purchase price is subject to a post-closing adjustment based on the net operating assets of the subsidiaries at closing. The parties are currently in discussion regarding the calculation of the adjustment. Management believes the Company will not incur a charge related to the working capital adjustment and has not adjusted the gain on the sale for the resolution of the working capital adjustment. The gain on the sale is $1.7 million, net of fees of $0.5 million. In accordance with FASB Statement No. 144, the Company has reflected the results of its former Australia and New Zealand operations as discontinued operations for all periods presented on the consolidated statements of operations. The income taxes from this gain on sale were nil as a result of applying the benefit of net operating loss carryforwards that had been fully reserved in earlier periods. See Note 5.

~~For~~Summarized ~~the~~financial 12data ~~weeks ended July 12, 2008, the Company had an income tax provision from continuing operations of approximately $0.5 million~~ on adiscontinued ~~pre-tax loss from continuing~~ operations ~~of $14.4~~is ~~million,~~as which represents an effective tax rate of -3.2%. The tax provision was primarily generated from tax on foreign operations, and interim period adjustments to deferred tax assets related to federal and Australian net operating losses.follows:

For the 36 weeks ended July 12, 2008, the Company had an income tax provision from continuing operations of approximately $20.2 million on a pre-tax loss from continuing operations of $21.8 million, which represents an effective tax rate of -92.5%. The tax provision was primarily generated from the establishment of a valuation allowance during the second quarter of fiscal 2008 on its net deferred tax assets, with the exception of those deferred tax assets related to certain net operating losses because it believes it can realize this asset by carrying the net operating loss back to a prior period. The Company has not set up a valuation allowance against deferred tax assets of $0.8 million related to the estimated federal and Australian net operating loss because it believes these assets are more likely than not of being realized. The foreign deferred tax assets relate to net operating losses in jurisdictions which have not experienced cumulative losses in recent periods.

	12 Weeks Ended
	January 24, 2009			January 26, 2008
	(In thousands)

Revenue	$	2,086		$	35,786
Operating (loss) income from discontinued operations	(315		)	170
Less: Income taxes and net interest expense	85			(1		)

Income (loss) from discontinued operations, net of tax	(400		)	171

Gain on sale, net of income taxes	1,747			—

Total income from discontinued operations, net of tax	$	1,347		$	171

7. Goodwill and Intangibles

	November 1, 2008

Cash and cash equivalents	$	4,040
Trade accounts receivable, net	9,176
Prepaid expenses	291
Property and equipment, net	666
Other assets	1,284
Assets of discontinued operations	$	15,457

Notes payable	$	4,578
Accounts payable	208
Accrued payroll and expenses	2,873
Other liabilities	1,422
Liabilities of discontinued operations	$	9,081

The Company’s goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired at the date of acquisition. The primary other identifiable intangible assets of the Company with indefinite lives are reacquired franchise rights. These assets are not amortized but rather tested for impairment at least annually in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. This test is generally performed by the Company during its fourth fiscal quarter or more frequently if the Company believes impairment indicators are present. The Company determined its reporting units to be the same as its operating segments under SFAS 131 “Disclosures about Segments of an Enterprise and Related Information”. See Note 17.

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~~During the Company’s second quarter several factors led management to consider whether its goodwill and other intangibles might be impaired~~5. Income ~~These~~Taxes factors included three possible indicators of impairment, including: a) a decline in the market capitalization of the company to a level below the book carrying value of its equity; 2) the sale of its UK subsidiary below the fair value as determined at September 1, 2007; and ~~3) unexpected revenue declines for its U.S. domestic reporting unit~~Related ~~through~~Valuation the end of its second fiscal quarter. As a result of these conditions, the Company performed the first step in the impairment test required by SFAS 142 which compares the fair value of a reporting unit to its carrying value, including goodwill and intangibles and concluded that the fair value of its US Domestic Reporting Unit exceeded the carrying value and market capitalization which indicated that the Company’s goodwill was not impaired. Therefore the Company did not perform the second step of the impairment test and no impairment charge was recorded in the second quarter. In light of the continued decline in revenue and market capitalization for Westaff, the Company determined that an interim impairment test was necessary during the third quarter of 2008.Allowance

~~Prior to~~For ~~performing~~the ~~Step~~12 1weeks ofended January 24, 2009, the ~~goodwill~~Company ~~impairment~~had ~~testing~~a ~~process~~zero ~~for~~income atax ~~reporting unit~~provision ~~under~~from ~~SFAS~~continuing ~~142,~~operations ifon ~~there~~a pre-tax isloss ~~reason~~from tocontinuing ~~believe~~operations ~~that~~of ~~other~~$5.6 ~~non-goodwill~~million, which represents an ~~related~~effective ~~intangible~~tax ~~assets~~rate ~~may~~of bezero. The ~~impaired,~~zero ~~these~~tax ~~other~~provision ~~intangible~~was ~~assets~~primarily ~~must~~the result ~~first~~of bea ~~tested~~full ~~for~~valuation ~~impairment~~allowance ~~under~~established ~~SFAS~~against ~~142~~current orperiod ~~SFAS 144~~losses. ~~Assets~~The ~~governed~~Company byhad ~~SFAS~~a ~~144~~gain ~~require~~on athe sale of ~~recoverability~~discontinued ~~test~~operations ~~whereby~~of ~~the~~approximately ~~gross~~$1.7 ~~undiscounted~~million, ~~cash~~net ~~flows~~of ~~are~~income ~~determined~~tax. The income taxes from this gain on sale were ~~specific~~nil toas a result of applying the ~~asset. For~~benefit ~~non-goodwill related~~of ~~indefinite-lived~~net ~~assets,~~operating aloss ~~fair~~carryforwards that ~~value~~had ~~determination~~been isfully ~~made~~reserved in earlier periods. IfThe ~~the~~Company ~~carrying~~also ~~value~~had ofa ~~the~~loss ~~asset~~from ~~exceeds~~discontinued ~~the~~operations ~~fair~~from ~~value,~~its ~~then~~foreign ~~impairment~~operations ~~occurs~~of approximately $0. ~~The~~4 ~~carrying~~million, ~~values~~net of ~~these~~a zero ~~assets~~tax ~~are~~provision, ~~impaired~~which aswas ~~necessary~~also toa ~~provide the~~result ~~appropriate~~of ~~carrying~~the ~~value~~establishment ~~for~~of ~~the~~a ~~goodwill~~current period ~~impairment~~valuation ~~calculation~~allowance.

~~Based on the impairment evaluation as of July 12, 2008, it was determined that the indefinite life franchise right intangible was impaired by $171,000~~6. ~~Such~~ Goodwill anand ~~impairment charge was measured in accordance with SFAS 142 as the excess of the carrying value over the fair value of the asset.~~Intangibles

~~After completing~~Following the ~~intangible~~sale ~~asset~~of ~~impairments~~its foreign subsidiaries, the Company ~~compared~~operates ~~the~~as ~~fair value~~one ofreporting ~~the~~segment. The USCompany ~~Reporting~~performed ~~Unit~~the toimpairment ~~its~~tests required ~~carrying~~by ~~value~~Statement ~~and~~of ~~determined~~Financial ~~that~~Accounting ~~the reporting~~Standards ~~unit~~(“SFAS”) ~~was impaired~~No. ~~Upon~~ 142, “Goodwill ~~completion~~and ofOther ~~step~~Intangible ~~two~~Assets” ofdue to the ~~impairment~~significant ~~test,~~decline ~~the~~in ~~Company~~revenue ~~recorded~~and ~~a goodwill~~the ~~impairment~~decrease ofin ~~$11.4~~market ~~million~~capitalization inof ~~relation~~the company to ~~its~~a ~~U.S.~~level ~~domestic~~below ~~services~~the ~~reporting~~book ~~unit. The~~carrying ~~fair~~ value of ~~the~~its ~~Australia and~~equity ~~New~~during ~~Zealand~~the ~~reporting~~third ~~units~~quarter ~~were~~of ~~greater~~fiscal ~~than~~2008. As ~~the~~a ~~net book value and accordingly~~result, nothe ~~second step was required. The~~ Company’s ~~impairment~~goodwill ~~evaluations~~was ~~were~~fully impaired ~~performed~~in bythe ~~management. The~~third ~~evaluations~~quarter ~~for~~of ~~other~~fiscal ~~goodwill~~year ~~and~~2008 ~~other intangible assets included reasonable~~ and ~~supportable~~the ~~assumptions~~indefinite ~~and~~life ~~projections~~franchise ~~and~~right ~~were~~intangible ~~based~~was onimpaired ~~estimates~~by of$0.2 ~~projected future cash flows~~million.

~~The~~Due to the continued decline in revenues in ~~goodwill~~the ~~and~~geographical ~~intangible~~markets ~~assets~~that benefit from the franchise right intangibles, impairment ~~charge~~tests iswere ~~non-cash~~done in ~~nature~~the ~~and~~fourth ~~does not~~quarter ~~affect~~of ~~the~~fiscal ~~Company’s~~year ~~liquidity,~~2008 ~~cash~~and ~~flows~~the first ~~from~~quarter ~~operating~~of ~~activities,~~fiscal oryear 2009. No ~~debt~~impairment ~~covenants,~~charges orwere ~~have~~made ~~any~~to ~~impact~~the onfranchise ~~future~~rights ~~operations~~as a result of the evaluation.

The following table shows the change to ~~goodwill and~~ intangible assets during the first ~~three~~quarter ~~quarters~~ of fiscal ~~2008~~year 2009.

	Gross goodwill and intangible assets								~~July 12, 2008~~
	Year End		Impairments			Gross			Accumulated			Effects of			Net
	Year End November 1, 2008		Effects of Foreign Currency			Assets Sold November 10, 2008			Period End January 24, 2009			Accumulated Amortization			Net Amount
	November 3, 2007		2008			Amount			Amortization			foreign currency			Amount
			(In thousands)
	(In thousands)
Domestic Business Services amortized intangible assets - Non-compete agreements	$	17	$	—		$	—		$	17		$	(4	)	$	13
Domestic Business Services amortized intangible assets - Non-compete agreements	$	177	$	—		$	177		$	(155	)	$	—		$	22
Domestic Business Services indefinite life intangible assets - Franchise rights	3,487		—			—			3,487			—			3,487
Domestic Business Services indefinite life intangible assets - Franchise rights	3,658		(171		)	3,487			—			—			3,487
Total intangible assets	3,504					—			3,504			(4		)	3,500
Total intangible assets	3,835		(171		)	3,664			(155		)	—			3,509
Domestic Business Services goodwill	—		—			—			—			—			—
Domestic Business Services goodwill	11,369		(11,369		)	—			—			—			—
Assets Held for Sale (Australia goodwill)	636		33			(669		)	—			—			—
Australia goodwill	1,259		—			1,259			—			78			1,337
Total goodwill	636		33			(669		)	—			—			—
Total goodwill	12,628		(11,369		)	1,259			—			78			1,337
Total goodwill and intangible assets	$	4,140	$	33		$	(669	)	$	3,504		$	(4	)	$	3,500
Total goodwill and intangible assets	$	16,463	$	(11,540	)	$	4,923		$	(155	)	$	78		$	4,846

Total estimated amortization expense for the remaining 1640 weeks of fiscal year ~~2008~~2009 is $513,000 ~~and for fiscal year 2009 is $17,000~~.

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87. Accrued Expenses

	July 12,		November 3,
	January 24, 2009		November 1, 2008
	2008		2007
	(In thousands)
Accrued payroll and payroll taxes	$	126,~~503~~650	$	167,~~356~~030
Accrued insurance	2,024		3,151
Accrued insurance and general liability	1,775		2,085
Checks outstanding in excess of book cash balances	169		4,753
Accrued legal, audit and professional fees	1,529		1,298
Taxes other than income taxes	3,001		4,120
Deferred revenue on sale of building	655		745
Franchise commisions payable	~~1,007~~519		~~1,599~~831
Restructuring accrual (Note 15)	367		1,146
Checks outstanding in excess of book cash balances	345		2,949
Other	4,902		3,022
Taxes other than income taxes	233		242
	$	23,973	$	34,147
Restructuring accrual (Note 14)	294		300
Other	1,057		1,019
	$	13,057	$	16,499

98. Credit Agreements

On February 14, 2008, the Company’s ~~(through its~~ wholly-owned subsidiary Westaff (USA), Inc. (as borrower) ~~entered~~and ~~into~~the aCompany ~~financing~~(as parent guarantor) ~~agreement~~entered ~~with~~into ~~U.S.~~the ~~Bank~~Financing ~~National~~Agreement ~~Association~~with (“U.S. Bank~~”),~~ ~~as agent,~~ and ~~the lenders~~Wells ~~thereto~~Fargo, which provides for a five-year revolving credit facility that ~~previously~~ ~~provided~~had originally provided for an aggregate ~~commitment~~revolving credit commitments of up to $50.0 million, including a letter of credit sub-limit of $35.0 million ~~(the “Financing Agreement”)~~. Borrowings under the Financing Agreement bear interest, at the Company’s election, at either U.S. Bank’s prime rate or at LIBOR plus an applicable LIBOR rate margin ranging from 1.25% to 2.00%. The Financing Agreement provides that a default rate would apply on all loan obligations in the event of default under the Financing Agreement and related documents, at a rate per annum of 2.0% above the applicable interest rate. Interest is payable on a monthly basis. The Company has $27.3 million of letters of credit supporting workers’ compensation obligations outstanding under the U.S. Bank Credit facility at January 24, 2009, but no cash borrowings. The credit obligations under the Financing Agreement are secured by a first priority security interest in the assets of the Borrower, the Company and the other Guarantors, with certain exceptions set forth in the Financing Agreement and the other Credit Documents.

On May 23, 2008, ~~the~~Westaff ~~Company~~(USA), Inc. received a notice of default from U.S. Bank ~~National Association (“U.S. Bank”) (as agent for itself and Wells Fargo Bank, National Association (“Wells Fargo”), as lenders,~~ stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to ~~the~~its ~~Company’s~~ failure to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for the fiscal period ended April 19, 2008; and (2) as a result of the Event of Default, effective May 21, 2008, U.S. Bank increased the rate of interest to the default rate of interest on the borrowings outstanding under ~~the~~ the Financing Agreement. ~~The Company had $27.3 million of letters of credit supporting workers’ compensation obligations outstanding under the U.S. Bank credit facility at July 12, 2008, but no outstanding borrowings.~~

OnBeginning on July 31, 2008, ~~the~~Westaff (USA), Inc. and the Company entered into a series of Forbearance ~~Agreement~~Agreements with U.S. Bank and Wells ~~the~~Fargo, ~~lenders. Pursuant~~under towhich, ~~the~~among ~~terms~~other ofthings, ~~the~~U.S. ~~Forbearance Agreement,~~Bank ~~(i) the~~and ~~lenders~~Wells ~~agreed~~Fargo agreed to forbear from exercising any of their default rights and remedies in response to the occurrence and continuance of the Event of Default commencing on the date of the Forbearance Agreement and ending on ~~August~~December 2619, 2008,. Among ~~(ii)~~other things, the Company agreed to a reduction in the aggregate amount of the commitments under the Financing Agreement from $50.0 million to $33.0 million effective as of June 23, 2008, and ~~(iii) U.S. Bank~~ agreed to maintain a reserve against the revolving credit availability to to cover the Company’s payroll and payroll tax obligations. The interest rates applicable to the loans made pursuant to the Financing Agreement continued at the default rate through December 19, 2008.

~~The Company is currently in discussions with U.S. Bank~~From inDecember 20, ~~order~~2008 to ~~seek~~February 17, a2009, ~~waiver or continued forbearance in respect of~~ the ~~Event of Default. There can be no assurance that the~~ Company ~~will~~did benot ~~able to obtain a waiver or continued forbearance or that~~enter ~~such~~into aany ~~waiver~~further ~~or continued~~ forbearance ~~would~~agreements bewith ~~on terms acceptable to the Company~~U. IfS. ~~the~~Bank ~~Company~~and isWells ~~unable~~Fargo tounder ~~obtain~~which aU.S. ~~waiver~~Bank ~~or continued forbearance~~ and ~~the~~Wells ~~lenders~~Fargo ~~elect~~would toagree ~~pursue remedies under the Financing Agreement, such as limiting or terminating the Company’s right~~ to ~~borrow~~continue ~~under the Financing Agreement or electing not~~ to ~~renew~~forbear ~~letters~~from ofexercising ~~credit~~their ~~supporting~~default ~~the~~rights ~~Company’s~~and ~~workers’~~remedies ~~compensation~~beyond ~~insurance~~December 19, ~~it would~~ ~~have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows~~2008. ~~In response to the continued default~~Accordingly, the Company ~~secured~~had ~~$3.0~~operated ~~million subordinated~~without ~~loan~~a ~~facility, subsequent to the end of the quarter and as~~continued ~~described~~forbearance infrom ~~Note 19~~U. ~~This~~S. ~~facility is~~Bank ~~available~~and ~~for~~Wells ~~working~~Fargo ~~capital~~during ~~and~~this ~~general business purposes~~period.

~~The~~On ~~Company’s~~February 18, ~~Australian~~2009, ~~subsidiary~~Westaff ~~maintains~~entered aninto ~~A$12~~a Third Amended and ~~million~~Restated ~~Australian~~Forbearance ~~dollar~~Agreement ~~facility~~with ~~agreement~~U.S. ~~(the~~Bank ~~“A$~~and ~~Facility~~Wells ~~Agreement”)~~Fargo, ~~with~~under which, GEamong ~~Capital~~other things, asU.S. ~~primary~~Bank ~~agent,~~and ~~expiring~~Wells inFargo ~~May~~agreed to continue to forbear from exercising any of their default rights and remedies during a forbearance period ending on April 7, 2009. The Company Aagreed to a further reduction in the aggregate amount of the commitments under the Financing Agreement from $33.0 ~~Facility~~million to $28.0 million and U.S. Bank agreed to amend certain letters of credit outstanding under the Financing Agreement ~~includes~~(including aan outstanding letter of credit ~~sub-facility~~with a face amount of $27. ~~The~~0 ~~outstanding~~million in favor of Travelers, which is the carrier under the Company’s ~~balance~~existing onworkers’ compensation insurance program) to extend the ~~Australia~~expiration ~~Facility~~date of ~~Agreement~~such atletters ~~July~~of credit from February 1228, ~~2008~~2009 ~~was~~to $3April 7, 2009.1 In ~~million~~addition, atthe aCompany’s 10ability to borrow under the Financing Agreement (other than forced loans due to draws upon the outstanding letters of credit) was terminated.~~31%~~ The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate ~~per~~through ~~annum~~April 7, 2009.

During the 36 weeks ended July 12, 2008, the Company recorded a charge to earnings for the previously capitalized costs associated with the former credit facility of approximately $0.4 million.

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10The Company has recorded $0. ~~Related~~8 ~~Party~~million ~~Transactions~~of amortizable debt issuance costs related to the U.S. Bank credit facility as a long term asset. If the credit agreement was terminated for any reason, the amortization of these costs would be accelerated and the asset balance would be fully expensed at the time of termination.

~~The Company has an~~On ~~unsecured~~August 25, ~~subordinated~~2008, ~~promissory~~the ~~note~~Company insecured ana ~~amount of~~ $23.0 million, ~~dated~~subordinated ~~May 17,~~loan ~~2002~~facility ~~and~~with ~~payable~~its toprincipal ~~the~~stockholder, ~~former Chairman of the Board of Directors~~DelStaff. ~~The~~This ~~note~~facility ~~matured~~may onbe ~~August 18,~~used ~~2007,~~by ~~is now past due and has an interest rate equal to an indexed rate as calculated under~~ the Company’s ~~credit~~for working ~~facilities~~capital ~~plus seven percent, compounded monthly~~ and ~~payable~~general 60business ~~calendar~~purposes ~~days~~during ~~after~~ the ~~end~~term of ~~each of~~ the ~~Company’s fiscal~~ ~~quarters~~facility. The ~~effective~~outstanding ~~interest~~loan ~~rate on~~balance ~~July~~at January 1224, ~~2008~~2009 was 12$2.~~0%.~~7 ~~Payment~~million, ofwhich ~~interest~~includes isa ~~contingent~~$0.2 ~~on the Company~~million ~~meeting~~facility ~~minimum~~fee ~~availability~~that ~~requirements~~was ~~under~~added ~~its~~to ~~credit~~the ~~facilities. Additionally,~~loan ~~payments~~balance ofupon ~~principal~~receipt ~~or interest are prohibited in the event~~ of ~~any default under~~ the ~~credit~~initial ~~facilities~~advance. ~~Following~~Accrued aand ~~default~~unpaid ~~under~~interest aon ~~prior~~this ~~loan~~note ~~facility~~ at ~~the end of the third quarter of fiscal 2007~~January 24, a2009 ~~former lender~~was ~~exercised~~$0.1 ~~its right to prohibit repayment of the note at its maturity~~million. ~~U.S.~~See ~~Bank~~Note ~~has also exercised~~9. ~~its~~Subsequent ~~right~~ to ~~prohibit~~quarter ~~repayment~~end ofon ~~this note during the 12-week period ended July~~January 1229, ~~2008. Accrued~~ ~~and~~2009, ~~unpaid~~the ~~interest~~Company onwas ~~this~~advanced ~~note~~an atadditional ~~July 12, 2008 was~~ $~~297~~500,000 ~~and~~from ~~is included in accrued~~DelStaff. ~~expenses~~See inNote ~~the Company’s consolidated balance sheets~~18.

11The Company’s former Australian subsidiary had previously maintained an A$12 million Australian dollar facility agreement (the “A$ Facility Agreement”) with GE Capital, as primary agent, that had been set to expire in May 2009. ~~Commitments~~ The outstanding balance on the Australia Facility Agreement was $4.6 million at 8.17% rate per annum and ~~Contingencies~~was classified as current liabilities held for sale in the consolidated balance sheet as of November 1, 2008. As of January 24, 2009, the GE Capital debt was paid in full in connection with the sale.

InThe ~~the ordinary course of its business, the~~ Company ishas ~~periodically threatened~~an ~~with~~unsecured orsubordinated ~~named~~promissory asnote ~~a defendant~~ in ~~various~~an ~~lawsuits,~~amount of ~~including,~~$2.0 ~~among other~~million, ~~litigation~~dated ~~brought by former franchisees or licensees~~May 17, ~~and~~2002 ~~administrative claims~~ and ~~lawsuits~~payable ~~brought~~to bythe ~~employees or~~ former ~~employees,~~Chairman ~~etc. The Company insures itself to cover principal~~of ~~risks~~the ~~like~~Board ~~workers’~~of ~~compensation,~~Directors. Accrued ~~general liability, automobile liability,~~and ~~property~~unpaid ~~damage,~~interest ~~alternative~~on ~~staffing~~this ~~errors~~note ~~and~~at ~~omissions~~January 24, ~~fiduciary~~2009 ~~liability and~~was ~~fidelity losses~~$0.4 ~~Management~~million ~~believes~~and ~~there are no matters that will have a~~is ~~material~~included ~~adverse~~in ~~effect~~accrued onexpenses in the Company’s consolidated ~~financial~~balance ~~statements~~sheets.

During the fourth quarter of fiscal 2005, the Company was notified by the California Employment Development Department (“EDD”) that its domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004, which would result in additional unemployment taxes of approximately $0.9 ~~million together with interest at applicable statutory rates~~. ~~Management believes~~ Related ~~that~~Party it has properly calculated its unemployment insurance 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 outside counsel to resolve this matter. A hearing officer has been assigned to the matter and a confirmation of a hearing date from the EDD is awaited. Management believes the resolution of this matter will not have a material adverse effect on the Company’s consolidated financial statements.Transactions

12The Company has an unsecured subordinated promissory note in an amount of $2. ~~Workers~~0 million, dated May 17, 2002 and payable to the former Chairman of the Board of Directors. The note matured on August 18, 2007, is now past due and has an interest rate equal to an indexed rate as calculated under the Company’s ~~Compensation~~credit facilities plus seven percent, compounded monthly and payable 60 calendar days after the end of each of the Company’s fiscal quarters. The effective interest rate on January 24, 2009 was 10.25%. Payment of interest is contingent on the Company meeting minimum availability requirements under its credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the credit facilities. U.S. Bank, which is the agent and a lender under our primary credit facility, has exercised its right to prohibit repayment of the note. There were no interest payments on this note during fiscal year 2008 and during the first quarter of fiscal year 2009. Accrued and unpaid interest on this note at January 24, 2009 was $0.4 million and is included in accrued expenses in the Company’s consolidated balance sheets.

