WSTF Westaff (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

FORM 10-Q/A

Amendment No. 1

For the transition period from              to              

Commission file number 000-24990

WESTAFF, INC.

(Exact name of registrant as specified in its charter)

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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:

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q of Westaff, Inc. (the “Registrant”) amends the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 12, 2008 that was originally filed with the Securities and Exchange Commission on August 26, 2008 (the “Original Filing”).  This Amendment No. 1 is being filed to make the following change:

·       Part II, Item 1A – Risk Factors

We changed the following sentence to correct a typographical item:

“As of July 12, 2008, our principal stockholder, DelStaff LLC (“DelStaff’), together with its affiliates, controls approximately 49.5% (previously stated as 44.1%) of the total outstanding shares of our common stock.”

No other changes have been made to the Original Filing.  This Amendment No. 1 does not amend or update any other information set forth in the Original Filing including the information contained in the condensed consolidated balance sheets, statements of operations and cash flows as of July 12, 2008 and for the 12 and 36 weeks then ended, and the Registrant has not updated disclosures contained therein to reflect any events subsequent to the filing of the Original Filing.  This Amendment No. 1 consists solely of the preceding cover page, this explanatory note, Item 1A (as amended), the signature page and the certifications required