~~Domestically~~On August 25, 2008, the Company issecured ~~responsible~~a $3.0 million subordinated loan facility with its principal stockholder, DelStaff. This facility may be used by the Company for working capital and ~~pays~~general ~~workers’~~business ~~compensation~~purposes ~~costs~~during ~~for~~the ~~its~~term of the ~~temporary~~facility. The ~~and~~unpaid ~~regular~~principal ~~employees~~balance under ~~and~~the Subordinated Loan bears interest at an annual rate of twenty percent (20%). Interest is ~~self~~payable-~~insured~~in-kind ~~for~~and accrues monthly in arrears on the ~~deductible~~first ~~amount~~day of each month as an increase in the ~~related~~principal toamount ~~workers’~~of ~~compensation~~the ~~claims~~Subordinated Loan. ~~The~~A ~~Company~~default ~~accrues~~rate applies on all obligations under the ~~estimated~~Subordinated ~~costs~~Loan Agreement from and after the Maturity Date (August 15, 2009) and also during the existence of ~~workers’~~an ~~compensation~~Event ~~claims~~of Default (as defined in the Subordinated ~~based~~Loan ~~upon~~Agreement) at an annual rate of ten percent (10%) also payable-in-kind over the ~~expected~~then-existing ~~loss~~applicable ~~rates~~interest ~~within~~rate. If the ~~various~~principal ~~temporary~~is ~~employment~~not repaid on the ~~categories~~Maturity ~~provided~~Date, byan additional 5% of outstanding principal must be paid along with the ~~Company~~default rate interest. AtThe ~~least~~obligations ~~annually,~~under the ~~Company~~Subordinated ~~obtains~~Loan anAgreement ~~independent~~are ~~actuarial~~secured ~~valuation~~by a security interest in substantially all of the existing and future assets (the “Subordinated ~~estimated~~Collateral”) ~~costs~~of the Company. The lien granted to the Subordinated Lender in the Subordinated Collateral is subordinated to the lien in that same collateral granted to U.S. Bank. Borrowings in excess of ~~claims~~$1.0 ~~reported~~million ~~but~~require the ~~not~~Subordinated ~~settled~~Lender approval. The Subordinated Loan may be prepaid without penalty, ~~and~~subject ~~claims~~to ~~incurred~~approval ~~but~~by ~~not~~U.S. ~~reported~~Bank ~~(IBNR)~~and the terms of an Intercreditor Agreement. Under certain circumstances, ~~and~~the ~~adjusts~~Company must prepay all or a portion of any amounts outstanding under the ~~accruals~~Subordinated ~~based~~Loan Agreement, onsubject to the ~~results~~terms of the ~~valuations~~ Intercreditor Agreement. The ~~following~~outstanding ~~summarizes~~loan ~~the~~balance at January 24, ~~workers’~~2009 ~~compensation~~was ~~liability~~$2.7 asmillion, which includes a $0.2 million facility fee that was added to the loan balance upon receipt of ~~July~~the initial advance. Accrued and unpaid interest on this note at January 1224, 2009 was $0.1 million. There were no interest payments on this note during fiscal year 2008. Subsequent to ~~and~~quarter ~~November~~end on January 329, 2009, the Company was advanced an additional ~~2007:~~$500,000 from DelStaff. See Note 18.

	July 12, 2008		November 3, 2007
	(in millions)
Current portion	$	8.8	$	9.9
Long-term portion	15.0		16.0
Total Liabilities	$	23.8	$	25.9
Self-insurance deductible (per claim)	$	0.75	$	0.50
Letters of Credit (1)	$	27.3	$	28.4

10. Commitments and Contingencies

AsIn the ordinary course of ~~July 12~~its business, ~~2008~~the ~~and~~Company ~~November 3~~is periodically threatened with or named as a defendant in various lawsuits, ~~2007~~including, ~~the current~~among ~~liabilities~~other, ~~include~~litigation ~~$0.1~~brought by former franchisees or licensees, and administrative $0claims and lawsuits brought by employees or former employees.5 The ~~million~~Company ~~respectively,~~insures initself to cover principal risks like workers’ compensation, general liability, automobile ~~expense~~liability, ~~related~~property todamage, ~~Australia~~alternative staffing errors and omissions, fiduciary liability and fidelity losses. Management believes there are no matters that will have a material adverse effect on the Company’s consolidated financial statements.

(1)The insurance carrier requires the Company to collateralize its recorded obligations through the use of irrevocable letters of credit, surety bonds or cash.

13. Stock-Based Compensation

Stock Incentive Plan and Employee Stock Purchase Plan. The Company has a stock incentive plan and an Employee Stock Purchase Plan. Please refer to Note 14 of the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended November 3, 2007 for additional information related to these stock-based compensation plans.

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~~Restricted~~During ~~Stock~~the ~~Units. On~~fourth ~~May 30, 2008,~~quarter ~~the~~of ~~Company~~fiscal ~~granted~~year 902005,~~000~~ ~~restricted~~we ~~stock~~were notified ~~units~~by tothe ~~certain~~California ~~employees. Each~~Employment ~~grant~~Development ~~entitles~~Department ~~the~~(“EDD”) ~~recipient~~that ~~to convert~~our ~~units~~domestic tooperating ~~shares~~subsidiaries ofunemployment ~~common~~tax ~~stock~~rates ~~subject~~would tobe ~~terms~~increased retroactively offor ~~the~~both ~~awards~~calendar years 2005 and 2004. The ~~maximum~~total ~~units~~assessment toby bethe ~~awarded,~~EDD ifof ~~all~~additional ~~performance~~unemployment ~~conditions~~taxes ~~are~~for ~~met~~both years, ~~are~~net ~~135,000~~of ~~units~~applied overpayments is approximately $1. ~~The~~5 million including ~~restricted~~interest ~~stock~~at ~~units~~applicable ~~will~~statutory ~~vest,~~rates. Management ifbelieves ~~all conditions~~that ~~are~~it ~~met,~~has ~~50%~~properly calculated onits ~~October 30,~~unemployment ~~2010~~insurance tax and ~~50%~~is onin ~~October 29,~~compliance with all ~~2011~~applicable laws and regulations. ~~Besides~~The Company has timely appealed the ~~condition~~ruling ~~that~~by the ~~recipient~~ ~~must~~EDD ~~complete~~and ais ~~period~~working ofwith ~~continuous~~the outside ~~service~~counsel to ~~the~~resolve ~~Company~~this ~~through~~matter. Additionally, management contends that ~~and~~the ~~including~~notification by the ~~vest~~EDD ~~dates,~~of ~~there~~the is2004 aassessment ~~performance~~was ~~condition~~not timely and aholds ~~market~~the ~~condition,~~position ~~both~~that ofthe ~~which~~assessment ~~must~~is beprocedurally ~~met~~invalid. Consequently, at November 1, 2008 and at ~~First~~January 24, 2009, the Company has no reserve for ~~each~~the of2004 ~~three~~assessment ~~fiscal~~and has ~~years,~~accrued ~~beginning~~the ~~with~~assessment ~~fiscal~~for ~~2008~~2005 of $0.3 million, ~~the company~~including ~~must~~interest ~~meet~~and net of an ~~EBITDA~~applied ~~target~~overpayment. Although ~~and~~we believe ~~second,~~that ~~the~~we ~~company’s~~have ~~stock~~properly ~~price~~calculated ~~must~~our unemployment insurance tax and are ~~meet~~in ~~certain~~compliance ~~requirements~~with asall ~~compared~~applicable tolaws aand ~~designated~~regulations, ~~“peer”~~there ~~group’s~~can ~~average~~be no ~~stock~~assurances ~~price. As~~this ofwill ~~July~~be settled in our favor. ~~12,~~ Management ~~2008,~~believes the Company is well positioned to defend against the un-accrued portion and the ~~achievement~~ultimate resolution of ~~performance~~this ~~based~~matter ~~criteria~~will is not ~~probable;~~have ~~therefore no~~a ~~compensation~~material ~~expense~~adverse ~~has~~effect ~~been~~on ~~recognized~~the Company’s consolidated financial statements.

~~Stock-based compensation~~11. ~~Effective~~ Workers’ with the beginning of the first quarter of fiscal 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (“SFAS 123(R)”) using the modified prospective method of adoption.Compensation

~~For~~The ~~the~~Company ~~12-week~~is responsible for and ~~36-week~~pays workers’ compensation costs for ~~periods~~its ~~ended~~temporary ~~July 12,~~and ~~2008~~regular employees and ~~July~~is self-insured for the deductible amount related to workers’ compensation claims. 7, The ~~2007~~Company accrues the estimated costs of workers’ compensation claims based upon the expected loss rates within the various temporary employment categories provided by the Company. At least annually, the Company ~~recognized~~obtains an independent actuarial valuation of the ~~stock-~~estimated costs of claims reported but not settled, and claims incurred but not reported (IBNR), and adjusts the accruals based on the results of the valuations. The following summarizes the workers’ compensation ~~expense~~liability as ~~follows~~of January 24, 2009 and November 1, 2008:

	12 Weeks Ended				36 Weeks Ended
	January 24, 2009		November 1, 2008
	July 12,		July 7,		July 12,		July 7,
	(In millions)
	2008		2007		2008		2007
Current portion	$	8.0	$	8.0
	(In thousands)
Long-term portion	$	15.0	$	15.3
Stock-based compensation	$	50	$	408	$	63	$	547
Total Liabilities	$	23.0	$	23.3
Self-insurance deductible (per claim)	$	0.75	$	0.75
Letters of Credit (1)	$	27.3	$	27.3

(1)The insurance carrier requires the Company to collateralize its recorded obligations through the use of irrevocable letters of credit, surety bonds or cash. Per the Third Amended and Restated Forbearance Agreement, the letters of credit for Travelers in the amount of $27 million expire on April 7, 2009. The Ohio workers’ compensation letter of credit expired on February 28 2009.

12. Stock-Based Compensation

Stock Incentive Plan and Employee Stock Purchase Plan. The Company has a stock incentive plan and an Employee Stock Purchase Plan. Please refer to Note 12 of the Company’s audited consolidated financial statements included in the 2008 Form 10-K for additional information related to these stock-based compensation plans.

Restricted Stock Units. On May 30, 2008, the Company granted 90,000 restricted stock units to certain employees. Each grant entitles the recipient to convert units to shares of common stock subject to terms of the awards. The maximum units to be awarded, if all performance conditions are met, are 135,000 units. The restricted stock units will vest, if all conditions are met, 50% on October 30, 2010 and 50% on October 29, 2011. Besides the condition that the recipient must complete a period of continuous service to the Company through and including the vest dates, there is a performance condition and a market condition, both of which must be met. First, for each of three fiscal years, beginning with fiscal year 2008, the company must meet an EBITDA target and second, the company’s stock price must meet certain requirements as compared to a designated “peer” group’s average stock price. As of January 24, 2009, the achievement of performance based criteria is not probable; therefore no compensation expense has been recognized.

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

For the 12-week period ended January 24, 2009 and January 26, 2008, the Company recognized stock-based compensation expense as follows:

	12 Weeks Ended
	January 24, 2009		January 26, 2008
	(In thousands)

Stock-based compensation	$	42	$	74

Stock-based compensation expense is included in selling and administrative expenses.

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

The Company estimates the volatility of the common stock by using historical volatility over a period equal to the award’s expected term. The risk-free interest rates that are used in the valuation models are based upon yields of the U.S. Treasury constant maturities at the time of grant having a term that approximates the expected life of the options. Dividend yield is zero as the Company did not declare or pay dividends during fiscal 2008 or fiscal 2007, and its current credit facilities prohibit payment of dividends. The Company does not currently have plans to declare dividends in future years.

SFAS 123(R) requires companies to estimate future expected forfeitures at the date of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. In previous years, the Company had recognized the impact of forfeitures as they occurred. Under SFAS 123(R), the Company uses historical data to estimate pre-vesting forfeiture rates in determining the amount of stock-based compensation expense to recognize. During the 36 weeks ended July 12, 2008, the Company increased its forfeiture rate by analyzing historic forfeiture rates and reviewing outstanding unvested option grants which resulted in a decrease to stock-based compensation expense. The 12 and 36 weeks ended July 7, 2007 included $373,000 of expense related to the acceleration of options and restricted stock awards upon the departure of a specific executive. No such expense was present during the 12 and 36 weeks ended July 12, 2008.

All stock-based compensation awards are amortized on a straight-line basis over the requisite service periods of the awards.

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~~14. Loss~~The ~~per~~determination ~~share~~of the fair value of stock options, using the Black-Scholes model, is affected by the Company’s stock price as well as assumptions as to the Company’s expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior, the risk-free interest rate, and expected dividends.

The Company estimates the volatility of the common stock by using historical volatility over a period equal to the award’s expected term. The risk-free interest rates that are used in the valuation models are based upon yields of the U.S. Treasury constant maturities at the time of grant having a term that approximates the expected life of the options. Dividend yield is zero as the Company did not declare or pay dividends during fiscal year 2009 or fiscal year 2008, and its current credit facilities prohibit payment of dividends. The Company does not currently have plans to declare dividends in future years.

SFAS 123(R) requires companies to estimate future expected forfeitures at the date of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. In previous years, the Company had recognized the impact of forfeitures as they occurred. Under SFAS 123(R), the Company uses historical data to estimate pre-vesting forfeiture rates in determining the amount of stock-based compensation expense to recognize. During the 12 weeks ended January 24, 2009, the Company increased its forfeiture rate by analyzing historic forfeiture rates and reviewing outstanding unvested option grants which resulted in a decrease to stock-based compensation expense.

The Company will accelerate the vesting of all outstanding stock options per the Merger Agreement with Koosharem Corporation which was entered into on January 28, 2009. Upon completion of the Merger each outstanding stock option to purchase shares of Company common stock, whether or not then exercisable or vested, will be cancelled and converted into the right to receive, within ten business days following the effective time of the Merger, an amount in cash (subject to applicable withholding taxes) equal to (a) the excess, if any, of the Merger Consideration over the per share exercise price of the stock option, multiplied by (b) the number of shares of Company common stock subject to the stock option. See Note 18.

All stock-based compensation awards are amortized on a straight-line basis over the requisite service periods of the awards.

13. (Loss) Earnings per Share

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

	12 Weeks Ended						36 Weeks Ended
	July 12,			July 7,			July 12,			July 7,
	2008			2007			2008			2007
	(In thousands, except per share amounts)
Loss from continuing operations	$	(14,885	)	$	(2,846	)	$	(42,017	)	$	(2,816	)
Loss from discontinued operations, net of tax	(188		)	(73		)	(165		)	(363		)
Net loss	$	(15,073	)	$	(2,919	)	$	(42,182	)	$	(3,179	)
Denominator for basic and diluted loss per share - weighted average shares	16,697			16,623			16,697			16,607
Basic and Diluted earnings per share
Net loss from continuing operations	$	(0.89	)	$	(0.17	)	$	(2.52	)	$	(0.17	)
Net loss from discontinued operations	(0.01		)	(0.01		)	(0.01		)	(0.02		)
Loss per share
Basic and diluted	$	(0.90	)	$	(0.18	)	$	(2.53	)	$	(0.19	)
Anti-dilutive weighted shares excluded from diluted earnings per share	419			157			416			153

15. Company Restructuring

In the third quarter of fiscal 2007, the Company approved a restructuring plan to, among other things, reduce its workforce and consolidate facilities. Restructuring charges have been recorded to align the Company’s cost structure with changing market conditions and to create a more efficient organization. The Company’s restructuring charges have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities.

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

	36 weeks ended
	July 12, 2008
	(In thousands)
	Facilities
Restructuring accrual - November 3, 2007
Rent expense under non-cancellable leases reduced by estimated sublease income	$	1,146
Rents paid reduced by sublease income	(629		)
Restructuring benefit	(150		)
Restructuring accrual - July 12, 2008	$	367

During the 36 weeks ended July 12, 2008, the Company successfully negotiated early termination agreements for nine locations and entered into a sublease for three locations, the effects of which resulted in a $150,000 reduction in our estimated accrual. The Company is still responsible for lease payments on 12 locations and is actively negotiating early terminations, where possible, and sublease opportunities to mitigate its obligation. The restructuring accrual, representing rent expense under non-cancellable leases has been reduced by the current estimated future sublease income.

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16. Comprehensive loss

	12 Weeks Ended
	January 24, 2009			January 26, 2008
	(In thousands, except per share amounts)

Loss from continuing operations	$	(5,652	)	$	(2,066	)
Income from discontinued operations, net of income tax	1,347			171
Net loss	$	(4,305	)	$	(1,895	)
Denominator for basic earnings per share-weighted average shares	16,697			16,697

Effect of dilutive securities: stock options and awards	—			—
Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions	16,697			16,697

Loss per share from continuing operations
Basic	$	(0.34	)	$	(0.12	)
Diluted	(0.34		)	(0.12		)

Earnings per share from discontinued operations
Basic	$	0.08		$	0.01
Diluted	0.08			0.01
Loss per share
Basic	$	(0.26	)	$	(0.11	)
Diluted	$	(0.26	)	$	(0.11	)

Antidilutive weighted shares excluded from diluted earnings per share	718			396

~~Comprehensive loss~~14. Company ~~consists of the following:~~Restructuring

	12 Weeks Ended						36 Weeks Ended
	July 12,			July 7,			July 12,			July 7,
	2008			2007			2008			2007
	(In thousands)						(In thousands)
Net loss	$	(15,073	)	$	(2,919	)	$	(42,182	)	$	(3,179	)
Currency translation adjustments	209			285			130			1,153
Comprehensive loss	$	(14,864	)	$	(2,634	)	$	(42,052	)	$	(2,026	)

In the third quarter of fiscal year 2007, the Company approved a restructuring plan to, among other things, reduce its workforce and consolidate facilities. Restructuring charges have been recorded to align the Company’s cost structure with changing market conditions and to create a more efficient organization. The Company’s restructuring charges have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities.

17The Company accounted for each of these costs in accordance with FASB 146, “Accounting for Costs Associated with Exit or Disposal Activities.” ~~Operating~~The accrual represents the ~~Segments~~remaining costs related to leases associated with vacating certain facilities in the restructuring plan initiated in fiscal year 2007.

The ~~following~~detail ~~table summarizes~~is ~~reporting~~as ~~segment data~~follows:

	Domestic					New
	12 Weeks Ended January 24, 2009 (In thousands)
	Business Services			Australia		Zealand			Total
	Facilities
				(In thousands)
Accrual balance at November 1, 2008	$	300
12 Weeks Ended July 12, 2008
Rent expense under non-cancellable leases reduced by sublease income	(58		)
Revenue	$	71,894		$	25,732	$	1,805		$	99,431
Restructuring expense	52
Operating income (loss) from continuing operations	$	(14,255	)	$	200	$	33		$	(14,022	)
Accrual balance at January 24, 2009	$	294
12 Weeks Ended July 7, 2007
Revenue	$	99,401		$	21,446	$	1,574		$	122,421
Operating income (loss) from continuing operations	$	(2,794	)	$	89	$	(12	)	$	(2,717	)
36 Weeks Ended July 12, 2008
Revenue	$	228,186		$	76,974	$	5,159		$	310,319
Operating income (loss) from continuing operations	$	(20,561	)	$	644	$	88		$	(19,829	)
36 Weeks Ended July 7, 2007
Revenue	$	294,931		$	63,292	$	4,998		$	363,221
Operating income (loss) from continuing operations	$	(2,273	)	$	297	$	67		$	(1,909	)

18. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. On November 14, 2007 the FASB partially deferred the effective date of the standard for certain non-financial assets and liabilities. In February 2008, the FASB issued Final FASB staff Position, or FSP 157-2. The FSP which was effective upon issuance, delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value at least once a year, to fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on its operating income or net earnings.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS 159 on a retrospective basis unless they choose early adoption. The Company is evaluating the impact, if any, the adoption of SFAS 159 will have on its operating income or net earnings.

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InThe Company ~~December 2007,~~is ~~the FASB issued SFAS No. 141(R), “Business~~still ~~Combinations.” SFAS~~responsible ~~141(R) requires all~~for ~~business~~lease ~~combinations~~payments ~~completed~~on ~~after~~six ~~the~~locations ~~effective~~and ~~date~~is toactively ~~be accounted~~negotiating ~~for~~early byterminations, ~~applying~~where ~~the acquisition method (previously referred to as the purchase method)~~possible. ~~Companies applying this method~~The ~~will~~restructuring ~~have~~accrual, torepresenting ~~identify~~rent ~~the~~payments ~~acquirer,~~due ~~determine~~under ~~the~~non-cancellable leases ~~acquisition~~has ~~date~~been ~~and~~reduced ~~purchase price~~by ~~and~~any ~~recognize~~contractual atsubleases. The ~~their~~Company ~~acquisition-date~~has ~~fair~~not ~~values~~reduced the ~~identifiable~~January 24, ~~assets~~2009 ~~acquired,~~liability ~~liabilities~~by ~~assumed,~~any ~~and~~estimated ~~any~~future ~~non-controlling~~sublease ~~interests~~income inas the ~~acquiree. In~~ ~~the~~Company ~~case~~does ~~of a bargain~~not ~~purchase~~believe the ~~acquirer~~remaining isoffices ~~required~~will tobe ~~reevaluate~~subleased. The ~~the~~severance ~~measurements~~amounts ofrelated ~~the~~to headcount ~~recognized~~reductions ~~assets~~in ~~and liabilities at~~ the ~~acquisition~~first ~~date~~quarter ~~and~~of ~~recognize~~fiscal ayear ~~gain on~~2009 ~~that~~were ~~date~~included ifas anpart ~~excess~~of selling ~~remains.~~and ~~SFAS~~administrative ~~141(R) is~~expenses ~~effective~~and ~~for~~the ~~fiscal periods~~remaining ~~beginning~~accrual ~~after~~at ~~December~~January 1524, ~~2008.~~ ~~The~~2009 ~~Company~~ is ~~currently~~$0.1 ~~evaluating the impact of SFAS 141(R)~~million.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (an Amendment of ARB 51). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. In addition this statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 becomes effective for fiscal periods beginning after December 15~~, 2008~~. ~~The~~Comprehensive ~~Company is currently evaluating the impact of SFAS 160.~~Loss

InComprehensive ~~May 2008,~~loss ~~the~~consists ~~FASB issued SFAS No. 162, “The Hierarchy~~ of ~~Generally~~ ~~Accepted Accounting Principles.” SFAS No. 162 identifies~~ the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements which are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States. SFAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.:

19. Subsequent Events

	12 Weeks Ended
	January 24, 2009			January 26, 2008
	(In thousands)

Net loss	$	(4,305	)	$	(1,895	)
Currency translation adjustments (1)	(668		)	(571		)
Comprehensive loss	$	(4,973	)	$	(2,466	)

On(1) The ~~August~~currency ~~25,~~translation ~~2008,~~in the ~~Company entered into a Subordinated Loan~~ ~~Agreement~~current ~~with~~fiscal ~~its~~year ~~principal~~relates ~~stockholder,~~to ~~Delstaff, LLC, which provides a loan facility allowing~~ the ~~Company~~recognition toof ~~request~~cumulative ~~loan~~translation ~~advances in an aggregate~~amounts ~~principal~~due ~~amount of up~~ to ~~$3.0~~the ~~million. The~~sale ~~maturity date~~ of the ~~Subordinated~~Australia ~~Loan~~and ~~Agreement~~New isZealand ~~August 15, 2009 (the “Maturity Date”)~~operations.

~~The unpaid principal balance under the Subordinated Loan bears interest at an annual rate of twenty percent (20%)~~16. ~~Interest is payable-in-kind and accrues monthly in arrears on the first day of each month as an increase in the principal amount of the Subordinated Loan.~~ ~~A default rate applies on all~~Operating obligations under the Subordinated Loan Agreement from and after the Maturity Date and also during the existence of an Event of Default (as defined in the Subordinated Loan Agreement) at an annual rate of ten percent (10%) also payable-in-kind over the then-existing applicable interest rate and if principal is not repaid on the Maturity Date, an additional 5% of outstanding principal must be paid along with the default rate interest. The obligations under the Subordinated Loan Agreement are secured by a security interest in substantially all of the existing and future assets (the “Subordinated Collateral”) of the Company. The lien granted to the Subordinated Lender in the Subordinated Collateral is subordinated to the lien in that same collateral granted to U.S. Bank. The Subordinated Loan is available for working capital and general business purposes. Borrowings in excess of $1.0 million require the Subordinated Lender approval. The Subordinated Loan may be prepaid without penalty, subject to approval by U.S. Bank and the terms of an Intercreditor Agreement.Segments

~~Under~~The ~~certain~~Company ~~circumstances~~had four reportable segments; however, only its domestic subsidiary is currently included in our results of continuing operations. On March 31, 2008, the Company ~~must~~sold ~~prepay~~its ~~all~~former United orKingdom operations and related subsidiary. On November 10, 2008, the Company sold its former Australia and New Zealand subsidiaries. In accordance with SFAS 144, a ~~portion~~component of an entity that has been disposed of ~~any~~is ~~amounts~~considered ~~outstanding~~a ~~under~~discontinued operation. Accordingly, the ~~Subordinated~~Company ~~Loan~~has ~~Agreement,~~reflected ~~subject~~the toresults of these subsidiaries as discontinued operations in the ~~terms~~consolidated statement of ~~the~~operations ~~Intercreditor~~for ~~Agreement~~all periods presented. See Note 4.

~~Under~~Following the ~~terms~~sale of the ~~Subordinated~~Company’s ~~Loan~~former United ~~Agreement,~~Kingdom operations and related subsidiary and the sale of the Company’s ~~has~~former Australia and New Zealand ~~agreed~~subsidiaries, tothe ~~pay~~Company’s toremaining segment consist of the ~~Subordinated~~Domestic Business ~~Lender~~Services. Domestic Business Services provides a ~~facility~~variety ~~fee~~of attemporary staffing ~~the~~and ~~closing~~permanent ~~which~~placement services, primarily in clerical and light ~~will~~industrial bepositions, ~~added~~through toa ~~the~~network ~~principal~~of Company-owned and franchise agent offices. The segment consists of ~~the~~four ~~Subordinated~~geographically ~~Loans~~diverse atcompany regions under the ~~closing~~direction of regional vice presidents and one combined franchise region, ~~but~~which together comprise a single reportable operating segment as such ~~will~~term ~~not~~is ~~reduce~~defined ~~the~~under ~~availability~~SFAS No. 131, “Disclosures about Segments of ~~the~~an Enterprise $3and Related Information.0” ~~million~~Revenue ~~facility~~from the Domestic Business Services operating segment is derived wholly from the United States and its territories.

The following table summarizes reporting segment data for Domestic Business Services and the Discontinued Operations:

	12 Weeks ended January 24, 2009
	Domestic Business Svcs			Discontinued Operations			Total
	(In thousands)

Revenue	$	51,548		$	2,086		$	53,634
Operating loss from continuing operations	$	(5,066	)	$	(315	)	$	(5,381	)

	12 Weeks ended January 26, 2008
	Domestic Business Svcs			Discontinued Operations		Total
	(In thousands)

Revenue	$	81,048		$	35,786	$	116,834
Operating income (loss) from continuing operations	$	(1,964	)	$	170	$	(1,794	)

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17. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (R), “Business Combinations.” SFAS 141(R) requires all business combinations completed after the effective date to be accounted for by applying the acquisition method (previously referred to as the purchase method). Companies applying this method will have to identify the acquirer, determine the acquisition date and purchase price and recognize at their acquisition-date fair values the identifiable assets acquired, liabilities assumed, and any non-controlling interests in the acquiree. In the case of a bargain purchase the acquirer is required to reevaluate the measurements of the recognized assets and liabilities at the acquisition date and recognize a gain on that date if an excess remains. SFAS 141(R) is effective for fiscal periods beginning on or after December 15, 2008. The Company is currently evaluating the impact of SFAS 141(R).

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB agreed to a one-year deferral for the implementation of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on its operating results and financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. The Company adopted the SFAS No. 159 in the first quarter of fiscal year 2009 and there was no impact to operating results and financial condition.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (an Amendment of ARB 51). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure on the face of the consolidated statement of operations, of the amounts of consolidated net income (loss) attributable to the parent and to the non-controlling interest. In addition this statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 becomes effective for fiscal periods beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS 160.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS 161 to have a material impact on the consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements which are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States. SFAS No. 162 became effective November 15, 2008. The adoption of SFAS 162 did not have a material impact on our financial position or results of operations.

In November 2008 the Emerging Issues Task Force (“EITF”) issued Issue No. 08-7, “Accounting for Defensive Intangible Assets.” EITF 08-7 applies to all acquired intangible assets in which the acquirer does not intend to actively use the asset but intends to hold (lock up) the asset to prevent its competitors from obtaining access to the asset (a defensive asset), assets that the acquirer will never actually use, as well as assets that will be used by the acquirer during a transition period when the intention of the acquirer is to discontinue the use of those assets. EITF 08-7 is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of EITF 08-7 to have a material impact on the consolidated financial statements.

18. Subsequent Events

On January 28, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Koosharem Corporation, a California corporation doing business as Select Staffing (“Koosharem”) and Select Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Koosharem (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation and a wholly-owned subsidiary of Koosharem (the “Merger”), in accordance with and subject to the terms and conditions set forth in the Merger Agreement. Concurrently with the execution of the Merger Agreement, our principal stockholder, DelStaff entered into a Stock & Note Purchase Agreement with Koosharem (the “Purchase Agreement”), pursuant to which Koosharem will purchase, immediately prior to the effective time of the

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Merger: (1) all of the Company common stock owned by DelStaff in exchange for first lien term loan debt to be issued by Koosharem under Koosharem’s first lien credit facility bearing a face amount of $40.0 million and (2) all of the then outstanding subordinated notes (the “DelStaff Subordinated Notes”) issued by the Company to DelStaff under the Subordinated Loan Agreement, dated as of August 25, 2008, by and among the Company, Westaff (USA), Inc., Westaff Support, Inc., MediaWorld International (as borrowers) and DelStaff, in exchange for first lien term loan debt to be issued by Koosharem under Koosharem’s first lien credit facility bearing a face amount equal to the actual principal amount of the then outstanding DelStaff Subordinated Notes held by DelStaff, but which face amount shall not exceed $3.0 million. In addition, subject to the terms and conditions of the Purchase Agreement, DelStaff has agreed (1) to vote all of its shares of Company common stock in favor of the proposed Merger and against any third-party proposal to acquire the Company and (2) not to transfer its shares of Company common stock other than in accordance with the Merger Agreement.

Pursuant to the terms and conditions of the Merger Agreement, at the effective time of the Merger: (1) each outstanding share of Company common stock (other than those owned by the Company, Koosharem, Merger Sub or any subsidiary of the Company, Koosharem or Merger Sub, and other than those shares with respect to which dissenters rights are properly exercised) will be cancelled and converted into the right to receive $1.25 per share in cash (the “Merger Consideration”) and (2) each outstanding stock option to purchase shares of Company common stock, whether or not then exercisable or vested, will be cancelled and converted into the right to receive, within ten business days following the effective time of the Merger, an amount in cash (subject to applicable withholding taxes) equal to (a) the excess, if any, of the Merger Consideration over the per share exercise price of the stock option, multiplied by (b) the number of shares of Company common stock subject to the stock option.

Consummation of the Merger is subject to the satisfaction of various conditions, including, among others, the receipt by Koosharem and Merger Sub of the financing pursuant to and on the terms contemplated by the applicable commitment letters, the consummation of the transactions under the Purchase Agreement, the requisite approval by the Company’s stockholders, a requirement for the Company to hold a minimum of $9.5 million in cash and equivalents immediately prior to the closing date, the lack of any legal impediment to the Merger, and the lack of any Material Adverse Effect as specified in the Merger Agreement. Upon the recommendation of a special committee of independent members of the Company’s board of directors (the “Special Committee”), all of the members of the Company’s board of directors not affiliated with DelStaff approved the Merger Agreement and the Purchase Agreement. Robert W. Baird & Co. Incorporated provided a fairness opinion to the Special Committee. The Merger Agreement contains certain termination rights for both the Company, on the one hand, and Koosharem and Merger Sub, on the other hand. Upon any termination of the Merger Agreement, under specified circumstances, the Company may be required to pay Koosharem and Merger Sub a $2.0 million termination fee, and under other specified circumstances, Koosharem and Merger Sub may be required to pay the Company a $2.0 million termination fee.

For additional information regarding the Merger Agreement and the proposed Merger, please refer to the definitive proxy statement that the Company filed with the SEC on February 23, 2009 and mailed to the Company’s stockholders in connection with the planned special meeting of stockholders to be held on March 17, 2009 and at which the Company’s stockholders will be asked to consider and vote upon a proposal to adopt the Merger Agreement and the transactions contemplated thereby.

On January 29, 2009, the Company was advanced a loan in an aggregate principal amount of $500,000 from DelStaff under the previously-announced loan agreement, dated as of August 25, 2008 (the “Subordinated Loan Agreement”), among DelStaff and the Borrowers.

In January 2009, Westaff USA, Inc. was notified that Australia received a ruling from the Tasmanian Workplace Ombudsmen stating that Westaff Australia owed $40,000 in back wages to employees related to the fiscal year 2008. This amount was subsequently paid. Additionally, Westaff Australia has received a “Notice of Investigation” from the Workplace Ombudsmen (Melbourne) with respect to the Workplace Relations Act. To date, there has been no assessment and no accrual. In February of 2009, the Company was notified by the buyers of the Australian subsidiary that there are potential warranty claims under the Sale Agreement. The issue will be reviewed as the Company continues to negotiate the calculation of the working capital adjustment. However, based on our review of such claims, management believes this will not have a material adverse effect on the Company’s consolidated financial statements.

In February 2009, Westaff was notified by NASDAQ Stock Market (“NASDAQ”) that the closing bid price of the Company’s common stock has been at $1.00 per share or greater for at least 10 consecutive business days. Accordingly, the Company has regained compliance with Marketplace Rule 4450(a)(5) and the matter of the common stock possibly being delisted is now closed.

On February 18, 2009, Westaff (USA), Inc. and the Company entered into a Third Amended and Restated Forbearance Agreement with U.S. Bank and Wells Fargo, under which, among other things, U.S. Bank and Wells Fargo agreed to continue to forbear from exercising any of their default rights and remedies during a forbearance period ending on April 7, 2009. The Company agreed to a further reduction in the aggregate amount of the commitments under the Financing Agreement from $33.0 million to $28.0 million and U.S. Bank agreed to amend certain letters of credit outstanding under the Financing Agreement (including an outstanding letter of credit with a face amount of $27.0 million in favor of Travelers, which is the carrier under the Company’s existing workers’ compensation insurance program) to extend the expiration date of such letters of credit from February 28, 2009 to April 7, 2009. In addition, the Company’s ability to borrow under the Financing Agreement (other than forced loans due to draws upon the outstanding letters of credit) was terminated. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through April 7, 2009.

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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~~ assessment of significant changes and trends related to the results of operations and financial condition of Westaff, Inc., together with its ~~consolidated~~ consolidated subsidiaries. This discussion and analysis should be read in conjunction with the condensed ~~consolidated~~ consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in the ~~Company’s~~2008 ~~Annual Report on~~ Form 10-K ~~for the fiscal year ended November 3, 2007~~.

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

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Except for statements that are purely historical, all statements included in this Quarterly Report on Form 10-Q are forward-looking statements, and readers are cautioned not to place undue reliance on those statements. You can also identify these statements by the fact that they do not relate strictly to current facts and use words such as “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. The forward-looking statements include, without limitation our ability to achieve better people and process efficiencies as a result of changes to our operational structure, our ability to enhance the profitability of our accounts through hiring industry-proven placement consultants, and our ability to reduce selling and administrative costs. These statements are only predictions, and actual events or results may differ materially. The forward-looking statements provide our current expectations or forecasts of future events. These forward-looking statements are made based on information available as of the date of this report and are subject to a number of risks and uncertainties that could cause the Company’s actual results and financial position to differ materially from those expressed or implied in forward-looking statements and to be below the expectations of public market analysts and investors. Investors should bear this in mind as they consider forward-looking statements.

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

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, except as required by applicable laws and regulations.

Company Overview

We provide staffing services primarily in suburban and rural markets (“secondary markets”), as well as in the downtown areas of certain major urban centers (“primary markets”) in the United States (“US”), ~~Australia and New Zealand~~ through our network of Company-owned, and franchise agent ~~and licensed~~ offices. On March 31, 2008, the Company sold its former United Kingdom operations and related subsidiary,. On ~~as described in Note 5 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form~~November 10~~-Q. We offer a wide range of staffing solutions~~, ~~including permanent placement~~2008, ~~replacement,~~the ~~supplemental~~Company ~~and~~sold ~~on-site~~its ~~temporary programs~~former toAustralia ~~businesses~~ and ~~government~~New ~~agencies.~~Zealand ~~Our~~subsidiaries ~~primary focus is on~~as ~~recruiting~~described ~~and~~in ~~placing~~Note ~~clerical/administrative~~4 ~~and~~to ~~light industrial personnel. We have 60 years of experience in~~ the ~~staffing~~condensed ~~industry~~consolidated ~~and,~~financial asstatements ofincluded ~~July 12,~~elsewhere ~~2008, operated through 177 offices~~ in 46this ~~states~~Quarterly ~~and two foreign countries.~~ Report Ason ~~of July~~Form ~~12, 2008, 64% of these offices were Company~~10-~~owned and operated and 36% were operated by franchise agents~~Q. ~~Our corporate headquarters provides support services to the field offices, in areas such as marketing, human resources, risk management, legal, strategic sales, accounting, and information technology.~~

We offer a wide range of staffing solutions, including permanent placement, replacement, supplemental and on-site temporary programs to businesses and government agencies. Our primary focus is on recruiting and placing clerical/administrative and light industrial personnel. We have 60 years of experience in the staffing industry and currently operate through a network of 152 offices in 41 states. 60% of these offices are Company-owned and operated and 40% are operated by franchise agents. Our corporate headquarters provides support services to the field offices, in areas such as marketing, human resources, risk management, legal, strategic sales, accounting, and information technology.

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

The staffing industry is highly competitive with generally few barriers to entry, which contributes to significant price competition as competitors attempt to maintain or gain market share. On a prospective basis, we believe our focus on increasing clerical and administrative sales, improving results from underperforming field offices and prudently managing costs will permit us to improve our operating margins.

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Our business tends to be seasonal, with sales for the first fiscal ~~quarter~~ quarter typically lower than other fiscal quarters. This decrease results from the traditional holidays that are included within the first fiscal quarter, as well as other customer closures for the holiday season. These closures and post-holiday season declines in business activity negatively impact orders received from customers, particularly in the light industrial sector. Demand for staffing services historically tends to grow during the second and third fiscal quarters and has historically been greatest during the fourth fiscal quarter due largely to customers’ planning and business cycles. The recent economic downturn in the ~~first~~fiscal year ~~half~~2008 ofand the first quarter of fiscal ~~2008~~year 2009 has negatively impacted this expected historical growth, reducing demand for temporary employees and adversely affecting our sales. We anticipate that we may continue to experience weaker demand for temporary employees through the remainder of fiscal ~~2008~~year 2009.

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

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions affecting the amounts and disclosures reported within those financial statements. These estimates are evaluated on an ongoing basis by management and generally affect revenue recognition, workers’ compensation costs, collectability of accounts receivable, impairment of goodwill and intangible assets, contingencies, litigation and income taxes. Management’s estimates and assumptions are based on historical experiences and other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the financial statements.

Our critical accounting policies are described in the notes to the audited consolidated financial statements included in the ~~Company’s~~ ~~previously-filed~~2008 ~~Annual Report on~~ Form 10-K ~~for the fiscal year ended November 3, 2007~~. During the first quarter of fiscal year 2008, we adopted the provisions of FIN 48 effective November 4, 2007. Please see Note 43 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. ~~Except~~There ~~for the adoption of the provisions of FIN 48, there~~ were no changes to these policies during the 3612-week period ended ~~July~~ January 1224, ~~2008~~2009.

Executive Overview

Our gross revenues for the 12-week period ended ~~July~~January 1224, ~~2008~~2009 were $9951.4 5 million, which represents a decline of $2329.05 million ~~from gross revenues for the same period last year~~, ~~and~~or ~~gross revenues for the~~ 36~~-week period ended on July 12, 2008 were $310~~.~~3 million~~4%, ~~which represents a decline of $52.9 million~~ from the same period last year. The decline in revenues was primarily ~~attributable~~due to athe ~~softening~~economic ~~economy~~downturn ~~during~~that ~~the~~began ~~first~~in ~~three quarters~~early of fiscal year 2008, ~~our~~and ~~closing~~the ofloss ~~a number~~ of ~~branch~~two ~~offices~~large incustomers ~~fiscal 2007,~~which ~~the~~together ~~termination~~made ofup a9.2% ~~number~~ of revenues ~~unprofitable~~for ~~customer accounts, and~~ the ~~disruption~~ infirst ~~billing~~quarter ~~caused by our implementation~~ of ~~a new Pay/Bill system during~~ the ~~first~~fiscal ~~quarter~~year 2008.

Our ~~loss~~ ~~from~~net ~~continuing~~loss ~~operations~~ for the ~~12-week~~first ~~period~~quarter ~~ended~~of ~~July 12,~~fiscal ~~2008 was~~year ~~$14.9~~2009 ~~million~~was ~~which includes an impairment charge of~~ $114.53 million ~~compared~~ tocompared with a net loss of $21.89 million for the same period last year. The loss ~~from~~for ~~continuing~~the ~~operations~~first ~~for~~fiscal quarter of 2009 includes the gain on the sale of the Company’s ~~36-week~~former ~~period~~Australia ~~ended~~and ~~July 12,~~New ~~2008~~Zealand ~~was~~subsidiaries of $421.7 million, ~~which~~and ~~includes~~a loss of $200.2 4 million ~~income~~for ~~tax~~the ~~expense~~discontinued ~~and~~operations anfor ~~impairment~~the ~~charge~~same ofperiod. Additionally, the loss includes $110.53 million ~~compared~~ of personnel expense related to ~~income~~a ~~from~~reduction ~~continuing~~in ~~operations~~workforce and legal fees related to the potential merger of $20.82 million ~~for~~both ~~the~~which ~~same~~occurred ~~period~~in ~~last~~the first quarter of fiscal year 2009.

We have made changes in our ~~domestic~~ operational structure in an effort to achieve better people and process efficiencies. We We are committed to ~~enhancing~~improving the profitability of our organization byand ~~hiring~~increasing ~~industry-proven~~our ~~placement~~market ~~consultants~~share. ~~whom~~We wehave ~~expect~~had ~~will~~success ~~enhance~~in ~~the~~reducing ~~profitability of~~ our ~~existing~~selling ~~accounts~~ and administrative ~~will~~costs ~~increase~~in ~~market~~total, ~~share. We~~including, ~~have~~among ~~had~~other ~~success~~things, in reducing our headcount ~~domestic~~by ~~selling and~~approximately ~~administrative~~66 ~~costs~~positions in ~~total~~the first quarter of fiscal year 2009, and we are evaluating and implementing additional opportunities for savings. Further, we have divested anour ~~unprofitable~~ international ~~subsidiary~~subsidiaries in order to to concentrate on our core domestic business.

OnMerger March 31, 2008, the company sold its Westaff U.K. subsidiary operations, as described in Note 5 and recognized a gain of $1.2 million net of tax. During the 12 weeks ended July 12, 2008, the Company reduced the gain on the sale by about $0.3 million ($0.2 million net of tax) as a result of an amendment to the original sales agreement to forgive Fortis Recruitment Group Limited of various payables and royalties due to Westaff in lieu of agreeing to any working capital adjustments.Agreement

On January 28, 2009, we entered into the Merger Agreement with Koosharem and Merger Sub, pursuant to which Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation and a wholly-owned subsidiary of Koosharem, in accordance with and subject to the terms and conditions set forth in the Merger Agreement. For additional information regarding the Merger Agreement and the proposed Merger, please refer to the definitive proxy statement that the Company filed with the SEC on February 23, 2009 and mailed to the Company’s stockholders in connection with the planned special meeting of stockholders to be held on March 17, 2009 and at which the Company’s stockholders will be asked to consider and vote upon a proposal to adopt the Merger Agreement and the transactions contemplated thereby.

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Going Concern Considerations

The Company has incurred operating losses ~~and negative operating cash flow since~~ since the second quarter of fiscal year 2007, offset by slight operating income in the fourth quarter of fiscal year 2007. The Company may incur additional losses in the future, particularly because of the current ~~soft~~significant economic ~~conditions~~downturn and recession.

The Company’s operations, even if they perform in accordance with management’s expectations, may not generate sufficient cash flow to finance the Company’s operations at current levels or to permit the Company to expand its business. As a result, the Company expects to continue to rely on borrowing to finance its operations because equity financing is not likely to be available.

As discussed in Note 9 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, the Company has (through its wholly-owned subsidiary, Westaff (USA), Inc.) a financing agreement with U.S. Bank National Association (“U.S. Bank”) and Wells Fargo Bank, National Association (“Wells Fargo”), as lenders, which provides for a five-year revolving credit facility with an aggregate commitment of up to $33.0 million (the “Financing Agreement”). The Company is currently in default under certain covenants of the Financing Agreement and has entered into a Forbearance Agreement that provides for a forbearance period ending on August 26, 2008. While the Company is negotiating with its lenders for a waiver or continued forbearance in respect of this default, there can be no assurances that a waiver or continued forbearance can be obtained. If the Company is unable to obtain a waiver or continued forbearance on acceptable terms, the Company may be unable to access the funds necessary to satisfy its liquidity requirements, or may be unable to obtain letters of credit under the facility needed for the Company to obtain workers’ compensation insurance. In that case, its business and operating results would be adversely affected and the Company may be unable to continue its operations as a going concern. In response to the continued default, the Company secured $3.0 million subordinated loan facility, subsequent to the end of the quarter and as described in Note 19. This facility may be used by the Company for their working capital and general business purposes during the term of the facility.

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Results of Operations – 12 weeks ended July 12, 2008 and July 7, 2007

Revenue

Gross revenue from consolidated continuing operations declined by $23.0 million or 18.8% to $99.4 million for the 12 weeks ended July 12, 2008 as compared to the same period in the prior year. Domestic revenue declined by $27.5 million or 27.7% to $71.9 million driven largely by a 29.9% decrease in billed hours. Revenue from domestic franchise operations declined from $35.8 million or 17.3% to $29.6 million driven largely by a 21.4% decrease in billed hours due to the economic downturn. Revenue from domestic company-owned operations declined from $63.6 million or 33.5% to $42.3 million driven largely by a 34.9% decrease in billed hours due to the economic down turn and customer losses related to the restructuring plan implemented in the third quarter of fiscal 2007. This decline was particularly notable in the lower billings for several of our larger customers in the 12 weeks ended July 12, 2008. Total billings for the top 20 customers in the 12 weeks ended July 12, 2008 declined by $2.4 million or 11.2% to $18.6 million compared to the same period for fiscal 2007, offset slightly by an increase in our average bill rate. Our average bill rate on a per hour basis for temporary services increased 3.5% in the third quarter of fiscal 2008 compared with the third quarter of fiscal 2007. Additionally, revenue from domestic permanent placement, transition, and transfer fees declined by 26.1% or $1 million to $2.9 million for the 12 weeks ended July 12, 2008 as compared to the same period in the prior year.

Internationally, gross revenue increased by $4.5 million or 19.6% to $27.5 million for the 12 weeks ended July 12, 2008 as compared to the same period in the prior year. The increase was predominantly attributable to Australia primarily resulting from new business totaling $3.1 million. Additionally, total billings for the top ten customers for Australia in the 12 weeks ended July 12, 2008 increased $1.3 million or 12.7% compared to the same period for fiscal 2007. Australia accounted for $4.3 million of the gross revenue increase and New Zealand accounted for $0.2 million.

Costs of services and gross margin

Consolidated costs of services include hourly wages of temporary employees, employer payroll taxes, state unemployment and workers’ compensation costs and other temporary employee-related costs. Costs of services from continuing operations decreased $18.0 million or 17.8% to $83.1 million for the 12 weeks ended July 12, 2008 as compared to the same period in the prior year. The larger percentage decrease in consolidated gross revenue than in direct costs caused consolidated gross margin percentage to decrease to 16.4% in the 12 weeks ended July 12, 2008 compared to 17.4% in the same period in the prior year.

Domestic gross margin decreased to 17.7% in the 12 weeks ended July 12, 2008 compared to 18.2% in the same period in the prior year. This decrease is primarily as result of a decrease in permanent placement revenue in the 12 weeks ended July 12, 2008 compared to the same period in the prior year. Our average pay rate on a per hour basis for domestic temporary services increased 2.7% in the third quarter of fiscal 2008 compared with the third quarter of fiscal 2007. The resulting bill pay spread on domestic temporary services in the third quarter has increased 5.5% in the 12 weeks ended July 12, 2008 over the same period in the prior year. The change in the pay bill spread is a result of the continued focus of our sales efforts on opportunities yielding a higher gross margin, which has resulted in decreased sales revenue from lower margin business.

The gross margin in Australia, including permanent placements, decreased to 12.1% in the 12 weeks ended July 12, 2008 from 13.4% in the same period in the prior year. The gross margin for temporary labor in Australia decreased slightly to 11.2% in the 12 weeks ended July 12, 2008 from 11.7% in the same period in the prior year.

Franchise agents’ share of gross profit

Selling and administrative expenses

Consolidated selling and administrative expenses decreased $2.4 million or 14.3% to $14.5 million for the 12 weeks ended July 12, 2008 as compared to the same period in the prior year. This decrease is primarily attributable to decreased salary and related costs of $1.5 million as a result of decreased headcount in the domestic operations following the restructuring in the third quarter of fiscal 2007.

We achieved cost savings in domestic operations in the areas of facilities, advertising and promotion and supplies totaling $0.8 million as we consciously looked at opportunities to reduce spending in light of the significant decline in gross revenue. In addition, we incurred lower communications and services costs, largely due to improvements made in our information systems infrastructure. We achieved a $0.3 million reduction in bad debt expense due to management closely monitoring slow paying customers in light of the slowdown in the domestic U.S. economy and management being more proactive in reserving for those amounts in the early stages of identifying concerns.

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~~As a~~The ~~percentage~~Company’s ~~of revenue~~operations, ~~selling~~even ~~and~~if ~~administrative~~they perform ~~expenses~~in ~~were~~accordance ~~14.6%~~with ~~for~~management’s ~~the 12~~expectations, ~~weeks~~may ~~ended~~not ~~July 12,~~generate sufficient ~~2008,~~cash ~~compared~~flow toor ~~13.8%~~accounts ~~for~~receivables ~~same~~to ~~period~~finance in the Company’s ~~prior~~operations ~~year.~~at ~~The~~current ~~increase~~levels, ascollateralize aworkers’ ~~percent~~compensation ofliabilities, or ~~sales~~permit isthe ~~primarily~~Company ~~due~~ to ~~the decreased~~expand ~~level~~its ofbusiness. ~~sales~~As asa ~~total~~result, ~~selling~~the ~~and~~Company ~~administrative costs declined at~~expects ato ~~slower~~continue ~~rate~~to ~~for~~rely ~~the~~on 12operational ~~weeks~~cash ~~ended~~flow ~~July 12,~~to ~~2008~~fund asoperations ~~compared~~because alternative tosources ~~the~~of ~~same period~~capital inmay ~~the~~be ~~prior year~~unavailable.

~~Depreciation~~As discussed in Note 8 to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we are currently in default under certain covenants of the Financing Agreement, which provides for our primary credit facility, and ~~amortization~~we have entered into a Third Amended and Restated Forbearance Agreement, subject to the terms and conditions of which, among other things: (1) U.S. Bank and Wells Fargo agreed to forbear from exercising their default rights and remedies under the Financing Agreement during a forbearance period ending on April 7, 2009, (2) certain outstanding letters of credit expiring on February 28, 2009 (including the outstanding letter of credit in favor of Travelers) previously issued by U.S. Bank under the Financing Agreement were extended to April 7, 2009 and (3) the Company’s ability to borrow under the Financing Agreement (other than forced loans due to draws upon the outstanding letters of credit) was terminated. Because the Company no longer has any right to borrow under the Financing Agreement (other than forced loans due to draws upon the outstanding letters of credit), if the Company’s available cash is insufficient to satisfy the Company’s liquidity requirements and the Company is unable to find alternative sources of capital, the Company may be unable to continue its operations as a going concern. Under these circumstances, unless the proposed Merger with Koosharem is completed, the Company may be required to seek alternative transactions and/or consider filing for bankruptcy protection. There can be no assurance that any alternative sources of capital and/or alternative transactions would be available to us on acceptable terms or at all in the current challenging economic environment. While we were able to obtain a forbearance under the Third Amended and Restated Forbearance Agreement, there can be no assurances that we will be able to continue to satisfy the conditions required for the forbearance or that waivers or additional forbearances can be obtained by us on acceptable terms in the future. If we are unable to obtain waivers or additional forbearances from U.S. Bank and Wells Fargo on acceptable terms in the future, U.S. Bank and Wells Fargo would be able to elect at any time to pursue further remedies available to them under the Financing Agreement, including (1) electing not to renew or extend letters of credit issued under the Financing Agreement or (2) under specified conditions and at certain times, limiting our ability to use our cash to pay ordinary course expenses and possibly disrupting our business operations. In addition, while we were able to obtain an extension of the letters of credit under the Third Amended and Restated Forbearance Agreement, there can be no assurances that the Company will be able to continue to satisfy the conditions required for the extension and thereby obtain sufficient workers’ compensation coverage to support our operations. Our workers’ compensation carrier has the right to draw on the letter of credit supporting our workers’ compensation insurance prior to its expiration. If our workers’ compensation carrier draws on this letter of credit, U.S. Bank may require us to fund the draw in cash which would force us to borrow under the Financing Agreement. If no waiver or forbearance is then currently effective and U.S. Bank and Wells Fargo elect to pursue remedies under the Financing Agreement, such as calling the loan, there can be no assurance that we would be able to find alternative sources of capital to repay the loan, in which case we may be unable to continue our operations as a going concern.

~~Depreciation and~~In ~~amortization~~response ~~increased~~to ~~$0.2~~the ~~million~~continued ordefault, ~~27.5%~~the Company tosecured a $13.0 million, ~~excluding~~subordinated loan facility during the ~~write-down~~fourth quarter of ~~intangibles~~fiscal ofyear ~~$11~~2008.5 ~~million~~As asof ~~described~~January 24, 2009, loans in ~~Note~~an aggregate principal amount of $2.7 million, ~~for~~including ~~the~~a $0.2 ~~third~~million ~~quarter~~facility offee, ~~fiscal~~were ~~2008,~~outstanding asunder ~~compared~~this tofacility, ~~fiscal~~the ~~2007. This~~proceeds ~~increase~~of which iswere ~~primarily~~used ~~attributable~~by to the ~~new~~Company ~~Pay-Bill~~for ~~system~~working ~~implementation~~capital ~~costs,~~and ~~which~~general ~~were~~business purposes. On ~~previously~~January 29, ~~capitalized~~2009, the ~~during~~Company ~~pre-launch~~was ~~stages~~advanced ~~and~~an ~~now~~additional ~~are~~loan ~~amortized~~in toan ~~income~~aggregate ~~concurrent~~principal ~~with~~amount ~~the~~of ~~launch~~$500,000 offrom ~~the~~DelStaff. No ~~system~~additional borrowings inare available to the ~~first~~Company ~~quarter~~under ofthis ~~fiscal~~facility. See ~~2008~~Note 18.

~~Impairment~~The Company has extended its workers’ compensation insurance through April 1, 2009 which required $1.0 million in cash collateral as of ~~goodwill~~November 1, 2008 and $0.3 million ~~intangible~~paid by February 28, 2009. The collateral is included in other current assets. In addition, the letter of credit for the workers’ compensation insurance expired on February 28, 2009. However on February 18, 2009, the Company entered into a Third Amended and Restated Forbearance Agreement which extended the letter of credit to April 7, 2009. There can be no assurance that the Company will be able to renew or extend its current workers’ compensation policy or negotiate a new policy with a new carrier on terms acceptable to the Company.

AsAmong sother ~~result~~things, of the ~~continued~~Company ~~decline~~has inresponded to ~~revenue~~these ~~partially~~issues ~~due~~by toselling aits ~~loss of~~foreign aoperations ~~major~~in ~~customer~~Australia and ~~the~~New ~~continued~~Zealand, reducing ~~decline~~operating incosts, ~~market~~and ~~capitalization~~reducing ~~for Westaff,~~its ~~the~~headcount ~~Company~~by ~~determined~~approximately ~~that~~60 positions anin ~~interim~~the ~~impairment~~corporate ~~test~~and ~~was~~field ~~necessary~~ offices during ~~the~~fiscal ~~third~~year ~~quarter~~2008 ofand ~~2008.~~ 66 ~~Accordingly,~~positions in ~~accordance~~the ~~with~~first ~~SFAS~~quarter ~~No. 142,~~of ~~“Goodwill~~fiscal ~~and~~year ~~Other Intangible Assets” and SFAS No~~2009. ~~144~~ ~~“Accounting~~This ~~for~~was ~~the~~accomplished ~~Impairment~~by ofa ~~Disposal~~combination of ~~Long-Lived~~attrition ~~Assets,”~~and ~~the~~a ~~Company~~planned ~~applied~~reduction ~~impairment~~in ~~tests~~force. Total toseverance ~~its intangible~~amounts ~~assets,~~related ~~including~~to ~~goodwill~~headcount reductions ~~during~~recorded in the ~~third~~first quarter of ~~2008. The~~fiscal ~~Company~~year ~~determined~~2009 ~~its~~were ~~reporting~~$0.3 ~~units to~~million beand ~~the~~are ~~same~~included as ~~its~~part ~~operating segments. See Note 17. As a result~~ of ~~this testing~~selling and inadministrative ~~accordance with SFAS No~~expenses. ~~142,~~ ~~the~~The Company ~~recorded a~~ ~~pre-tax,~~continues ~~non-cash~~to ~~charge~~look offor ~~approximately~~and ~~$11.5~~act ~~million~~on inadditional ~~the~~cost ~~third~~savings ~~quarter~~measures ofwithin the ~~fiscal~~organization ~~2008~~while ~~related~~it tois ~~the~~exploring ~~impairment~~alternative offinancing ~~intangible~~arrangements ~~assets~~ and ~~goodwill~~ ~~associated~~strategic ~~with~~partnering ~~the~~alternatives. USSee ~~reporting unit~~Note 18.

~~Net~~The ~~interest~~audit ~~expense~~report contained in the 2008 Form 10-K included an explanatory paragraph from the Company’s independent registered public accounting firm expressing substantial doubt about the Company’s ability to continue as a going concern due to the fact that the Company has suffered recurring losses, is out of compliance with its bank covenants and may be unable to obtain an extension of its workers’ compensation policy.

Net interest expense decreased by $91,000 or 18.5% to $0.4 million for the 12 weeks ended July 12, 2008 as compared to the same period in the prior year. The decrease is primarily attributable to a decrease in the rate of interest resulting from the new financing agreement with U.S. Bank during fiscal 2008 and as described in Note 9.

Net loss

The result of the aforementioned items was a loss for the third quarter of fiscal 2008 of $15.1 million, or $0.90 per share, as compared with net loss of $2.9 million, or $0.18 per share for the third quarter of fiscal 2007.

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Results of Operations –— Fiscal 36Quarter ~~weeks~~ ended ~~July~~January 1224, ~~2008~~2009 and ~~July~~Fiscal Quarter ended January 726, ~~2007~~2008

Revenue

Gross revenue from ~~consolidated~~ continuing operations declined by $5229.95 million or 1436.64% to $~~310~~51.35 million for the 3612 weeks ended ~~July~~January 1224, ~~2008~~2009 as compared to the same period in the prior year. Domestic revenue declined by $66.7 million or 22.6% to $228.2 million driven largely by a 24.9% decrease in billed hours. Revenue from domestic franchise operations declined from $101.7 million or 8.6% to $93.0 million driven largely by a 12.6% decrease in billed hours due to economic downturn. Revenue from domestic company-owned operations declined from $193.2 million or 30.0% to $135.2 million driven largely by a 31.7% decrease in billed hours due to the economic down turn and customer losses related to the restructuring plan implemented in the third quarter of fiscal 2007. This decline was particularly notable in the lower billings for several of our larger customers. Total billings for the top 20 customers in the 36 weeks ended July 12, 2008 declined by $7.0 million or 10.6% to $59.1 million compared to the same period for fiscal 2007, offset slightly by an increase in our average bill rate. Our average bill rate on a per hour basis for temporary services increased 3.2% in the 36 weeks ended fiscal 2008 compared with the same period in the prior year. Additionally, revenue from domestic permanent placement, transition, and transfer fees declined by 22.3% or $2.8 million to $9.8 million for the 36 weeks ended July 12, 2008 as compared to the same period in the prior year.

~~Internationally, gross~~Revenue ~~revenue~~from ~~increased~~franchise byoperations declined from $1332.82 million or 2042.34% to $8218.15 million ~~for~~driven ~~the~~largely ~~36 week~~by ~~ended~~a ~~July 12,~~45.6% ~~2008~~decrease asin ~~compared~~billed hours due to the economic ~~same~~downturn. ~~period~~Revenue infrom ~~the~~company-owned ~~prior year. The~~operations ~~increase~~declined ~~was~~from ~~predominantly~~$48.7 ~~attributable~~million toor ~~Australia~~32.0% ~~primarily~~to ~~resulting~~$33.1 ~~from~~million ~~new~~driven ~~business~~largely ~~totaling~~by $6a 34.68% decrease in billed ~~million. $13.6~~hours ~~million~~due ofto the ~~gross~~economic downturn. ~~revenue~~Total ~~increase~~billings ~~was~~for ~~attributed~~the totop ~~Australia~~20 ~~and~~customers ~~New~~in ~~Zealand~~the ~~accounted~~12 ~~for~~weeks ended January 24, 2009 declined by $08.7 million or 40.2 % to $12.9 million compared to the same period for fiscal year 2008.

The decrease was offset slightly by an increase in our average bill rate. Our average bill rate on a per hour basis for temporary services increased 4.9% in the first quarter of fiscal year 2009 compared with the first quarter of fiscal year 2008.

However, revenue from permanent placement and transition fees declined by 56.3% or $0.4 million to $0.3 million for the 12 weeks ended January 24, 2009 as compared to the same period in the prior year.

Costs of services and gross margin

~~Consolidated costs~~Costs of services include hourly wages of temporary employees, employer ~~payroll~~ payroll taxes, state unemployment and workers’ compensation costs and other ~~temporary~~ temporary employee-related costs. Costs of services from continuing operations decreased $4023.87 million or 1335.6% to $~~259~~42.6 8 million for the 3612 weeks ended ~~July~~January 1224, 2009 ~~2008~~ as compared to the same period in ~~the prior year. The larger percentage decrease~~ in ~~gross revenue than in direct costs caused consolidated gross margin percentage to decrease to 16.4% in~~ the ~~36 weeks ended July 12, 2008 from 17.3% compared to the same period in the~~ prior year.

~~Domestic gross~~The ~~margin~~major ~~decreased~~component ~~slightly to 17.5%~~ in ~~the~~our 36costs ~~weeks~~of ~~ended~~services ~~July 12, 2008~~is ~~from 18.0% compared to~~ the ~~same~~pay ~~period~~rate ~~in the prior year. This decrease is primarily as result~~ of aour ~~decrease~~temporary ~~in permanent placement revenue in the 36 weeks ended July 12, 2008 compared to the same period in the prior year~~workers. Our average pay rate on a per hour basis for ~~domestic~~ temporary ~~services~~workers increased 32.45% in the 36first ~~weeks~~quarter of ~~ended~~fiscal ~~July 12,~~year ~~2008~~2009 as compared towith the ~~same~~first ~~period~~quarter inof fiscal ~~the prior~~ year. ~~The resulting bill pay spread on~~2008. ~~domestic~~Additionally ~~temporary~~the ~~services~~Company inadjusted ~~the~~its 36workers’ ~~weeks~~compensation ~~ended~~reserves with ~~July~~a ~~12,~~charge ~~2008~~of ~~has increased 2~~$0.8%6 ~~over~~million in the ~~same~~first ~~period~~quarter inof ~~the~~fiscal ~~prior~~ year. 2009. The ~~change~~workers’ incompensation ~~the~~insurance ~~pay~~as ~~bill spread~~a ispercentage aof ~~result~~direct oflabor ~~the~~was ~~continued~~7.3% ~~focus~~in ofthe ~~our~~current ~~sales~~fiscal ~~efforts~~quarter oncompared ~~opportunities~~to ~~yielding~~5.5% ~~a higher gross margin, which has resulted~~ in ~~decreased~~the ~~sales~~first ~~revenue from~~quarter ~~lower~~of ~~margin~~fiscal ~~business~~year 2008.

The gross margin percentage declined from 17.9% in ~~Australia,~~the ~~decreased~~prior fiscal year to 1217.20% infor the 3612 weeks ended ~~July~~January 1224, 2009. The pay-bill spread on temporary services in ~~2008~~the ~~from~~first ~~13.5~~quarter has increased 10.8% ~~compared~~in tothe 12 weeks ended January 24, 2009 over the same period in the prior year. The change in the pay-bill spread is a result of the continued focus of our sales efforts on opportunities yielding a higher gross margin. The increase in the average pay-bill rate was offset by an increase in the average pay rate and the charge to workers’ compensation to adjust the Company’s reserves in the first quarter of fiscal year 2009. Additionally, the significant reduction in permanent placement and transition fees negatively effected gross margin.

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 the sales or gross profit generated by the franchise agents’ operations. Franchise agents’ share of gross profit decreased $1.02 million or 935.42% to $102.02 million. The ~~which~~decrease ~~was~~is ~~slightly~~a ~~greater~~direct ~~than~~ result of the ~~decline~~42.4% decrease in ~~overall~~ franchise ~~owned~~operations ~~gross~~ revenue~~. Franchisees~~ ~~generally~~and ~~receive~~the a37.9% ~~greater~~decrease ~~share of~~in ~~permanent~~gross ~~placement~~margin for ~~revenue~~the ~~which~~first ~~declined~~quarter asof afiscal ~~lesser~~year ~~rate~~2009 ~~than~~compared ~~the~~to ~~overall decline~~same inperiod ~~permanent placement revenue~~ in the ~~first 36 weeks of fiscal~~prior ~~2008~~fiscal year. As a percentage of consolidated revenue, franchise agents’ share of gross profit increased slightly ~~from~~to 34.13% ~~for~~ for the first quarter of fiscal ~~2007~~year ~~quarters~~2009 toquarter, 3from 4.2% for the ~~fiscal~~first ~~2008 quarters. The increase was a result~~ quarter of ~~franchisee revenue~~fiscal ~~not~~year ~~dropping as significantly as the total decline in domestic revenue~~2008.

Selling and administrative expenses

~~Consolidated selling~~Selling and administrative expenses decreased $31.97 million or 813.08% to $4510.04 million for the 3612 weeks ended ~~July~~January 1224, ~~2008~~2009 as compared to the same period in the prior year. This decrease is primarily attributable to decreased salary and related costs of $31.74 million as a result of ~~decreased~~the Company’s reductions in headcount in 2008 and the ~~domestic~~ ~~operations~~recent ~~following~~reduction ~~the~~in ~~restructuring~~workforce in the first ~~third~~ quarter of fiscal ~~2007. We~~ ~~experienced~~2009, aoffset ~~decrease~~by ofseverance ~~$3.9 million~~and ofother ~~salary~~non-recurring personnel ~~and~~costs related ~~costs~~to inthe ~~our~~reduction ~~domestic~~in ~~operations~~work ~~which~~force ~~were offset~~that byincurred anduring ~~increase~~the first ~~internationally~~quarter of ~~approximately~~fiscal $0year 2009.~~2 million.~~

We achieved cost savings in ~~domestic operations in~~ the areas of ~~facilities,~~ advertising and promotion, travel, and ~~supplies~~professional fees totaling $2.0.6 million as we consciously looked at opportunities to reduce spending in light of the significant decline in gross revenue. In addition, we incurred ~~lower~~ lower communications and services costs, ~~largely due to improvements made in our information systems infrastructure. We achieved a reduction in bad debt expense~~ of $0.12 million, inlargely ~~the~~due ~~first 36 weeks of fiscal 2008 as compared~~ to ~~the first 36 weeks of fiscal 2007. Management is also closely monitoring slow~~improvements ~~paying~~made ~~customers~~ in ~~light~~our ofinformation ~~the~~systems ~~slow down in the domestic U~~infrastructure.~~S. economy and is more proactive in reserving for those amounts in the early stages of identifying concerns.~~

Offsetting these savings, the Company expensed legal fees related to the potential merger of $0.2 million in the first quarter of fiscal year 2009.

As a percentage of revenue, selling and administrative expenses were 20.3% for the 12 weeks ended January 24, 2009, compared to 14.9% for same period in the prior year. The increase as a percent of sales is primarily due to the decreased level of sales as total selling and administrative costs declined at a slower rate for the 12 weeks ended January 24, 2009 as compared to the same period in the prior year. In addition, there are certain fixed costs that do not correspond to fluctuations in revenue such as rent, utilities, and taxes and licenses. We have also experienced a slight increase in bad debt expense due to the downturn of the economy.

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As a percentage of revenue, selling and administrative expenses were 14.5% for the 36 weeks ended July 12, 2008, compared to 13.5% for the third fiscal quarter of 2007. The increase as a percent of sales is primarily due to the decreased level of sales as total selling and administrative costs declined at a slower rate for the 36 weeks ended July 12, 2008 as compared to the same period in the prior year.Restructuring

~~Restructuring~~ We ~~benefit~~recorded charges in the third and fourth quarter of fiscal year 2007 related to reduction in force and closure of several branch offices. In connection with the closures we recorded an expense in the third and fourth quarter of fiscal 2007 for severance payments and an estimate for lease termination costs calculated for the remainder of the lease term reduced by an estimate for sublease income. During the first quarter of fiscal year 2009, we adjusted the accrual for the recalculation of the rent due on one office. As of January 24, 2009, the Company is responsible for lease payments on six locations totaling $0.3 million. The restructuring accrual, representing rent payments under non-cancellable leases with lease terms that extend through fiscal year 2012 has been reduced by the current estimated future sublease income under contractual agreements.

We recorded restructuring charges in the third and fourth quarter of fiscal 2007 related to reduction in force and closure of several branch offices. In connection with the closure we recorded an expense in the third and fourth quarter for severance payments and an estimate for lease termination costs calculated for the remainder of the lease term reduced by an estimate for sublease income. During the 36 weeks ended July 12, 2008, the Company successfully negotiated early termination agreements for nine locations and entered into a sublease for three locations, the effects of which resulted in a $150,000 reduction in our estimated accrual. The Company is still responsible for lease payments on 12 locations and is actively negotiating early terminations, where possible, and sublease opportunities to mitigate its obligation. The restructuring accrual, representing rent expense under non-cancellable leases has been reduced by the current estimated future sublease income.

Depreciation and amortization

Depreciation and amortization ~~increased~~remained ~~$1.7~~consistent ~~million~~at ~~or 69.2% to~~ $41.1 million, ~~excluding the~~for ~~write-down~~the offirst ~~intangibles~~quarter of ~~$11.5~~fiscal ~~million as described in Note 7, for the 36~~year ~~weeks ended July 12~~2009, ~~2008~~ as compared to the ~~same period in the prior~~first ~~year. This increase is primarily attributable to an out of period adjustment of $0.9 million in the second~~ quarter of fiscal ~~2008,~~year ~~resulting in additional depreciation that should have been depreciated in prior periods~~2008. In ~~addition,~~The ~~the~~Company ~~increase~~has ~~was~~decreased ~~caused~~its bycapital ~~the~~expenditures ~~new~~during ~~Pay-Bill~~fiscal ~~system implementation~~year ~~costs,~~2008 ~~which were previously capitalized during pre-launch stages~~ and ~~now are amortized to income concurrent with~~ the ~~launch of the system in the~~ first quarter of fiscal ~~2008~~year 2009.

Impairment of goodwill and intangible assets

As a result of the continued decline in revenue partially due to a loss of a major customer and the continued decline in market capitalization for Westaff, the Company determined that an interim impairment test was necessary during the third quarter of 2008. Accordingly, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets,” the Company applied impairment tests to its intangible assets, including goodwill during the third quarter of 2008. The Company determined its reporting units to be the same as its operating segments. See Note 17. As a result of this testing and in accordance with SFAS No. 142, the Company recorded a pre-tax, non-cash charge of approximately $11.5 million in the third quarter of fiscal 2008 related to the impairment of intangible assets and goodwill associated with the US reporting unit.

Net interest expense

Net interest expense ~~increased~~for bythe ~~$0.5~~12 ~~million~~week ~~or 33.5% to $2.0 million for the~~period ~~first~~ended 36January 24, ~~weeks~~2009 ofremained ~~fiscal~~consistent ~~2008~~at as$0.6 million compared to the ~~first 36 weeks of fiscal~~ ~~2007. The~~same ~~increase~~period isfor ~~primarily attributable to~~ the ~~early~~prior ~~termination~~fiscal ~~of our credit facility with General~~year. ~~Electric~~Lower ~~Capital~~interest ~~Corporation~~rates in during the ~~second~~first quarter ofwere ~~fiscal~~offset ~~2008,~~by ~~resulting~~an increase in ~~additional~~average ~~amortization expense of $0~~borrowings.~~4 million from the write-off of deferred debt issue costs.~~

Income taxes

For the 36 12-weeks ended ~~July~~January 1224, ~~2008~~2009, we recorded aan ~~consolidated~~ income tax provision ~~on continuing operations~~ of ~~$20.2~~nil ~~million~~ on a pre-tax loss from continuing operations of $215.8 7 million. The ~~difference between the year~~decrease tofrom ~~date tax provision of $20.2 million and~~ the prior ~~period~~ year toprovision ~~date benefit~~ of $0.65 million ~~relates~~is primarily to the ~~establishment~~result of ~~a valuation allowance against a significant portion of~~ the ~~Company’s deferred tax assets in~~ ~~the~~establishment ~~second quarter~~ of ~~fiscal 2008. The Company recorded~~ a full valuation allowance inagainst ~~the second quarter of fiscal 2008 due to cumulative losses in recent periods and revised projections indicating continued losses for the remainder of fiscal 2008. Although it is possible these~~ deferred tax ~~assets~~ ~~could still be realized in the future, the Company believes that is it more likely than not that these deferred tax~~ assets ~~will not be realized in the~~ ~~foreseeable~~relating ~~future. The Company intends~~ to ~~reevaluate~~current ~~its~~period ~~position with respect to the valuation allowance periodically~~losses.

Net loss

The result of the aforementioned items ~~was~~plus athe ~~net~~gain ~~loss~~on ~~for~~the sale of the Australia ~~first~~and 36New ~~weeks~~Zealand subsidiaries of $1.7 million and the net loss from ~~fiscal~~discontinued ~~2008~~operations of $420.24 million, was a total net loss of $4.3 million, or $20.5326 per share, asfor the 12-week period ended January 24, 2009, as compared with a net loss of $31.29 million, or $0.1911 per share infor the same period ofin fiscal ~~2007~~year 2008.

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Liquidity and Capital Resources

We require significant amounts of working capital to operate our business and to pay expenses relating to employment of temporary employees. Our traditional use of cash is for financing of accounts receivable, particularly during periods of economic upswings and growth, when sales are seasonally high. In periods of economic contraction or recession, the Company builds cash collected from accounts receivable and uses this cash to fund operations as necessary. Temporary personnel are typically paid on a weekly basis while payments from customers are generally received 30 to 60 days after billing.

We finance our operations primarily through cash generated by our operating activities ~~and borrowings under our revolving credit facilities~~. Net cash provided by operations was $32.9 million for the 36first ~~weeks~~quarter ~~ended~~of ~~July 12~~2009, ~~2008,~~ compared to cash ~~provided~~used of $23.8 4 million for the ~~same~~first ~~period~~quarter inof ~~the prior~~fiscal year 2008, an increase of $6. 3 million. Changes in accounts receivable due to decreased sales and increased cash collections was the largest significant source of cash providing $1912.3 million during the 36first ~~weeks ended~~quarter ~~July 12,~~of ~~2008~~fiscal year 2009 as compared to $34.1 0 million for the ~~same~~first ~~period~~quarter inof ~~the prior~~fiscal year 2008. ~~This~~Cash ~~increase in changes in cash~~ provided by accounts receivable was offset by ancash ~~increase~~used into ~~changes~~pay in accounts payable and accrued expenses of $74.9 2 million~~. The~~ ~~increase~~during inthe ~~changes~~first inquarter ~~accounts receivable~~of ~~was~~fiscal ~~offset~~year by2009. The acompany ~~net~~used ~~loss of~~ $425.2 5 million of cash for ~~the~~accounts 36payable ~~weeks~~and ~~ended~~accrued ~~July 12, 2008,~~expenses ~~which~~in ~~includes~~the ~~$20.9~~first ~~million~~quarter of ~~non-cash~~the ~~income~~prior year. For ~~tax~~the ~~expense,~~first asquarter ~~described~~of fiscal inyear ~~Note 6~~2009, the net loss of $4.3 million includes $1.1 million in non-cash depreciation and amortization ~~and $11.5 million non-cash impairment~~, as ~~described in Note 7,~~ compared with a net loss of $31.2 9 million and $21.7 4 million in non-cash depreciation and amortization for the same period inof ~~the prior~~fiscal year 2008. Additionally, included in the Company’s net loss for the 36first ~~weeks~~quarter ~~ended~~of ~~July~~fiscal ~~12,~~year ~~2008~~2009, is a recorded gain, net of tax, of $1.0 7 million resulting from the sale of our former ~~United~~Australia and New ~~Kingdom~~Zealand operations and related ~~subsidiary~~subsidiaries on ~~March 31~~November 10, 2008, as described in Note 4.

WeOur ~~saw a decrease in our~~ domestic days sales outstanding, (DSO) is measured by dividing our ending net accounts receivable balance by total sales multiplied by the number of days in the fiscal quarter,. (DSO) ~~to 42.5 days~~ at ~~July~~January 1224, 2009 ~~2008~~decreased ~~compared~~ to 4537.7 8 days from 49.2 at ~~July~~January 726, ~~2007~~2008. ~~This~~ This decrease ~~was offset~~in ~~slightly~~DSO bywas ~~our~~a ~~Australian~~result ~~DSO~~of ~~increasing~~increased tocollection ~~45.7~~efforts ~~days~~in atfiscal ~~July 12,~~year 2008 ~~compared~~and tothe ~~45.0~~first ~~days~~quarter ~~at July 7, 2007. New Zealand accounts receivable are not a significant driver~~ of ~~our~~fiscal ~~consolidated~~year ~~DSO~~2009.

Cash provided by investing activities was $47.9 0 million for the 36first ~~weeks~~quarter ~~ended~~of ~~July 12,~~fiscal ~~2008~~year 2009, as compared to cash used for investing activities of $30.5 6 million for the ~~same period~~first inquarter ~~the~~of ~~prior~~fiscal year 2008. ~~Capital expenditures,~~The ~~which~~cash ~~are~~generated by investing activities was primarily ~~for~~due ~~information~~to ~~system~~the ~~initiatives~~net ~~both domestically~~proceeds ~~and~~of ~~internationally,~~$7.6 ~~represented~~million received from the ~~majority~~sale of ~~this~~the ~~decrease~~company’s former Australia and New Zealand operations and ~~from~~related subsidiaries, offset by related fees and expenses of $30.25 million. Capital ~~for~~spending in the 36first ~~weeks~~quarter ~~ended~~of ~~July 7~~fiscal year 2009 was only $10,000, ~~2007~~as compared to $0.3 7 million ~~for~~of capital expenditures in the 36first ~~weeks~~quarter ~~ended~~of ~~July 12,~~fiscal year 2008. As The ~~noted~~decrease ~~above~~ in ~~Discontinued~~capital ~~Operations, effective~~expenditures ~~March 31,~~for ~~2008~~ the ~~Company~~first ~~sold~~quarter ~~its~~of ~~U.K.~~fiscal year ~~subsidiary~~2009 ~~operations for~~was ~~net~~primarily ~~proceeds~~a result of ~~approximately~~less ~~$5.4~~purchases ~~million~~of furniture and equipment both domestically and internationally.

Cash used ~~for~~in financing activities was $109.2 8 million infor 36the ~~weeks~~first ~~ended~~quarter ~~July 12,~~of ~~2008~~fiscal year 2009 compared with cash ~~used~~provided ~~for~~by financing activities of $03.6 2 million for the ~~same~~first ~~period~~quarter inof ~~the prior~~fiscal year 2008. This increase in cash used for financing activities is primarily attributable to $5.2 million in net payments under line of credit agreements as compared to $3.4 million in net borrowings in the first quarter of fiscal year 2008, and an increase in restricted cash of $5.0 million during the 36first quarter ~~weeks~~of ~~ended~~fiscal ~~July~~year 122009, ~~2008,~~related asto ~~described~~the inCompany’s sale of its former ~~Note~~Australia ~~3. There~~and ~~was~~New noZealand ~~change~~operations inand related subsidiaries on November 10, ~~restricted~~2008 ~~cash~~as ~~for~~described ~~the~~in ~~same~~Note 4. ~~period~~Additionally, in the ~~prior~~first quarter of fiscal year~~. We~~ ~~paid~~2009 ~~down~~the ~~our~~Company ~~line~~made ofpayments ~~credit~~on bycapital lease obligations of $30.91 million ~~primarily~~and asalso areceived ~~result~~$0.5 ofmillion ~~our~~in ~~increase~~proceeds infrom ~~accounts~~its ~~receivable~~subordinated loan ~~collections~~facility with its principal stockholder, DelStaff. See Note 9.

OnThe ~~February 14, 2008, the~~ Company’s ~~(through its~~ wholly-owned subsidiary Westaff (USA), Inc.) has a five-year revolving credit facility under the Financing Agreement with U.S. Bank and Wells Fargo. As discussed in Note 8 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we are currently in default under certain covenants of the Financing Agreement and on February 18, 2009, we entered into a ~~financing~~Third ~~agreement~~Amended and Restated Forbearance Agreement with U.S. Bank and ~~National~~Wells ~~Association~~Fargo, (“under which, among other things, U.S. Bank~~”),~~ asand ~~agent,~~Wells Fargo agreed to continue to forbear from exercising any of their default rights and remedies during a forbearance period ending on April 7, 2009. Under the ~~lenders~~terms ~~thereto~~of the Third Amended and Restated Forbearance Agreement, ~~which~~the ~~provides~~Company ~~for~~agreed to a ~~five-year~~further reduction in ~~revolving~~the ~~credit~~aggregate ~~facility~~amount ~~that~~of ~~previously~~the ~~provided~~commitments ~~for~~under anthe ~~aggregate~~Financing ~~commitment~~Agreement from of$33.0 upmillion to $5028.0 million, and U.S. Bank agreed to amend certain letters of credit outstanding under the Financing Agreement (including aan outstanding letter of credit ~~sub-limit~~with a face amount of $3527.0 million in favor of Travelers, (which is the ~~“Financing~~carrier ~~Agreement”). Borrowings~~ under the ~~Financing~~Company’s ~~Agreement~~existing ~~bear~~workers’ ~~interest,~~compensation insurance atprogram) to extend the ~~Company’s~~expiration ~~election,~~date atof such letters of credit from ~~either~~February 28, U2009 to April 7, 2009.S. ~~Bank~~In addition, the Company’s ability ~~prime~~to ~~rate~~borrow orunder atthe ~~LIBOR~~Financing ~~plus~~Agreement an(other ~~applicable~~than ~~LIBOR~~forced ~~rate~~loans ~~margin~~due to ~~ranging~~draws ~~from~~upon ~~1.25%~~the tooutstanding 2letters of credit) was terminated.~~00%.~~ ~~The~~Because ~~Financing~~the ~~Agreement~~Company ~~provides~~no ~~that~~longer ahas ~~default~~any right ~~rate~~to ~~would~~borrow ~~apply~~under onthe ~~all~~Financing ~~loan~~Agreement ~~obligations~~(other inthan forced loans due to draws upon the ~~event~~outstanding letters of ~~default~~credit), ~~under~~if the Company’s available cash is ~~Financing~~insufficient ~~Agreement~~to satisfy the Company’s liquidity requirements and ~~related~~the ~~documents,~~Company atis unable ato ~~rate~~find ~~per~~alternative ~~annum~~sources of ~~2.0%~~capital, ~~above~~ the ~~applicable~~Company ~~interest~~may ~~rate. Interest~~be unable to iscontinue ~~payable~~its onoperations as a ~~monthly~~going ~~basis~~concern. The ~~Company~~interest rates applicable to ~~has~~the ~~$27.3~~loans ~~million~~made ofpursuant ~~letters~~to ofthe ~~credit~~Financing ~~supporting~~Agreement ~~workers’~~will ~~compensation~~continue at the default ~~obligations~~rate ~~outstanding~~through ~~under~~April 7, 2009. For additional information regarding the ~~U.S.~~Financing ~~Bank~~Agreement ~~Credit~~and ~~facility~~the atThird ~~July~~Amended ~~12,~~and ~~2008~~Restated Forbearance Agreement, ~~but~~please refer to Note 8 to the condensed consolidated financial statements included elsewhere noin ~~cash~~this ~~borrowings~~Quarterly Report on Form 10-Q.

On May 23, 2008, the Company received a notice of default from U.S. Bank National Association (“U.S. Bank”) (as agent for itself and Wells Fargo Bank, National Association (“Wells Fargo”), as lenders, stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to the Company’s failure to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for the fiscal period ended April 19, 2008; and (2) as a result of the Event of Default, effective May 21, 2008, U.S. Bank increased the rate of interest to the default rate of interest on the borrowings outstanding under the Financing Agreement.

On July 31, 2008, the Company entered into a Forbearance Agreement with U.S. Bank and the lenders. Pursuant to the terms of the Forbearance Agreement, (i) the lenders agreed to forbear from exercising any of their default rights and remedies in response to the occurrence and continuance of the Event of Default commencing on the date of the Forbearance Agreement and ending on August 26, 2008, (ii) the Company agreed to a reduction in the aggregate amount of the commitments under the Financing Agreement from $50.0 million to $33.0 million effective as of June 23, 2008, and (iii) U.S. Bank agreed to maintain a reserve against the revolving credit availability to cover the Company’s payroll and payroll tax obligations.

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The Company ~~is currently~~has ina ~~discussions~~$3.0 ~~with~~million ~~U.S.~~subordinated ~~Bank~~loan infacility ~~order~~with toits ~~seek~~principal stockholder, DelStaff, under a ~~waiver~~subordinated orloan ~~continued forbearance~~agreement, indated ~~respect~~as of August 25, 2008, by and among the ~~Event~~Company, ofWestaff ~~Default~~(USA), Inc. ~~There~~, ~~can~~Westaff beSupport, Inc., MediaWorld noInternational ~~assurance~~(as ~~that~~borrowers) ~~the~~and ~~Company~~DelStaff. For ~~will~~additional beinformation ~~able~~regarding tothe ~~obtain~~subordinated aloan ~~waiver~~facility, orplease ~~continued~~refer to ~~forbearance~~Note or9 ~~that~~to ~~such~~the acondensed ~~waiver~~consolidated orfinancial ~~continued~~statements ~~forbearance~~included ~~would~~elsewhere bein onthis ~~terms~~Quarterly ~~acceptable~~Report toon ~~the Company~~Form 10-Q. IfThe outstanding ~~the~~loan ~~Company~~balance isat ~~unable~~January 24, to2009 ~~obtain~~was a$2.7 ~~waiver~~million, which orincludes ~~continued~~a ~~forbearance~~$0.2 ~~and~~million ~~the~~facility ~~lenders~~fee ~~elect~~that was added to ~~pursue~~the ~~remedies~~loan ~~under~~balance upon receipt of the initial advance. Accrued ~~Financing~~and ~~Agreement,~~unpaid ~~such~~interest ason ~~limiting~~this ornote ~~terminating~~at ~~the~~January 24, ~~Company’s~~2009 ~~right~~was to$0.1 ~~borrow~~million. Subsequent ~~under~~to ~~the~~quarter ~~Financing~~end ~~Agreement~~on orJanuary 29, 2009, ~~electing~~the ~~not~~Company towas ~~renew~~advanced ~~letters~~an ~~of credit~~additional $500,000 itfrom ~~would~~DelStaff. No ~~have~~additional aborrowings ~~material~~are ~~adverse~~available ~~effect~~under this onfacility. See Note 18 to the ~~Company’s~~condensed ~~business,~~ consolidated financial statements ~~condition,~~included ~~results~~elsewhere ofin ~~operations~~this ~~and~~Quarterly ~~cash~~Report ~~flows~~on Form 10-Q.

The Company ~~secured~~’s former Australian subsidiary had previously maintained an A$~~3.0~~12 million ~~subordinated~~Australian ~~loan~~dollar facility, ~~subsequent~~agreement to (the ~~end~~“A$ ofFacility ~~the~~Agreement”) ~~quarter~~with ~~and~~GE Capital, as ~~described~~primary inagent, ~~Note~~that ~~19.~~had ~~This~~been ~~facility~~set ~~may~~to beexpire ~~used~~in byMay 2009. The outstanding balance on the ~~Company~~Australia ~~for~~Facility ~~working~~Agreement ~~capital~~was $4.6 million at 8.17% rate per annum and ~~general~~was ~~business~~classified as ~~purposes~~current ~~during~~liabilities held for sale in the ~~term~~consolidated balance sheet as of November 1, 2008. As of January 24, 2009, the ~~facility~~GE Capital debt was paid in full in connection with the sale.

The Company’s has an unsecured subordinated ~~Australian~~promissory ~~subsidiary~~note ~~maintains~~in an Aamount of $122.0 million, ~~Australian~~dated ~~dollar~~May 17, ~~facility~~2002 and payable ~~agreement~~to (the ~~“A$~~former ~~Facility~~Chairman ~~Agreement”)~~of ~~with~~the GEBoard ~~Capital,~~of asDirectors. Accrued ~~primary~~and ~~agent, expiring~~unpaid ininterest ~~May~~on this note at January 24, 2009~~. The~~ Awas $ ~~Facility~~0.4 ~~Agreement~~million ~~includes~~and ais ~~letter~~included ofin ~~credit~~accrued ~~sub-facility~~expenses in the Company’s consolidated balance sheets.

~~The~~We ~~Company~~are ~~has~~responsible ~~an unsecured~~for ~~subordinated promissory note in an amount of $2.0 million, dated May 17, 2002~~ and ~~payable~~pay ~~to the former Chairman of the Board of Directors. The note,~~workers’ ~~matured~~compensation oncosts ~~August 18,~~for ~~2007,~~our isdomestic ~~now~~temporary ~~past due~~ and ~~has~~regular anemployees ~~interest~~and ~~rate equal~~are toself-insured anfor ~~indexed~~the ~~rate~~deductible asamount ~~calculated~~related ~~under~~to ~~the Company~~workers’s ~~credit~~compensation ~~facilities plus~~claims ~~seven~~to ~~percent,~~a ~~compounded~~limit ~~monthly and payable 60 calendar days after the end~~ of ~~each~~ ~~of the Company’s fiscal quarters. The effective interest rate on July 12~~$750, ~~2008~~000 ~~was~~per ~~12.0%.~~claim ~~Payment~~for offiscal ~~interest~~year is2009 ~~contingent~~and ~~on the Company meeting~~fiscal ~~minimum~~year ~~availability requirements under its credit facilities~~2008. ~~Additionally~~Typically, ~~payments~~ ofeach ~~principal~~policy oryear ~~interest are prohibited in~~ the ~~event~~terms of ~~any default under~~ the ~~credit~~agreement ~~facilities. U.S.~~with ~~Bank,~~the ~~which~~insurance iscarrier ~~the~~are ~~agent~~renegotiated. ~~and~~The ainsurance ~~lender~~carrier ~~under~~requires ~~our~~us ~~primary credit facility, has~~to ~~exercised~~collateralize ~~its~~our ~~right~~obligations tothrough ~~prohibit~~the ~~repayment~~use of ~~the~~irrevocable ~~note.~~standby ~~Accrued~~letters ~~and unpaid interest~~of ~~on this note at July 12~~credit, ~~2008~~surety ~~was~~bonds ~~$297,000~~or ~~and is included in accrued expenses in the Company’s consolidated balance sheets~~cash.

WeFor ~~work~~the topolicy ~~balance~~term ~~our worldwide~~of ~~cash~~November 1, ~~needs~~ 2008 through ~~dividends~~April 1, ~~from~~2009, ~~and~~we ~~loans~~have topaid ~~our~~cash ~~international subsidiaries.~~premiums ~~These~~of ~~loans~~$1.6 ~~and~~million ~~dividends~~for ~~are~~the workers’ ~~limited~~compensation byinsurance ~~the~~program. ~~cash~~Cash ~~availability and~~payments ~~needs~~for of2009 ~~each~~policy ~~respective~~year claims ~~subsidiary,~~will ~~restrictions~~be ~~imposed~~paid directly by ~~our~~us ~~senior secured~~up ~~debt~~to ~~facilities~~our ~~and,~~deductible inof ~~some cases~~$750,000 ~~statutory~~per ~~regulations~~claim. As of ~~the subsidiary.~~January 24, ~~The~~2009, ~~U.S.~~we ~~operations~~had ~~cannot~~outstanding ~~directly~~$27.3 million ~~draw~~of onletters of ~~the~~credit ~~excess~~and ~~borrowing availability~~paid ofan ~~the~~additional ~~Australian~~$1.3 million ~~operations;~~in ~~however,~~cash weto ~~may~~secure ~~request repayments~~all onestimated ~~its~~outstanding ~~intercompany~~obligations ~~loan~~under toour ~~Australia,~~workers’ ~~along~~compensation ~~with~~program ~~intercompany~~for all ~~interest~~years ~~and royalties~~except 2003, ~~although~~which ~~remittances~~is ~~from~~fully ~~Australia~~funded ~~may~~although besubject ~~limited~~to ~~by certain~~annual ~~covenants~~retroactive ~~under~~premium ~~the~~adjustments ~~terms~~based ofon ~~the~~actual ~~Australia~~claims ~~credit facility~~activity. ~~Outstanding~~ ~~principal~~We ~~on the intercompany~~will ~~loan~~continue to ~~Australia~~make ~~was~~ongoing ~~approximately~~cash ~~$5.2~~payments ~~million~~for asclaims offor ~~July 12,~~all ~~2008. An~~other ~~additional~~open ~~$1.4 million was outstanding~~policy ~~from~~years ~~New~~(except ~~Zealand~~for to2003 ~~the~~as Unoted above).S.

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

For our 2008 policy year insurance program, we anticipate total cash premium payments of $4.2 million will be paid during fiscal 2008 in equal monthly installments, which commenced on November 1, 2007, as compared to $4.8 million paid during fiscal 2007. Cash payments for 2008 policy year claims will be paid directly by us up to our deductible which was increased from $500,000 per claim to $750,000 per claim for fiscal 2008 claims. As of July 12, 2008, we had outstanding $27.3 million of letters of credit to secure all estimated outstanding obligations under our workers’ compensation program for all years except 2003, which is fully funded although subject to annual retroactive premium adjustments based on actual claims activity. We will also make ongoing cash payments for claims for all other open policy years (except for 2003 as noted above).

We calculate the estimated liabilities associated with these programs based on our estimate of the ultimate costs to settle known claims as well as claims incurred but not yet reported to us (“IBNR claims”) as of the balance sheet date. Our estimated liabilities are not discounted and are based on information provided by our insurance brokers, insurers and actuary, combined with our judgment regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation and our claims settlement practices. We maintain stop-loss coverage with third party insurers to limit our total exposure for each of these programs. Significant judgment is required to estimate IBNR amounts as parties have yet to assert such claims. If actual claims trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

We continue to evaluate other opportunities to further strengthen our financial position and improve our liquidity. For a discussion regarding going concern considerations, please see “Going Concern Considerations” above elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

~~For~~Item a3. ~~discussion~~Quantitative ~~regarding going concern considerations, please see “Going Concern Considerations” above elsewhere in this Management’s Discussion~~ and ~~Analysis~~Qualitative ofDisclosures ~~Financial Condition~~about ~~and~~Market ~~Results of Operations.~~Risk

We are exposed to certain market risks from transactions that are entered into during the normal course of business. Our primary market risk exposure relates to interest rate risk. At January 24, 2009, our outstanding debt under variable-rate interest borrowings was approximately $4.8 million. A change of two percentage points in the interest rates would cause a change in interest expense of approximately $0.1 million on an annual basis. Our exposure to market risk for changes in interest rates is not significant with respect to interest income, as our investment portfolio is not material to our consolidated balance sheet. We currently have no plans to hold an investment portfolio that includes derivative financial instruments.

~~Table~~We ofdo not currently hold any market risk ~~Contents~~sensitive instruments entered into for hedging risks related to foreign currencies. In addition, we have not entered into any transactions with derivative financial instruments for trading purposes.

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~24

~~We are exposed to certain~~Table ~~market risks from transactions that are entered into during the normal course~~ of business. Our primary market risk exposure relates to interest rate risk. At July 12, 2008, our outstanding debt under variable-rate interest borrowings was approximately $5.1 million. A change of two percentage points in the interest rates would cause a change in interest expense of approximately $0.1 million on an annual basis. Our exposure to market risk for changes in interest rates is not significant with respect to interest income, as our investment portfolio is not material to our consolidated balance sheet. We currently have no plans to hold an investment portfolio that includes derivative financial instruments.Contents

ForItem the 36 weeks ended July 12, 2008, our international operations comprised 264.5% ofControls our gross revenue and, as of the end of that period, 25.3% of our total assets. We are exposed to foreign currency risk primarily due to our investments in foreign subsidiaries. The Company’s Australian subsidiary maintains a A$12 million Australian dollar facility agreement, which allows our Australian subsidiary to borrow in local currency and partially mitigates the exchange rate risk resulting from fluctuations in foreign currency denominated net investments in these subsidiaries in relation to the U.S. dollar. We do not currently hold any market risk sensitive instruments entered into for hedging risks related to foreign currencies. In addition, we have not entered into any transactions with derivative financial instruments for trading purposes.Procedures

25Management’s Evaluation of Disclosure Controls and Procedures.

~~Table~~We carried out an evaluation required by the Securities Exchange Act of 1934 (1934 Act), under the supervision and with the ~~Contents~~participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the 1934 Act. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures. Based on its evaluation, and in light of the previously identified material weaknesses in internal control over financial reporting identified in each of the first three quarters of fiscal year 2008, relating to a lack of qualified resources within the accounting department which has since been remediated, the Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of January 24, 2009, the Company’s disclosure controls and procedures were effective.

~~Item~~Based ~~4T.~~on ~~Controls~~this evaluation, the Chief Executive Officer and ~~Procedures~~Chief Financial Officer concluded that as of January 24, 2009 (the end of the period covered by this report), our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

WeChanges ~~maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed~~ in ~~our~~Internal ~~reports~~Control ~~filed~~over under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial ~~Officer, as~~ ~~appropriate, to allow timely decisions regarding required disclosure~~Reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

WeDuring ~~carried out an evaluation, under~~ the ~~supervision and with the participation of our senior~~ ~~management,~~quarter ~~including~~ended ~~our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July~~January 1224, ~~2008~~2009, ~~which~~there is the end of the period covered by this Quarterly Report on Form 10-Q. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ~~not~~ ~~effective~~no aschanges ~~of July 12, 2008 due to the existence of a continuing material weakness relating to a lack of qualified resources within the accounting department as previously identified~~ in our ~~Quarterly Reports on Form 10-Q~~internal ~~for~~control ~~the~~over ~~quarterly~~financial ~~periods~~reporting ~~ended~~that ~~January 26, 2008 and April 19, 2008. These prior Quarterly Reports also identified several other weaknesses in our disclosure controls and procedures, which we believe~~ have ~~been~~materially ~~remedied~~affected, ~~including~~or ~~burdens placed on our existing~~are ~~accounting~~reasonably ~~department~~likely byto ~~billing~~materially ~~system implementation issues~~affect, ~~since resolved, a delayed finalization of~~ our ~~fiscal~~internal ~~year~~control ~~2007~~over ~~audit, since completed, and~~financial ~~issues in completing account reconciliations on a timely basis, which the Company is making progress in resolving by improving the Company’s focus on and prioritizing this process~~reporting.

In fiscal 2008, the Company underwent a change in senior financial management with the resignation of the Chief Financial Officer and Controller, effective May 15, 2008. Subsequently, effective June 16, 2008, the Company underwent a further change in management, including the hiring of a new Chief Operating Officer and Chief Financial Officer, both with significant industry and Company experience. The Company continues to undertake a number of steps, including retaining executive search firms, to fill the vacant Controller position.25

~~Other~~Table ~~than~~of improvements in our situation discussed above, there was no change in our internal control over financial reporting that occurred during the quarterly period ended July 12, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Contents

26Part II. Other Information

TableItem of Contents1. Legal Proceedings

~~Part~~In IIthe ordinary course of our business, we are periodically threatened with or named as a defendant in various lawsuits. The ~~Other~~principal ~~Information~~risks that we insure against, subject to and upon the terms and conditions of our various insurance policies, are workers’ compensation, general liability, automobile liability, property damage, alternative staffing errors and omissions, fiduciary liability and fidelity losses.

~~Item~~During the fourth quarter of fiscal year 2005, we were notified by the California Employment Development Department (“EDD”) that our domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004. The total assessment by the EDD of additional unemployment taxes for both years, net of applied overpayments, is approximately $1.5 million including ~~Legal~~interest ~~Proceedings~~at applicable statutory rates. Management believes that it has properly calculated its unemployment insurance 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 the outside counsel to resolve this matter. Additionally, management contends that the notification by the EDD of the 2004 assessment was not timely and holds the position that the assessment is procedurally invalid. Consequently, at January 24, 2009, the Company has no reserve for the 2004 assessment and has accrued the assessment for 2005 of $0.3 million, including interest and net of an applied overpayment. Although we believe that we have properly calculated our unemployment insurance tax and are in compliance with all applicable laws and regulations, there can be no assurances this will be settled in our favor. Management believes the Company is well positioned to defend against the un-accrued portion and the ultimate resolution of this matter will not have a material adverse effect on the Company’s consolidated financial statements.

InOther than the ~~ordinary~~ ~~course~~action oflisted ~~our business~~above, we are ~~periodically~~not currently a party to any material litigation. However, from time to time we have been threatened with, or named as a defendant in ~~various~~litigation ~~lawsuits. The~~brought by ~~principal~~former ~~risks~~franchisees ~~that~~or welicensees, ~~insure~~and ~~against~~administrative ~~are~~claims ~~workers’~~and ~~compensation,~~lawsuits ~~general~~brought ~~liability,~~by ~~automobile~~employees ~~liability,~~or ~~property~~former ~~damage,~~employees. Management ~~alternative~~believes ~~staffing~~the ~~errors~~resolution of these matters would not have a ~~and~~material ~~omissions,~~adverse ~~fiduciary~~effect ~~liability~~on ~~and~~our ~~fidelity~~consolidated ~~losses~~financial statements.

During the fourth quarter of fiscal 2005, we were notified by the California Employment Development Department (the “EDD”) that our domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004, which would result in additional unemployment taxes of approximately $0.9 million together with interest at applicable statutory rates. Management believes that it has properly calculated its unemployment insurance tax and is in compliance with all applicable laws and regulations. We have timely appealed the ruling by the EDD and are working with our outside counsel to resolve this matter. A hearing officer has been assigned to the matter. We are awaiting confirmation of a hearing date from the EDD.26

~~Other than~~Table the action listed above, we are not currently a party to any material litigation. However, from time to time we have been threatened with, or named as a defendant in litigation brought by former franchisees or licensees, and administrative claims and lawsuits brought by employees or former employees. Management believes the resolution of ~~these matters would not have a material adverse effect on our consolidated financial statements.~~Contents

27Item 1A. Risk Factors

~~Table~~Investing in our common stock involves a high degree of ~~Contents~~risk. The following risk factors, issues and uncertainties should be carefully considered before deciding to buy, hold or sell our common stock. Set forth below and elsewhere in this Quarterly Report on Form 10-Q, and in other documents that we file with the SEC, are risks and uncertainties that could cause the Company’s actual results and financial position to differ materially from those expressed or implied in forward-looking statements and to be below the expectations of public market analysts and investors. See “Cautionary Statement Regarding Forward-Looking Statements” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any one of the following risks could harm our operating results or financial condition and could result in a significant decline in the value of an investment in our common stock. Further, additional risks and uncertainties that have not yet been identified or which we currently believe are immaterial may also harm our operating results and financial condition.

~~Item~~The ~~1A.~~recent ~~Risk~~economic ~~Factors~~downturn and recession has materially and adversely affected our business and a continuation of current economic conditions could cause further harm to our business, financial condition, results of operations and cash flows.

~~Investing~~Demand infor ~~our~~staffing ~~common~~services ~~stock~~is ~~involves a high degree~~significantly ofaffected ~~risk.~~by ~~The~~the ~~following~~general ~~risk~~level ~~factors,~~of ~~issues~~economic ~~and~~activity. ~~uncertainties~~According ~~should~~to bethe National ~~carefully~~Bureau ~~considered~~of ~~before~~Economic ~~deciding~~Research, tothe ~~buy,~~United ~~hold~~States oreconomy ~~sell~~has ~~our~~been ~~common~~in ~~stock.~~a ~~Set~~recession ~~forth~~since ~~below~~December 2007. ~~and~~We ~~elsewhere~~expect inthat ~~this~~the ~~Quarterly~~current ~~Report~~significant oneconomic downturn ~~Form 10-Q,~~ and recession in ~~other~~ ~~documents~~the ~~that~~economy wewill ~~file~~continue ~~with~~to ~~the~~materially ~~SEC,~~and ~~are~~adversely impact ~~risks~~the ~~and~~demand ~~uncertainties~~for ~~that~~staffing ~~could~~services ~~cause~~and the Company’s ~~actual~~performance. ~~results~~As ~~and~~economic ~~financial~~activity ~~position~~slows, tomany ~~differ~~customers ~~materially~~reduce ~~from~~their ~~those~~utilization ~~expressed~~of ortemporary employees ~~implied~~before ~~in forward-looking~~undertaking ~~statements~~layoffs ~~and~~of totheir beregular ~~below~~full-time ~~the~~employees. Further, ~~expectations~~demand offor ~~public~~permanent ~~market analysts~~placement ~~and~~services ~~investors.~~also ~~See~~slows ~~“Cautionary~~as ~~Statement~~the ~~Regarding~~labor ~~Forward-Looking~~pool ~~Statements”~~directly inavailable ~~Part I,~~to ~~Item~~our ~~2, “Management~~customers’s ~~Discussion~~increases, ~~and~~making ~~Analysis of~~it ~~Financial~~easier ~~Condition~~for ~~and~~them ~~Results~~to identify ofnew ~~Operations~~employees directly.” ~~Any~~In ~~one~~addition, ofwe ~~the~~have ~~following~~experienced ~~risks~~and ~~could~~expect ~~harm our operating results~~to orcontinue ~~financial~~to ~~condition~~experience ~~and~~increased ~~could~~pricing ~~result~~pressures infrom aother ~~significant~~staffing companies ~~decline~~adversely inaffecting ~~the~~our ~~value of~~revenues anand ~~investment~~operating ~~in us~~margins. ~~Further,~~These ~~additional~~adverse impacts ~~risks~~may persist and ~~uncertainties~~worsen ~~that~~over ~~have not~~the ~~yet~~next ~~been~~several ~~identified~~quarters orif ~~which~~not welonger, resulting ~~currently~~in ~~believe~~a ~~are~~material ~~immaterial~~adverse ~~may~~effect ~~also harm~~on our ~~operating results and~~ financial condition.

The ~~recent~~process ~~economic~~and ~~downturn~~uncertainties ~~could~~relating ~~result~~to ~~in our~~the ~~customers~~proposed ~~using~~Merger ~~fewer staffing services, which~~ could ~~materially~~ adversely affect our business.

~~Demand~~We ~~for~~entered ~~staffing~~into ~~services is significantly affected by~~ the ~~general~~Merger ~~level~~Agreement ~~of economic activity.~~ with WeKoosharem ~~expect~~Corporation, ~~that~~a ~~the~~California ~~recent~~corporation ~~downturn~~doing inbusiness ~~the~~as ~~economy will continue to~~Select ~~impact~~Staffing ~~the demand for staffing services~~ and ~~the~~Select ~~Company’s~~Merger ~~performance~~Sub Inc. As, ~~economic~~a ~~activity~~Delaware ~~slows,~~corporation ~~many customers~~and ~~reduce~~wholly-owned ~~their~~subsidiary ~~utilization~~ of ~~temporary~~Koosharem, ~~employees~~on ~~before~~January 28, ~~undertaking~~2009. ~~layoffs~~The pendency of ~~their~~the ~~regular~~Merger ~~full-time~~could ~~employees. Further, demand~~adversely ~~for~~affect ~~permanent~~our ~~placement~~ability ~~services~~to ~~also~~obtain ~~slows~~and asretain ~~the labor pool directly~~customers, ~~available~~ to ~~our~~recruit ~~customers~~temporary ~~increases,~~employees ~~making~~and itto ~~easier~~retain ~~for~~our ~~them~~existing ~~to identify new~~ employees ~~directly~~. ~~Typically,~~ ~~we may~~Further, ~~experience~~the ~~increased~~attention ~~pricing~~of ~~pressures~~our ~~from~~management ~~other~~will ~~staffing~~be ~~companies~~directed ~~during periods~~at ofleast ~~economic~~in ~~downturn,~~part ~~which~~toward ~~could~~the completion ~~have~~of a ~~material~~transaction ~~adverse~~and ~~effect~~thus ondiverted ~~our financial condition. Additionally,~~ in ~~geographic~~part ~~areas~~from ~~where we derive a~~day-to-day ~~significant~~operations. ~~amount~~Our of business, aand ~~regional~~operating orresults ~~localized~~could ~~economic~~be ~~downturn could~~ adversely ~~affect~~affected ~~our~~by these ~~operating results and financial position~~factors.

WeCompletion ~~have~~of ~~significant~~the ~~working~~Merger ~~capital~~is ~~requirements~~subject to a ~~and~~number of conditions which are ~~heavily~~largely ~~dependent~~or ~~upon~~partially outside of our control, including the ability of Koosharem to ~~borrow~~finalize ~~money~~the financing required in a manner satisfactory to ~~meet~~our ~~these~~workers’ compensation carrier, our ability to avoid ~~working~~declines in our revenues, and our ability to maintain a specified cash and cash equivalent balance immediately prior to closing, all as set forth in the Merger Agreement. A failure to complete the Merger would require us to address immediate and substantial issues with our existing lenders and to raise additional capital at a time when our business may have declined substantially and our alternatives are limited. There can be no assurance that we would be able to successfully address issues with our lenders, raise additional capital or address other problems we might face at the time if the Merger is not completed. Accordingly, if the Merger is not completed, we may be immediately unable to, among other things: (1) adequately collateralize our workers’ compensation obligations and obtain sufficient workers’ compensation coverage to support our operations and (2) satisfy our liquidity requirements and continue our operations as a going concern. Under these circumstances, we may be required to seek alternative transactions and/or consider filing for bankruptcy protection. There can be no assurance that any other alternative transaction similar to the merger would be available to us. Further, whether or not the proposed Merger is completed, we will have incurred substantial costs related to the Merger.

WeWhile ~~require~~the ~~significant~~Merger ~~amounts~~Agreement ofis ~~working~~in ~~capital~~effect, towe ~~operate~~are ~~our~~subject ~~business and~~ to ~~pay~~significant ~~expenses~~restrictions ~~relating~~on toour ~~employment~~business ofactivities ~~temporary employees. Temporary~~and ~~personnel are~~must generally ~~paid~~operate onour abusiness ~~weekly~~in ~~basis~~the ~~while~~ordinary ~~payments~~course ~~from~~(subject ~~customers~~to ~~are generally~~certain ~~received~~exceptions 30or tothe 60consent ~~days~~of ~~after~~Koosharem) ~~billing.~~as Asset aforth ~~result,~~in wethe ~~must~~Merger ~~maintain sufficient~~Agreement. ~~cash~~These ~~availability~~restrictions toon ~~pay~~our ~~temporary~~business ~~personnel~~activities ~~prior~~could tolimit ~~receiving~~our ~~payment~~ability ~~from~~to ~~customers. Any~~respond ~~lack of access~~ to ~~liquid working~~changes ~~capital~~in ~~would~~business ~~have~~conditions anor ~~immediate,~~other ~~material~~events, and ~~adverse~~therefore ~~impact on our~~could ~~business. There~~have ~~can~~a bematerial noadverse ~~assurance~~effect ~~that we~~on ~~will be able to access the funds necessary for~~ our ~~liquidity~~future ~~requirements, especially~~results ~~in light~~ of ~~the~~operations ~~recent~~or ~~downturn in the economy and dislocations in~~financial ~~the credit and capital markets~~condition.

We ~~finance~~are ~~our~~currently ~~operations~~in ~~primarily~~default ~~through~~under ~~cash~~our primary ~~generated~~credit byfacility. While ~~our~~we ~~operating~~have ~~activities~~recently obtained ~~and~~a forbearance through ~~borrowings~~April 7, ~~under~~2009 ~~our revolving~~for ~~credit~~this ~~facilities. Our~~default, ~~primary~~we no ~~credit~~longer ~~facility~~have isany ~~the~~right ~~Financing~~to ~~Agreement~~borrow ~~with~~under ~~U.S.~~this ~~Bank~~credit ~~and Wells Fargo~~facility, ~~which~~ ~~provides~~except for aforced loans ~~five-year~~due ~~revolving~~to ~~credit~~draws ~~facility~~upon ~~with~~letters anof ~~aggregate commitment~~credit ofoutstanding upunder tothis ~~$33~~credit facility.0 ~~million. In addition~~Accordingly, if our ~~Australian~~available ~~subsidiary~~cash ~~maintains~~is aninsufficient ~~A$12.0~~to ~~million~~satisfy ~~Australian~~our ~~dollar~~liquidity ~~facility~~requirements ~~agreement~~and ~~with~~we GEare ~~Capital~~unable ~~that~~to ~~expires~~find inalternative ~~May 2009. As~~sources of ~~July 12~~ capital, ~~2008,~~which ~~our~~may ~~total~~not ~~borrowing capacity~~be ~~was~~available ~~$13.2~~to ~~million,~~us ~~consisting~~on ofacceptable ~~$5.3~~terms ~~million~~or ~~for~~at ~~our~~all, ~~domestic~~we may ~~operations~~be ~~and~~unable ~~$7.9~~to ~~million~~continue ~~for~~ our ~~Australian~~ operations as a going concern.

The amounts we are entitled to borrow under our revolving credit facilities are calculated daily and are dependent on eligible trade accounts receivable generated from operations, which are affected by financial, business, economic and other factors, as well as by the daily timing of cash collections and cash outflows. If we experience a significant and sustained drop in operating profits, or if there are unanticipated reductions in cash inflows or increases in cash outlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, it may have a significant adverse effect on our business, financial condition or results of operations. Furthermore, our receivables may not be adequate to allow for borrowings for other corporate purposes, such as capital expenditures or growth opportunities, and we would be less able to respond to changes in market or industry conditions.27

~~We typically experience significant seasonal and other~~Table fluctuations in our borrowings and borrowing availability, particularly in the United States, and aggressively manage our cash to ensure adequate funds to meet working capital requirements. Such steps include working to improve collections and adjusting the timing of ~~cash expenditures and reducing operating expenses where feasible.~~Contents

We ~~have~~are ~~historically~~currently ~~experienced~~in ~~periods~~default under the Financing Agreement, dated as of ~~negative~~February 14, ~~cash~~2008 ~~flow~~(as ~~from~~amended, ~~operations~~the “Financing Agreement”), among Westaff (USA), Inc. (as borrower), the Company (as parent guarantor), U.S. Bank National Association (as agent for the lenders, letter of credit issuer and ~~investment~~a lender) and Wells Fargo Bank, National Association (as a lender), which provides for our primary credit facility. We have financed our operations primarily through cash generated by our operating activities and through borrowings under our revolving line of credit under the Financing Agreement. On May 23, ~~especially~~2008, we ~~during~~received ~~seasonal~~a notice of default from U.S. Bank (as agent for itself and Wells ~~peaks~~Fargo Bank) stating that (1) an Event of Default (as defined in ~~revenue~~the Financing ~~experienced~~Agreement) had occurred due to our failure to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the ~~third~~Financing ~~and~~Agreement) for ~~fourth~~our fiscal ~~quarters~~period ended April 19, 2008; and (2) as a result of the Event of Default, effective May 21, 2008, U.S. Bank increased the rate ~~year~~of interest to the default rate of interest on the borrowings outstanding under our line of credit. We had no borrowings outstanding under the Financing Agreement, but do have $27.3 million of outstanding letters of credit supporting our workers’ compensation obligations. The Company previously entered into a series of forbearance agreements providing for the lenders to forbear from exercising their default rights and remedies under the Financing Agreement through December 19, 2008. InHowever, ~~addition~~on January 28, we2009, Travelers, ~~are~~which ~~required~~is the carrier under the Company’s existing workers’ compensation insurance program and the beneficiary of a letter of credit with a face amount of $27.0 million expiring on February 28, 2009 previously issued by U.S. Bank under the Financing Agreement, was notified by U.S. Bank that such letter of credit will not be renewed. The Company recently entered into a Third Amended and Restated Forbearance Agreement, which became effective on February 18, 2009, subject to the terms and conditions of which, among other things: (1) the ~~pledge~~lenders ~~amounts~~agreed to ~~secure~~forbear from exercising their default rights and remedies under the Financing Agreement during the period from February 18, 2009 and ending on April 7, 2009, (2) certain outstanding letters of credit expiring ~~that~~on ~~collateralize~~February 28, ~~certain~~2009 ~~workers~~(including the outstanding letter of credit in favor of Travelers) previously issued by U.S. Bank under the Financing Agreement were extended to April 7, 2009 and (3) the Company’s ability to ~~compensation~~borrow ~~obligations~~under the Financing Agreement (other than forced loans due to draws upon the outstanding letters of credit) was terminated. Because the Company no longer has any right to borrow under the Financing Agreement (other than forced loans due to draws upon the outstanding letters of credit), if the Company’s available cash is insufficient to satisfy the Company’s liquidity requirements and the Company is unable to find alternative sources of capital, the Company may be unable to continue its operations as a going concern. Under these ~~amounts~~circumstances, unless the pending merger with Koosharem is completed, the Company may ~~increase~~be required to seek alternative transactions and/or consider filing for bankruptcy protection. There can be no assurance that any alternative sources of capital and/or alternative transactions would be available to us on acceptable terms or at all in ~~future~~the ~~periods~~current challenging economic environment. ~~Any~~In ~~such~~addition, ~~increase~~while the Company was able to obtain a forbearance under the Third Amended and Restated Forbearance Agreement, there can be no assurances that the Company will be able to continue to satisfy the conditions required for the forbearance or that waivers or additional forbearances can be obtained by the Company on acceptable terms in the ~~pledged~~future. ~~amounts~~If the Company is unable to obtain waivers or ~~sustained~~additional ~~negative~~forbearances ~~cash~~from ~~flows~~the lenders on acceptable terms in the future, the lenders would ~~decrease~~be ~~amounts~~able to elect at any time to pursue further remedies available ~~for~~to ~~working~~them under ~~capital~~the Financing Agreement, including (1) electing not to renew or ~~purposes~~extend letters of credit issued under the Financing Agreement or (2) under specified conditions and ~~could~~at ~~have~~certain atimes, ~~material~~limiting ~~adverse~~the ~~effect~~Company’s onability ~~our~~to use ~~liquidity~~its cash to pay ordinary course expenses and possibly disrupting the ~~financial~~Company’s ~~condition~~business operations.

WeIn ~~are~~response ~~currently~~to our short term forbearance issues, on August 25, 2008, the Company secured a $3.0 million Subordinated Loan facility with its principal stockholder, DelStaff. This facility may be used by the Company for working capital and general business purposes during the term of the facility. The unpaid principal balance under the Subordinated Loan bears interest at an annual rate of twenty percent (20%). Interest is payable-in-kind and accrues monthly in arrears on the first day of each month as an increase in the principal amount of the Subordinated Loan. A default rate applies on all obligations under the ~~primary~~Subordinated Loan Agreement from and after the Maturity ~~credit~~Date ~~facility~~(August 15, 2009) and also during the existence of an Event of Default (as defined in the Subordinated Loan Agreement) at an annual rate of ten percent (10%) also payable-in-kind over the then-existing applicable interest rate and if principal is not repaid on the Maturity Date, an additional 5% of outstanding principal must be paid along with the default rate interest. The obligations under the Subordinated Loan Agreement are secured by a security interest in substantially all of the existing and future assets (the “Subordinated Collateral”) of the Company. The lien granted to the Subordinated Lender in the Subordinated Collateral is subordinated to the lien in that wesame collateral ~~use~~granted to ~~finance~~U.S. ~~our~~Bank. ~~operations~~Borrowings in excess of $1. If0 million werequire the ~~are~~Subordinated ~~unable~~Lender approval. The Subordinated Loan may be prepaid without penalty, subject to ~~obtain~~approval aby ~~waiver~~U.S. Bank and the terms of an Intercreditor Agreement. Under certain circumstances, the Company must prepay all or a ~~continued~~portion ~~forbearance~~of ~~with~~any ~~respect~~amounts outstanding under the Subordinated Loan Agreement, subject to ~~this~~the ~~default~~terms of the Intercreditor Agreement. The outstanding loan balance at January 24, we2009 ~~may~~was be$2.7 million, ~~unable~~which includes a $0.2 million facility fee that was added to ~~satisfy~~the loan balance upon receipt ~~our~~of ~~liquidity~~the ~~requirements~~initial advance. Accrued and ~~continue~~unpaid ~~our~~interest ~~operations~~on asthis anote ~~going~~at ~~concern~~January 24, 2009 was $0.1 million. The Company borrowed an additional $500,000 on January 29, 2009.

We ~~finance~~may ~~our~~be ~~operations~~unable primarily through cash generated by our operating activities and through borrowings under our revolving line of credit with U.S. Bank, National Association (“U.S. Bank”) and Wells Fargo Bank, National Association, as lenders. On May 23, 2008, we received a notice of default from U.S. Bank (as agent for itself and Wells Fargo Bank) stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to ~~our~~ ~~failure~~adequately ~~to achieve a minimum required Fixed Charge Coverage Ratio (as~~collateralize ~~defined in the Financing Agreement) for~~ our ~~fiscal~~workers’ ~~period~~compensation ~~ended~~obligations ~~April 19, 2008;~~at ~~and~~their ~~(2) as~~current alevels ~~result~~or ofat ~~the Event of Default, effective May 21, 2008, U~~all.S. Bank increased the rate of interest to the default rate of interest on the borrowings outstanding under our line of credit. We had no borrowings outstanding under the Financing Agreement, but do have $27.3 million of letters of credit outstanding supporting our workers’ compensation obligations.

OnWe ~~July 31,~~are ~~2008,~~contractually weobligated ~~entered~~to ~~into~~collateralize aour ~~Forbearance~~workers’ ~~Agreement~~compensation ~~with~~obligations ~~U.S.~~under ~~Bank~~our ~~and~~workers’ ~~the~~compensation ~~lenders.~~ program through ~~Pursuant~~irrevocable toletters ~~the terms~~ of ~~the~~credit, ~~Forbearance~~surety ~~Agreement,~~bonds ~~(i) the~~or ~~lenders agreed~~cash. toAs ~~forbear~~of ~~from~~November 1, 2008, ~~exercising~~our ~~any~~aggregate ofcollateral ~~their~~requirements ~~default~~under ~~rights~~these ~~and~~contracts ~~remedies~~have inbeen ~~response~~secured tothrough ~~the~~$27.3 million ~~occurrence~~of ~~and~~letters ~~continuance~~ of ~~the~~credit ~~Event~~obtained ofthrough ~~Default commencing~~the onFinancing ~~the~~Agreement. ~~date~~Our ofworkers’ ~~the~~compensation ~~Forbearance~~policy, ~~Agreement~~which ~~and~~had ~~ending~~been originally set to expire on ~~August~~November 261, 2008, ~~(ii) we agreed~~has tobeen aextended ~~reduction~~through inApril 1, 2009. ~~the~~As ~~aggregate~~part ~~amount~~ of the ~~commitments~~extension, ~~under~~the ~~our~~Company ~~line of~~paid ~~credit from~~ $501.0 million toin cash collateral on October 31, 2008 and an additional $~~33.~~0.3 million ~~effective~~ as of ~~June~~February 2328, ~~2008~~2009. These amounts are included in other current assets. These collateral requirements are significant, place pressure on our liquidity and ~~(iii) U~~working capital capacity and are dependent on the Company having sufficient accounts receivable and cash balances.S. ~~Bank~~If ~~agreed~~we are not able to ~~maintain~~obtain a ~~reserve~~renewal ~~against~~of ~~the revolving~~our letters of credit ~~availability~~at toa ~~cover~~level sufficient to meet our ~~payroll~~collateral ~~and~~requirements, ~~payroll~~we ~~tax~~could ~~obligations~~be unable to obtain sufficient workers’ compensation coverage to support our operations.

We are currently in discussions with U.S. Bank in order to seek a waiver or continued forbearance in respect to the Event of Default. There can be no assurance that we will be able to obtain a waiver or continued forbearance on terms acceptable to us, or at all. If we are unable to obtain a waiver and the lenders elect to pursue their remedies under the line of credit, such as limiting or terminating our right to borrow or electing not to renew letters of credit, we may be unable to obtain the liquidity we need to continue our operations as a going concern or obtain workers’ compensation insurance needed to operate. Even if we are able to obtain funds through the line of credit, it is possible that limitations on the terms under which such borrowing may be made could adversely affect our business and operating results.28

~~On August 25, 2008, we entered into a Subordinated~~Table ~~Loan Agreement with our principal stockholder, Delstaff, LLC, which provides a loan facility allowing us to request loan advances in an aggregate principal amount~~ of ~~up to $3.0 million. The maturity date of the Subordinated Loan Agreement is August 15, 2009 (the “Maturity Date”).~~Contents

~~The~~On ~~unpaid~~January 28, ~~principal~~2009, ~~balance~~Travelers, ~~due~~which ~~under~~is the Company’s workers’ ~~Subordinated~~compensation ~~Loan~~carrier, ~~bears~~was ~~interest~~notified atby anU.S. ~~annual~~Bank ~~rate~~that ofthe ~~twenty~~letter ~~percent~~of credit ~~(20%). Interest~~issued ~~is payable-~~in~~-kind~~ ~~and accrues~~favor ~~monthly~~of inTravelers ~~arrears~~and expiring on ~~the~~February 28, ~~first~~2009 ~~day~~would ofnot be ~~each~~renewed. ~~month~~The asCompany anrecently ~~increase~~entered ininto the ~~principal~~ ~~amount~~Third ofAmended ~~the~~and ~~Subordinated Loan.~~ Restated AForbearance ~~default~~Agreement, ~~rate~~which ~~applies~~became effective on ~~all~~February 18, ~~obligations~~2009, subject ~~under~~to the ~~Subordinated~~terms ~~Loan Agreement~~and ~~from~~conditions ~~and~~of ~~after~~which, ~~the~~among ~~Maturity~~other ~~Date~~things, ~~and~~U.S. ~~also~~Bank agreed ~~during~~to ~~the~~extend ~~existence~~certain ofoutstanding ~~an Event~~letters of ~~Default~~credit ~~(as~~expiring ~~defined~~on inFebruary 28, 2009 (including the ~~Subordinated~~outstanding ~~Loan~~letter ~~Agreement)~~of atcredit anin ~~annual rate~~favor of ~~ten~~Travelers) previously ~~percent~~issued ~~(10%)~~by ~~also~~U.S. ~~payable-in-kind~~Bank ~~over~~under the ~~then-existing~~Financing Agreement to April 7, ~~applicable~~2009. ~~interest~~While ~~rate~~the ~~and~~Company ifwas ~~principal~~able isto ~~not~~obtain ~~repaid~~an onextension of the ~~Maturity~~letters ~~Date,~~of ancredit ~~additional~~under 5%the ofThird ~~outstanding~~Amended ~~principal~~and ~~must~~Restated beForbearance ~~paid~~Agreement, ~~along~~there ~~with~~can ~~the default~~be ~~rate~~no ~~interest. Our~~assurances ~~obligations~~that ~~under~~ the ~~Subordinated~~ ~~Loan~~Company ~~Agreement~~will ~~are~~be ~~secured~~able byto acontinue ~~security~~to ~~interest~~satisfy ~~in substantially~~the ~~all~~conditions ofrequired ~~our~~for ~~existing~~the extension and ~~future~~thereby ~~assets~~obtain (sufficient workers’ compensation coverage to support the ~~“Subordinated~~Company’s ~~Collateral”)~~operations. ~~The~~ ~~lien~~In ~~granted~~addition, tothe carrier has the ~~Subordinated~~right ~~Lender in~~to draw on the ~~Subordinated~~letter ~~Collateral~~of iscredit ~~subordinated~~prior to the ~~lien~~expiration. If inthe ~~that~~carrier ~~same collateral~~draws ~~granted~~on tothe Letter of Credit, U.S. Bank~~. We~~ may require the Company ~~use~~to fund the ~~Subordinated~~draw ~~Loan~~in ~~for~~cash ~~working~~which ~~capital~~would ~~and~~force ~~general~~the ~~business~~Company ~~purposes~~to borrow under the Financing Agreement. ~~Any~~ ~~borrowings~~If inno ~~excess~~waiver ofor ~~$1.0~~forbearance ~~million~~is then currently effective ~~require~~and ~~Subordinated~~the ~~Lender~~lenders ~~approval. The~~elect to pursue remedies under the Financing Agreement, such as ~~Subordinated~~calling ~~Loan~~the ~~may~~loan, there can be ~~prepaid~~no ~~without~~assurance ~~penalty,~~that ~~subject~~the toCompany ~~approval~~would bybe ~~U.S.~~able to ~~Bank~~find alternative sources of capital to repay the loan, ~~and~~in which case the ~~terms~~Company ofmay anbe ~~Intercreditor~~unable ~~Agreement~~to continue its operations as a going concern.

~~Under~~We ~~certain~~have ~~circumstances,~~significant weworking ~~must prepay all or a~~capital ~~portion~~requirements ofand ~~any~~are ~~amounts~~heavily ~~outstanding~~dependent ~~under~~upon ~~the~~our ~~Subordinated~~ability ~~Loan Agreement, subject~~ to ~~the~~borrow ~~terms~~money ofto ~~the~~meet these ~~Intercreditor~~working ~~Agreement~~capital requirements.

28We require significant amounts of working capital to operate our business and to pay expenses relating to employment of temporary employees. 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, we must maintain sufficient cash availability to pay temporary personnel prior to receiving payment from customers. Any lack of access to liquid working capital would have an immediate, material, and adverse impact on our business. There can be no assurance that we will be able to access the funds necessary for our liquidity requirements, especially in light of the recent downturn in the economy and dislocations in the credit and capital markets.

~~Table~~We finance our operations primarily through cash generated by our operating activities and through borrowings under our revolving credit facilities. Our primary credit facility is the Financing Agreement with U.S. Bank and Wells Fargo, which provides for a five-year revolving credit facility with an aggregate commitment of ~~Contents~~up to $28.0 million. Additionally, the Company secured a $3.0 million subordinated loan facility with its principal stockholder, DelStaff, to be used by the Company for working capital and general business purposes during the term of the facility.

~~Under~~The ~~the~~Company ~~terms~~recently ofentered into the ~~Subordinated~~Third Amended ~~Loan~~and Restated Forbearance Agreement, ~~the~~ ~~Company~~which ~~has~~became ~~agreed~~effective toon ~~pay~~February 18, 2009, subject to the ~~Subordinated~~terms ~~Lender~~and aconditions ~~facility~~of ~~fee~~which, atamong other things the ~~closing~~Company’s ~~which~~ability ~~will~~to beborrow ~~added~~under the Financing Agreement (other than forced loans due to draws upon the ~~principal~~outstanding letters of ~~the~~credit) ~~Subordinated~~was ~~Loans~~terminated. On atJanuary 29, 2009, the Company was ~~closing,~~advanced ~~but~~a ~~will~~loan ~~not~~in ~~reduce~~an ~~the~~aggregate ~~availability~~principal amount of $500,000 from the ~~$3.0~~DelStaff subordinated ~~million~~loan facility which is now fully drawn.

WeBecause the Company no longer has any right to borrow under the Financing Agreement (other than forced loans due to draws upon the outstanding letters of credit) or the DelStaff loan, if the Company’s available cash is insufficient to satisfy the Company’s liquidity requirements and the Company is unable to find alternative sources of capital, the Company may be unable to ~~adequately~~continue ~~collateralize~~its operations ~~our~~as a going concern. Under these circumstances, unless the pending ~~workers’~~merger ~~compensation~~with ~~obligations~~Koosharem is completed, the Company may be required to seek alternative transactions and/or consider filing for bankruptcy protection. There can be no assurance that any alternative sources of capital and/or alternative transactions would be available to us on acceptable terms or at ~~their~~all in the current ~~levels~~challenging economic environment. In addition, while the Company was able to obtain a forbearance under the Third Amended and Restated Forbearance Agreement, there can be no assurances that the Company will be able to continue to satisfy the conditions required for the forbearance or that waivers or additional forbearances can be obtained by the Company on acceptable terms in the future. If the Company is unable to obtain waivers or additional forbearances from the lenders on acceptable terms in the future, the lenders would be able to elect at ~~all~~any time to pursue further remedies available to them under the Financing Agreement, including (1) electing not to renew or extend letters of credit issued under the Financing Agreement or (2) under specified conditions and at certain times, limiting the Company’s ability to use its cash to pay ordinary course expenses and possibly disrupting the Company’s business operations.

We are ~~contractually~~exposed ~~obligated~~ to ~~collateralize~~credit ~~our workers’~~risks ~~compensation~~on ~~obligations~~collections from ~~under~~ our ~~workers’~~customers ~~compensation~~due ~~program through irrevocable letters of credit~~to, ~~surety~~among ~~bonds~~other ~~or cash. As of July 12~~things, ~~2008,~~ our ~~aggregate collateral~~assumption ~~requirements under these contracts have been secured through $27.3 million~~ of ~~letters of credit obtained through our U.S. Bank facility. Our workers’ compensation program expires November 1, 2008, and as part of~~ the ~~renewal, could be subject to an increase in~~obligation ~~collateral. These collateral requirements are significant and place pressure on our liquidity and working capital capacity. If we are not able~~ to ~~obtain~~ amake ~~renewal~~wage, ~~of our letters of credit at a level sufficient to meet our collateral requirements~~tax, weand ~~could~~regulatory bepayments ~~unable~~ to ~~obtain sufficient workers’ compensation coverage to support~~ our ~~operations~~temporary employees.

We ~~have~~are ~~had~~exposed ~~significant~~to ~~turnover~~the incredit risk of some of our ~~management~~customers. Temporary personnel are typically paid on a weekly basis while ~~team~~payments from customers are generally received 30 to 60 days after billing. We generally assume responsibility for and ~~further~~manage ~~loss~~the risks associated with our payroll obligations, including liability for payment of ~~any~~salaries and wages, payroll taxes as well as group health insurance. These obligations are fixed and become a liability of ours, whether or not the associated client to whom these employees have been assigned makes payments required by our ~~key~~service agreement, ~~personnel~~which exposes us to credit risks. We attempt to mitigate these risks by billing on a frequent basis, which typically occurs daily or ~~failure~~weekly. In addition, we establish an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to ~~recruit~~ make required and timely payments. Further, we carefully monitor the timeliness of our customers’ payments and impose strict credit standards. However, there can be no assurance that such steps will be effective in reducing these risks. Finally, the majority of our accounts receivable is used to secure our revolving credit facilities, which we rely on for ~~key~~liquidity. ~~open~~If ~~positions~~we ~~could~~fail ~~harm~~to adequately manage our credit risks associated with accounts receivable, our financial position could be adversely impacted. Additionally, to the extent that recent turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse effect on our business, financial condition or results of operations.

We have experienced substantial, ongoing turnover among members of our senior management team since the middle of 2007. This turnover and other staffing issues have significantly affected both our operations and finance organizations, and, in the case of our finance organizations, directly contributed to the creation and existence of a continuing material weakness in our disclosure controls and procedures as discussed in Item 4T, “Controls and Procedures” included elsewhere in this Quarterly Report on Form 10-Q. Any further loss of senior management personnel or difficulties in filling open positions may harm our business.29

~~On June 4, 2008, we announced the appointment of~~Table Mark Bierman as our Senior Vice President and Chief Information Officer. On June 16, 2008, we hired a new Chief Operating Officer, Stephen J. Russo, and Chief Financial Officer, Christa C. Leonard, both with significant industry and Company experience. We continue to undertake a number of ~~steps, including retaining executive search firms, to fill our vacant Controller position.~~Contents

~~Our~~Price ~~future~~competition ~~financial~~in ~~performance~~the isstaffing ~~significantly~~industry ~~impacted~~continues ~~by our ability~~ to ~~attract,~~be ~~motivate and retain key management personnel and other members of the senior management team. Competition for qualified management personnel is~~ intense, and inpricing ~~the~~pressures ~~event~~from ~~that~~both wecompetitors experience additional turnover in senior management positions, we cannot assure that we will be able to recruit suitable replacements on a timely basis. We must also successfully integrate all new management and ~~other key~~ ~~positions~~customers ~~within our organization to achieve our operating objectives. Even if we are successful, turnover in key management positions~~ could ~~temporarily~~adversely ~~harm~~impact our financial ~~performance and results of operations until the new management becomes familiar with our business~~decisions.

~~The~~We ~~staffing~~expect ~~industry~~the islevel ~~highly~~of ~~competitive~~competition ~~with~~to remain ~~limited~~high ~~barriers~~in the future, and competitive pricing pressures will continue to ~~entry~~make ~~which~~it difficult ~~could~~for ~~limit~~us to raise our ~~ability~~prices to ~~maintain~~immediately and fully offset increased costs of doing business, including increased labor costs, costs for workers’ compensation and state unemployment insurance. If we are not able to effectively compete in our targeted markets, our operating margins and other financial results will be harmed and the price of our securities could decline. We also face the risk that our current or ~~increase~~prospective customers may decide to ~~market~~provide ~~share~~services internally.

29The market for our stock may be limited, and the stock price may continue to be extremely volatile.

~~Table~~The average daily trading volume for our common stock on the NASDAQ Global Market was approximately 14,553 shares during the fiscal quarter ended January 24, 2009. Accordingly, the market price of ~~Contents~~our common stock is subject to significant fluctuations that have been, and may continue to be, exaggerated because an active trading market has not developed for our common stock. We believe that the price of our common stock has also been negatively affected by the fact that our common stock is thinly traded and also due to the absence of analyst coverage. The lack of analyst reports about our stock may make it difficult for potential investors to make decisions about whether to purchase our stock and may make it less likely that investors will purchase the stock, thus further depressing the stock price. These negative factors may make it difficult for stockholders to sell our common stock, which may result in losses for investors.

~~The~~Recently ~~staffing~~our ~~industry~~common isshares ~~highly~~traded ~~competitive~~at ~~with~~prices ~~limited~~below ~~barriers to entry and continues to undergo consolidation~~$1. ~~We compete in regional and local markets with large full service agencies, specialized temporary and permanent placement services agencies and small local companies~~00. ~~While~~ ~~some~~If ~~competitors~~this ~~are~~continues ~~smaller than us, they may enjoy an advantage~~ in ~~discrete~~the ~~geographic markets because of a stronger local presence. Other competitors have greater marketing~~future, ~~financial~~ ~~and~~our ~~other~~common ~~resources~~shares ~~than we do that, among other things,~~ could ~~enable~~be ~~them~~subject to ~~attempt~~delisting ~~to maintain or increase their market share~~ by ~~reducing~~NASDAQ ~~prices. Furthermore,~~Stock ~~in past years there has been an increase in the number of customers consolidating their staffing services purchases with a single provider or with a small number of providers~~Market. ~~The trend to consolidate staffing services purchases has in some cases made it more difficult for us to obtain or retain business.~~

~~Price~~Our ~~competition~~common instock currently trades on the NASDAQ ~~staffing~~Global ~~industry~~Market. On September 10, 2008 we received a letter from the ~~continues~~NASDAQ Stock Market (“NASDAQ”) indicating that for the last 30 consecutive business days prior to bethe ~~intense~~date of the letter, the bid price of Westaff’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion under NASDAQ Marketplace Rule 4450 (a)(5). Since that time the common shares have traded at prices above $1.00 per share and ~~pricing~~in ~~pressures~~February 2009, ~~from~~the ~~both~~Company ~~competitors~~was notified by NASDAQ that the closing bid price of Westaff’s common stock has been at $1.00 per share or greater for at least 10 consecutive business days. Accordingly, the Company has regained compliance, however, the share price may decrease in future and if our common shares are not listed on a national ~~customers~~securities ~~could~~exchange ~~adversely~~or ~~impact~~the NASDAQ, potential investors may be prohibited from or be less likely to purchase our ~~financial~~common ~~decisions~~shares, limiting the trading market for our stock.

WeIf ~~expect~~we ~~the~~fail ~~level of competition~~ to ~~remain~~maintain ~~high~~effective ~~in the~~internal ~~future,~~control ~~and~~over ~~competitive pricing pressures will continue to make it difficult for us to raise~~ our ~~prices~~financial ~~to immediately and fully offset increased costs of doing business~~reporting, ~~including increased labor costs, costs for workers’ compensation and, domestically, state unemployment insurance. If~~ we ~~are~~may ~~not~~cause ~~able~~investors to ~~effectively~~lose ~~compete in~~confidence ~~our~~in ~~targeted markets,~~ our ~~operating~~reported ~~margins and other~~ financial ~~results~~information, ~~will~~which ~~be harmed and the price of our securities~~ could ~~decline. We~~have ~~also~~an ~~face~~adverse ~~the~~effect ~~risk that~~ on our ~~current~~stock ~~or prospective customers may decide to provide services internally~~price.

~~Failure~~Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC regulations and proposed rules, we are required to ~~implement~~include in our ~~new~~annual ~~strategies~~report ~~could~~on ~~impede~~Form 10-K a report that assesses the effectiveness of our ~~growth~~internal control over financial reporting. In addition, the SEC approved a one-year extension of the compliance date for smaller public companies, therefore, beginning with our Form 10-K for the 2010 fiscal year our external auditors will be required to audit our internal control over financial reporting report and include their attestation on that report. The process of fully documenting and testing our internal control procedures in order to satisfy these requirements have resulted and are likely to continue to result in increased general and administrative expenses and the ~~significant~~diversion ~~added~~of ~~costs~~management time and attention from profit-generating activities to compliance activities. Furthermore, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective and our business may be harmed. Market perception of our financial condition and the trading price of our stock may also be adversely affected and customer perception of our business may suffer.

InOur ~~fiscal~~principal ~~2007~~stockholder, wetogether ~~made significant~~with ~~changes to our field structure and hired several new key executives~~its ~~late~~affiliates, incontrols ~~the~~a ~~fiscal~~significant ~~year~~amount toof ~~seek~~our tooutstanding ~~grow~~common ~~new~~stock ~~business markets for the~~thus ~~Company. Our~~allowing ~~failure~~them to ~~implement~~exert ~~these new strategies could impede our growth and result in~~ significant ~~added~~influence ~~costs. Even if our new strategies are successfully implemented, they may not have the favorable impact~~ on our ~~business~~management and ~~operations~~ ~~that we anticipate~~affairs.

~~Our~~As ~~principal~~of January 24, 2009, our principal stockholder, DelStaff, together with its affiliates, ~~controls~~controlled aapproximately 49.5% ~~significant~~of ~~amount~~the total outstanding shares of our ~~outstanding~~ common stock. ~~thus~~The members of ~~allowing~~DelStaff ~~them~~are H.I.G. Staffing, 2007, Ltd., Alarian Associates, Inc. and Michael T. Willis. As our principal stockholder, DelStaff and its affiliates have the ability to significantly influence all matters submitted to our stockholders for approval, including the election of directors, and to exert significant influence onover our management and affairs. On April 30, 2007, we entered into a Governance Agreement with DelStaff, Mr. Willis and Mr. Stover. On May 9, 2007, pursuant to the terms of the Governance Agreement, we expanded the size of our Board of Directors from five to nine directors and appointed the following DelStaff nominees to the Board: Michael T. Willis, John R. Black, Michael R. Phillips, Gerald E. Wedren and John G. Ball. DelStaff also has the ability to strongly influence any merger, consolidation, sale of substantially all of our assets or other strategic decisions affecting us or the market value of the stock. This concentration of stock and voting power could be used by DelStaff to delay or prevent an acquisition of Westaff or other strategic action or result in strategic decisions that could negatively impact the value and liquidity of our outstanding stock.

As of July 12, 2008, our principal stockholder, DelStaff LLC (“DelStaff’), together with its affiliates, controls approximately 44.1% of the total outstanding shares of our common stock. The members of DelStaff are H.I.G. Staffing, 2007, Ltd., Alarian Associates, Inc. and Michael T. Willis. As our principal stockholder, DelStaff and its affiliates have the ability to significantly influence all matters submitted to our stockholders for approval, including the election of directors, and to exert significant influence over our management and affairs. On April 30, 2007, we entered into a Governance Agreement with DelStaff, Mr. Willis and Mr. Stover. On May 9, 2007, pursuant to the terms of the Governance Agreement, we expanded the size of our Board of Directors from five to nine directors and appointed the following DelStaff nominees to the Board: Michael T. Willis, John R. Black, Michael R. Phillips, Gerald E. Wedren and John G. Ball. DelStaff also has the ability to strongly influence any merger, consolidation, sale of substantially all of our assets or other strategic decisions affecting us or the market value of the stock. This concentration of stock and voting power could be used by DelStaff to delay or prevent an acquisition of Westaff or other strategic action or result in strategic decisions that could negatively impact the value and liquidity of our outstanding stock.

30Table of Contents

~~Table~~ We derive a significant portion of ~~Contents~~our revenue from franchise agent operations.

~~Our~~Franchise ~~reserves~~agent operations comprise a significant portion of our revenue. As of January 24, 2009, franchisees represented 36.0% of gross receipts. In addition, our ten largest franchise agents (based on sales volume) accounted for ~~workers’~~24.5% ~~compensation~~of ~~claims~~our ~~may~~revenue. There can be no assurances that we will be ~~inadequate~~able to ~~cover~~attract ~~our~~new ~~ultimate~~franchisees ~~liability,~~or ~~and~~that we ~~may~~will be ~~incur~~able ~~additional~~to retain our existing franchisees. The loss of one or more of our ~~charges~~franchise ifagents ~~the~~and ~~actual~~any ~~amounts~~associated ~~exceed~~loss ~~the~~of ~~reserved~~customers ~~amounts~~and sales could have a material adverse effect on our results of operations.

WeOur ~~maintain~~service ~~reserves~~agreements tomay ~~cover~~be ~~our~~terminated ~~estimated~~on ~~liabilities~~short ~~for workers’ compensation claims based upon actuarial estimates of the future cost of claims and related expenses which have been reported but not settled~~notice, ~~and~~leaving ~~that~~us ~~have~~vulnerable ~~been~~to ~~incurred~~loss ~~but not yet reported. The determination~~ of ~~these reserves is based on~~ a ~~number~~significant ofamount ~~factors, including current and historical claims activity, medical cost trends and developments in existing claims. Reserves do not represent an exact calculation~~ of ~~liability and are affected by both internal and external events,~~ ~~such~~customers ~~as adverse development on existing claims, changes~~ in ~~medical~~a ~~costs, claims~~short ~~handling~~period procedures, administrative costs, inflation, legal trends and legislative changes. Reserves are adjusted as necessary to reflect new claims and existing claims development, and such adjustments are reflected in the results of ~~the periods in which the reserves are adjusted~~time. ~~While we believe our judgments and estimates are adequate, if our reserves are insufficient to cover our actual losses, an adjustment could be charged to expense that may be material to our earnings.~~

~~Workers’~~Our ~~compensation~~service ~~costs~~agreements ~~for~~are ~~temporary~~generally cancellable ~~employees~~with little or no notice by the customer to us. As a result, our ~~may~~customers ~~continue~~can terminate their agreement with us at any time, making us particularly vulnerable to ~~rise~~a ~~and~~significant ~~reduce~~decrease ~~margins~~in ~~and~~revenue ~~require~~within ~~more~~a ~~liquidity~~short period of time that could be difficult to quickly replace.

InOur ~~the~~reserves ~~United States, we are responsible~~ for ~~and pay~~ workers’ compensation ~~costs for our regular and temporary employees. In recent years, these costs have risen substantially as a result of increased~~ claims~~, general economic conditions,~~ ~~increases~~may inbe ~~healthcare~~inadequate ~~costs and governmental regulations. The frequency of new claims has fallen in fiscal 2008 as compared~~ to ~~prior~~cover ~~years, yet the cost per claim continues to increase. Under~~ our ~~workers’ compensation~~ultimate ~~insurance program~~liability, we maintain “per occurrence” insurance, which only covers claims for a particular event above a deductible. This deductible has been increased for our policy year ending November 1, 2008 from $500,000 to $750,000 per claim for fiscal 2008 claims. Our workers’ compensation insurance policy expires November 1, 2008 and we ~~cannot guarantee~~may ~~that~~incur ~~we will be able to successfully renew such policy. Further, there are covenants associated with~~additional ~~the~~charges ~~continuation~~if of the ~~policy~~actual ~~and~~amounts ~~there~~exceed ~~can be no guarantee that we will continue to meet those covenants going forward. Should our workers’ compensation premium costs continue to increase in~~ the ~~future,~~reserved there can be no assurance that we will be able to increase the fees charged to our customers to keep pace with increased costs or if we were unable to obtain insurance on reasonable terms or forced to significantly increase our deductible per claim, our results of operations, financial condition and liquidity could be adversely affectedamounts.

We ~~are~~maintain ~~exposed~~reserves to ~~credit~~cover ~~risks~~our onestimated liabilities ~~collections~~for ~~from~~workers’ compensation claims based upon actuarial estimates of ~~our~~the ~~customers~~future ~~due~~cost toof claims and related expenses which have been reported but not settled, ~~among~~and ~~other~~that ~~things~~have been incurred but not yet reported. The determination of these reserves is based on a number of factors, ~~our~~including ~~assumption~~current and historical claims activity, medical cost trends and developments in existing claims. Reserves do not represent an exact calculation of ~~the~~liability ~~obligation~~and toare ~~make~~affected ~~wage~~by both internal and external events, ~~tax~~such as adverse development on existing claims, changes in medical costs, claims handling procedures, administrative costs, inflation, legal trends and ~~regulatory~~legislative ~~payments~~changes. Reserves are adjusted as necessary to reflect new claims and existing claims development, and such adjustments are reflected in the results of the periods in which the reserves are adjusted. While we believe our ~~temporary~~judgments ~~employees~~and estimates are adequate, if our reserves are insufficient to cover our actual losses, an adjustment could be charged to expense that may be material to our earnings.

WeWorkers’ ~~are~~compensation ~~exposed~~costs to the credit risk of some of our customers. Temporary personnel are typically paid on a weekly basis while payments from customers are generally received 30 to 60 days after billing. We generally assume responsibility for ~~and manage the risks associated with our~~temporary payroll obligations, including liability for payment 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 the associated client to whom these employees ~~have~~ ~~been~~may ~~assigned~~continue ~~makes payments required by our service agreement, which exposes us~~ to ~~credit~~rise risks. We attempt to mitigate these risks by billing on a frequent basis, which typically occurs daily or weekly. In addition, we establish an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required and ~~timely~~reduce ~~payments. Further,~~margins ~~we carefully monitor the timeliness of our customers’ payments~~ and ~~impose~~require ~~strict~~more credit standards. However, there can be no assurance that such steps will be effective in reducing these risks. Finally, the majority of our accounts receivable is used to secure our revolving credit facilities, which we rely on for liquidity. If we fail to adequately manage our credit risks associated with accounts receivable, our financial position could be adversely impacted. Additionally, to the extent that recent turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse effect on our business, financial condition or results of operations.

31In the United States, we are responsible for and pay workers’ compensation costs for our regular and temporary employees. In recent years, these costs have risen substantially as a result of increased claims, general economic conditions, increases in healthcare costs and governmental regulations. The frequency of new claims decreased in fiscal year 2008 as compared to prior years, yet the cost per claim continues to increase. Under our workers’ compensation insurance program, we maintain “per occurrence” insurance, which only covers claims for a particular event above a deductible. This deductible is currently $750,000 per claim for fiscal year 2008 and fiscal year 2009 claims. Our workers’ compensation insurance policy expired November 1, 2008 and we have extended the policy through April 1, 2009. We have provided a cash payment of $1 million which was recorded as a short term deposit in fiscal year 2008 and we paid an additional $0.3 million in collateral as of February 28, 2009. Should our workers’ compensation premium costs continue to increase in the future, there can be no assurance that we will be able to increase the fees charged to our customers to keep pace with increased costs or if we were unable to obtain insurance on reasonable terms or forced to significantly increase our deductible per claim, our results of operations, financial condition and liquidity could be adversely affected.

~~Table~~Our success is impacted by our ability to ofattract ~~Contents~~and retain qualified temporary and permanent candidates.

We ~~derive~~compete with other staffing services to meet our customers’ needs, and we must continuously attract reliable candidates to meet the staffing requirements of our customers. Consequently, we must continuously evaluate and upgrade our base of available qualified personnel to keep pace with changing customer needs and emerging technologies. Furthermore, a ~~significant~~substantial ~~portion~~number of our ~~revenue~~temporary ~~from~~employees during any given year will ~~franchise~~terminate ~~agent~~their ~~operations~~employment with us and accept regular staff employment with our customers. Competition for individuals with proven skills remains intense, and demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified candidates will continue to be available to us in sufficient numbers and on acceptable terms to us. The failure to identify, recruit, train and place candidates as well as retain qualified temporary employees over a long period of time could materially adversely affect our business.

~~Franchise~~The ~~agent~~staffing ~~operations~~industry ~~comprise~~is ahighly ~~significant~~competitive ~~portion~~with oflimited ~~our~~barriers ~~revenue. For~~to ~~the~~entry ~~first~~which ~~36 weeks~~could oflimit ~~2008, franchisees represented 30.0% of gross receipts. In addition,~~ our ~~ten~~ability ~~largest franchise agents for the first 36 weeks of fiscal 2008 (based on sales volume) accounted for 20.2% of our revenue. There can be no assurances that we will be able~~ to ~~attract~~maintain ~~new franchisees~~ or ~~that we will be~~ ~~able~~increase tomarket ~~retain our existing franchisees~~share. ~~The loss of one or more of our franchise agents and any associated loss of customers and sales could have a material adverse effect on our results of operations.~~

The staffing industry is highly competitive with limited barriers to entry and continues to undergo consolidation. We compete in regional and local markets with large full service agencies, specialized temporary and permanent placement services agencies and small local companies. While some competitors are ~~subject~~smaller than us, they may enjoy an advantage in discrete geographic markets because of a stronger local presence. Other competitors have greater marketing, financial and other resources than us that, among other things, could enable them to ~~business~~attempt ~~risks~~to ~~associated~~maintain or increase their market share by reducing prices. Furthermore, in past years there has been an increase in the number of customers consolidating their staffing services purchases with a single provider or with a small number of providers. The trend ~~international~~to ~~operations~~consolidate ~~and~~staffing ~~fluctuating~~services ~~exchange~~purchases ~~rates~~has in some cases made it more difficult for us to obtain or retain business.

We presently have operations in Australia and New Zealand, which comprised 26.5% of our revenue for 36-week period ended July 12, 2008. Operations in foreign markets are inherently subject to certain risks, including in particular:31

~~· differences in cultures and~~Table ~~business~~of ~~practices;~~Contents

~~· overlapping~~The orcost ~~differing~~of ~~tax~~unemployment insurance for ~~laws~~temporary employees may rise and ~~regulations;~~reduce our margins.

· In the United States, we are responsible for and pay unemployment insurance premiums for our temporary and regular employees. At times, these costs have risen as a result of increased claims, general economic conditions and ~~political~~government regulations. Should these costs ~~uncertainties;~~continue to increase, there can be no assurance that we will be able to increase the fees charged to our customers in the future to keep pace with the increased costs, and if we do not, our results of operations and liquidity could be adversely affected.

~~· differences~~Our ininformation ~~accounting~~technology systems are ~~and~~critical ~~reporting~~to ~~requirements;~~the operations of our business.

~~· changing,~~Our ~~complex~~information ormanagement systems are ~~ambiguous~~essential ~~foreign~~for ~~laws~~data exchange and ~~regulations~~operational communications with branches spread across large geographical distances. We have replaced key component hardware and software including backup systems within recent years. However, ~~particularly~~any asfuture ~~they~~interruption, ~~relate~~impairment or toloss of data integrity or malfunction of these systems could severely impact ~~employment;~~our business, especially our ability to timely and accurately pay employees and bill customers.

~~· litigation~~Our business is subject to extensive government regulation, which may restrict the types of employment services that we are permitted to offer or result in additional tax or other costs that adversely affect our revenues and ~~claims~~earnings.

~~All~~We ofare ~~our~~in ~~sales~~the ~~outside~~business of employing people and placing them in the ~~United~~workplace ~~States~~of ~~are~~other businesses on either a temporary or ~~denominated~~permanent inbasis. ~~local~~As ~~currencies~~a ~~and~~result, ~~accordingly,~~ we are subject to ~~risks~~extensive laws and regulations ~~associated~~relating ~~with~~to ~~fluctuations~~employment. Changes in ~~exchange~~laws ~~rates,~~or ~~which~~government ~~could~~regulations ~~cause~~may aresult ~~reduction~~ in prohibition or restriction of certain types of employment services we are permitted to offer or the imposition of new or additional benefit, licensing or tax requirements that could reduce our ~~profits~~revenues and earnings. There can be no assurance that ~~any~~we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of ~~these~~any ~~factors~~changes ~~will~~in ~~not~~laws or government regulations. Any future changes in laws or government regulations may make it more difficult or expensive for us to provide staffing services and could have a material adverse effect on ~~our~~ our business, ~~results~~financial ofcondition ~~operations, cash flows~~ or ~~financial~~results ~~condition~~of operations.

~~Our~~We ~~success~~may isbe ~~impacted~~exposed ~~by our ability~~ to ~~attract~~employment-related claims and ~~retain~~costs ~~qualified~~that ~~temporary~~could ~~and~~materially ~~permanent~~adversely ~~candidates~~affect our business.

WeThe ~~compete~~risks ~~with~~related ~~other staffing services~~ to ~~meet~~engaging ~~our customers’~~in ~~needs, and we must continuously attract reliable candidates to meet the staffing requirements of~~ our ~~customers. Consequently, we must continuously~~business ~~evaluate~~include ~~and~~but ~~upgrade~~are ~~our~~not ~~base~~limited ~~of available qualified personnel~~ to keep pace with changing customer needs and emerging technologies. Furthermore, a substantial number of our temporary employees during any given year will terminate their employment with us and accept regular staff employment with our customers. Competition for individuals with proven skills remains intense, and demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified candidates will continue to be available to us in sufficient numbers and on acceptable terms to us. The failure to identify, recruit, train and place candidates as well as retain qualified temporary employees over a long period of time could materially adversely affect our business.:

~~Our~~· claims by ~~service~~our ~~agreements~~placed ~~may~~personnel beof ~~terminated~~discrimination onand ~~short notice,~~harassment ~~leaving~~directed usat ~~vulnerable~~them, including toclaims ~~loss~~arising offrom athe ~~significant~~actions ~~amount~~ of ~~customers~~our ~~in a short period of time.~~customers;

~~Our service agreements are generally cancellable with~~· workers’ ~~little~~compensation orclaims noand ~~notice~~other bysimilar the customer to us. As a result, our customers can terminate their agreement with us at any time, making us particularly vulnerable to a significant decrease in revenue within a short period of time that could be difficult to quickly replace.claims;

~~The cost~~ · violations of ~~unemployment~~wage ~~insurance~~and ~~for~~hour ~~temporary employees~~laws ~~may rise~~ and ~~reduce our margins.~~requirements;

~~In the United States, we are responsible for and pay~~· claims ~~unemployment insurance premiums for our temporary and regular employees. At times, these costs have risen as a result~~ of ~~increased claims~~misconduct, ~~general~~including ~~economic~~criminal ~~conditions~~activity ~~and~~or ~~government regulations. Should~~negligence ~~these~~on ~~costs continue to increase, there can be no assurance that we will be able to increase~~ the ~~fees~~ ~~charged~~part toof our ~~customers in the future to keep pace with the increased~~ ~~costs,~~placed ~~and if we do not, our results of operations and liquidity could be adversely affected.~~personnel;

~~Our~~· claims by ~~information~~our ~~technology~~customers ~~systems~~relating ~~are~~to ~~critical~~actions toby our placed personnel, including ~~the~~property ~~operations~~damage and personal injury, misuse of ~~our~~proprietary ~~business.~~information and misappropriation of assets or other similar claims; and

~~Our information management systems are essential for~~· immigration ~~data~~related ~~exchange and operational communications with branches spread across large geographical distances~~claims. We have replaced key component hardware and software including backup systems within the past twelve months. On November 12, 2007, we implemented a new accounts receivable billing and temporary payroll system. The new system receives information from our custom built front office system. We experienced technical issues after conversion that were not detected during the testing phases. These issues affected both the payroll and billing systems. We believe that we have identified and resolved the significant issues. These issues were disruptive to our business and could affect customer and employee relations. Additionally, these issues required significant amount of management time that impacted our ability to sell new services during the first half of fiscal 2008. We have made progress in resolving these specific payroll and billing systems issues. However, any future interruption, impairment or loss of data integrity or malfunction of these systems could severely impact our business, especially our ability to timely and accurately pay employees and bill customers.

32In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management team, and therefore, could have a negative effect on our business, financial conditions and results of operations. In some instances, we have agreed to indemnify our customers against some or all of these types of liabilities. We have policies and guidelines in place to help reduce our exposure to these risks and have purchased insurance policies against certain risks in amounts that we currently believe to be adequate. However, there can be no assurance that our insurance will be sufficient in amount or scope to cover these types of liabilities or that we will be able to secure insurance coverage for such risks on affordable terms. Furthermore, there can be no assurance that we will not experience these issues in the future or that they could have a material adverse effect on our business.

~~Table of Contents~~32

~~Our business is subject to extensive government~~Table ~~regulation, which may restrict the types~~ of ~~employment services that we are permitted to offer or result in additional tax or other costs that adversely affect our revenues and earnings.~~Contents

We are ininvolved ~~the business of employing people and placing them~~ in ~~the~~an ~~workplace~~action oftaken ~~other~~by businesses on either a temporary or permanent basis. As a result, we are subject to extensive laws and regulations relating to employment. Changes in laws or government regulations may result in prohibition or restriction of certain types of employment services we are permitted to offer or the ~~imposition of new or additional benefit,~~ ~~licensing~~California orEmployment ~~tax~~Development ~~requirements that could reduce our revenues and earnings~~Department. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in laws or government regulations. Any future changes in laws or government regulations may make it more difficult or expensive for us to provide staffing services and could have a material adverse effect on our business, financial condition or results of operations.

WeDuring ~~may~~the fourth quarter of fiscal year 2005, we were notified by the California Employment Development Department (“EDD”) that our domestic operating subsidiaries unemployment tax rates would be ~~exposed~~increased retroactively for both calendar years 2005 and 2004. The total assessment by the EDD of additional unemployment taxes for both years, net of applied overpayments is approximately $1.5 million including interest at applicable statutory rates. Management believes that it has properly calculated its unemployment insurance 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 the outside counsel to ~~employment-related~~resolve ~~claims~~this matter. Additionally, management contends that the notification by the EDD of the 2004 assessment was not timely and holds the ~~costs~~position that ~~could~~the ~~materially~~assessment ~~adversely~~is ~~affect~~procedurally invalid. Consequently, at January 24, 2009, the Company has no reserve for the 2004 assessment and has accrued the assessment for 2005 of $0.3 million, including interest and net of an applied overpayment. Although we believe that we have properly calculated our unemployment ~~business~~insurance tax and are in compliance with all applicable laws and regulations, there can be no assurances this will be settled in our favor. Management believes the Company is well positioned to defend against the un-accrued portion and the ultimate resolution of this matter will not have a material adverse effect on the Company’s consolidated financial statements.

~~The~~We ~~risks~~are ~~related~~a defendant in a variety of litigation and other actions from time to ~~engaging~~time, inwhich may have a material adverse effect on our business, ~~include but~~financial ~~are~~condition ~~not~~and ~~limited~~results ~~to:~~of operations.

~~· claims~~We byare ~~our~~regularly ~~placed~~involved in a variety of ~~personnel~~litigation arising out of ~~discrimination~~our business and, ~~harassment~~in ~~directed~~recent atyears, ~~them~~have paid significant amounts as a result of adverse arbitration awards. We do not have insurance for some of these claims, ~~including~~and there can be no assurance that the insurance coverage we have will cover all claims that may be asserted against ~~arising~~us. ~~from~~Should the ~~actions~~ultimate ofjudgments or settlements not be covered by insurance or exceed our ~~customers;~~insurance coverage, they could have a material adverse effect on our results of operations, financial position and cash flows. There can also be no assurance that we will be able to obtain appropriate and sufficient types or levels of insurance in the future or that adequate replacement policies will be available on acceptable terms, if at all.

~~· workers’~~We ~~compensation~~have ~~claims~~assets on our balance sheet for which ~~and~~their ~~other~~realization ~~similar~~is ~~claims;~~dependent on our future cash flows.

~~· violations~~As of ~~wage~~January 24, 2009, we have intangibles of $3.5 million. A majority of the remaining intangible asset balance relates to an indefinite life franchise right relating to the Houston market. If we are unable to maintain our projected levels of cash flows for this market, we may need to write off a portion or all of these assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and ~~hour~~Other Intangible Assets” which would result in a reduction of our ~~laws~~assets and ~~requirements;~~stockholders equity. Furthermore, under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company is required to assess the recoverability of its long-lived assets (such as its property and equipment) whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated cash flows expected to result from its use and eventual disposition. If we are unable to generate adequate cash flows we may need to write off a portion of our long-lived assets.

~~· claims~~Improper disclosure of ~~misconduct, including~~employee ~~criminal~~and ~~activity~~customer data orcould ~~negligence~~result onin ~~the~~liability ~~part~~and ofharm to our ~~placed personnel;~~reputation.

~~· claims~~Our bybusiness involves the use, storage and transmission of information about our employees and their customers. It is ~~relating~~possible that our security controls over personal data and other practices we and our third party service providers follow may not prevent the improper access to ~~actions~~or bydisclosure of personally identifiable information. Such disclosure could harm our ~~placed~~reputation ~~personnel,~~and ~~including~~subject ~~property~~us ~~damage~~to liability under our contracts and laws that protect personal ~~injury~~data, ~~misuse~~resulting in increased costs or loss of revenue. ~~proprietary~~Further, ~~information~~data privacy is subject to frequently changing rules and regulations. ~~misappropriation~~Our offailure to adhere to or successfully implement processes in ~~assets~~response to changing regulatory requirements in this area could result in legal liability or ~~other~~impairment ~~similar~~to ~~claims;~~our ~~and~~reputation in the marketplace.

· immigration related claims.

In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management team, and therefore, could have a negative effect on our business, financial conditions and results of operations. In some instances, we have agreed to indemnify our customers against some or all of these types of liabilities. We have policies and guidelines in place to help reduce our exposure to these risks and have purchased insurance policies against certain risks in amounts that we currently believe to be adequate. However, there can be no assurance that our insurance will be sufficient in amount or scope to cover these types of liabilities or that we will be able to secure insurance coverage for such risks on affordable terms. Furthermore, there can be no assurance that we will not experience these issues in the future or that they could have a material adverse effect on our business.

The market for our stock may be limited, and the stock price has been and may continue to be extremely volatile.

The average daily trading volume for our common stock on the NASDAQ Global Market was approximately 16,500 shares during the 36 weeks ended July 12, 2008. Accordingly, the market price of our common stock is subject to significant fluctuations that have been, and may continue to be, exaggerated because an active trading market has not developed for our common stock. We believe that the price of our common stock has also been negatively affected by the fact that our common stock is thinly traded and also due to the absence of analyst coverage. The lack of analyst reports about our stock may make it difficult for potential investors to make decisions about whether to purchase our stock and may make it less likely that investors will purchase the stock, thus further depressing the stock price. These negative factors may make it difficult for stockholders to sell our common stock, which may result in losses for investors.

The compliance costs associated with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002 regarding internal control over financial reporting could be substantial, while failure to achieve and maintain compliance could have an adverse effect on our stock price.

Table of Contents

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC regulations, beginning with our Annual Report on Form 10-K for the fiscal year ending November 1, 2008, we will be required to furnish a report by our management on our internal control over financial reporting. We will be required to have our independent registered public accounting firm attest to management’s assessment on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the fiscal year ending October 30, 2010. The process of fully documenting and testing our internal control procedures in order to satisfy these requirements will result in increased general and administrative expenses and may shift management time and attention from business activities to compliance activities. Furthermore, during the course of our internal control testing, we may identify deficiencies which we may not be able to remediate in time to meet the reporting deadline under Section 404. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.

We are involved in an action taken by the California Employment Development Department.

During the fourth quarter of fiscal 2005, the Company was notified by the EDD that its domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004, which would result in additional unemployment taxes of approximately $0.9 million together with interest at applicable statutory rates. Management believes that it has properly calculated its unemployment insurance 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 the outside counsel to resolve this matter. Although we believe that we have properly calculated our unemployment insurance tax and are in compliance with all applicable laws and regulations, there can be no assurances this will be settled in our favor.

We have assets on our balance sheet for which their realization is dependent on our future profitability.

As of July 12, 2008, we have intangibles of $3.5 million. During the Company’s third quarter of fiscal year 2008 in light of the continued decline in revenue partially due to a loss of a major customer and the continued decline in market capitalization for Westaff, the Company determined that an interim impairment test was necessary during the third quarter of 2008. Based on the impairment evaluation as of July 12, 2008, it was determined that the indefinite life franchise right intangible was impaired by $0.2 million. Such an impairment charge was measured in accordance with SFAS 142 as the excess of the carrying value over the fair value of the asset. After completing the intangible asset impairments, the Company compared the fair value of the US Reporting Unit to its carrying value and determined that the reporting unit was impaired. Upon completion of step two of the impairment test, the Company recorded a goodwill impairment of $11.4 million in relation to its U.S. domestic services reporting unit.

A majority of the remaining intangible asset balance of $3.5 million as of July 12, 2008 relates to an indefinite life franchise right intangible relating to the Houston market. If we are unable to maintain our projected levels of profitability for this market, we may need to write off a portion or all of these assets which would result in a reduction of our assets and stockholders equity.

Under U.S. GAAP, we are required to evaluate the realizability of the deferred tax assets based on our ability to generate future taxable income. During the second quarter of fiscal 2008, the Company established a valuation allowance of $23.2 million against deferred tax assets. As of July 12, 2008 we had deferred tax assets after valuation allowance of $0.8 million. These allowances were recorded against the deferred tax assets because the Company has recently reassessed the potential for their realization in future years. Although it is possible these deferred tax assets could still be realized in the future, the Company believes that it is more likely than not that these deferred tax assets will not be realized in the foreseeable future. The Company intends to reevaluate its position with respect to the valuation allowance in future periods.

We are a defendant in a variety of litigation and other actions from time 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 litigation arising out of our business and, in recent years, have paid significant amounts as a result of adverse arbitration awards. We do not have insurance for some of these claims, and there can be no assurance that the insurance coverage we have will cover all claims that may be asserted against us. Should the ultimate judgments or settlements not be covered by insurance or exceed our insurance coverage, they could have a material adverse effect on our results of operations, financial position and cash flows. There can also be no assurance that we will be able to obtain appropriate and sufficient types or levels of insurance in the future or that adequate replacement policies will be available on acceptable terms, if at all.

Improper disclosure of employee and customer data could result in liability and harm to our reputation.

Our business involves the use, storage and transmission of information about our employees and their customers. It is possible that our security controls over personal data and other practices we and our third party service providers follow may not prevent the improper access to or disclosure of personally identifiable information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None.

Item 5. Other Information

No events.

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Item 6. Exhibits

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

10.3.13.5		Settlement Agreement and Release in Full by and between the Jeffrey A. Elias and the Company and Westaff Support, Inc. dated June 2, 2008
10.3.15.1		First Amendment to Executive Employment Agreement between Michael T. Willis and Westaff Support, Inc., Westaff (USA), Inc. and the Company dated June 3, 2008
10.3.18		Employment Agreement, effective as of June 16, 2008, by and among Westaff Support, Inc., Westaff (USA), Inc. and Westaff, Inc. and Stephen J. Russo (1)
10.3.19		Employment Agreement, effective as of June 16, 2008, by and among Westaff Support, Inc., Westaff (USA), Inc. and Westaff, Inc. and Christa C. Leonard (2)
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.

~~(1) Incorporated herein by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K dated June 16, 2008.~~34

(2) Incorporated herein by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K dated June 16, 2008.

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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.	~~WESTAFF, INC.~~
August 26, 2008			/s/ Christa C. Leonard
March 16, 2009	/s/ Christa C. Leonard
Date	Christa C. Leonard		~~Christa C. Leonard~~
	Senior Vice President and Chief Financial Officer	~~Senior Vice President and Chief Financial Officer~~

3635

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

298 North Wiget Lane

Walnut Creek, California 94598-2453

(Address of registrant’s principal executive offices, including zip code)

WESTAFF, INC.

Cautionary Statement Regarding Forward-Looking Statements

Critical Accounting Policies

26Part II. Other Information

TableItem of Contents1. Legal Proceedings

27Item 1A. Risk Factors

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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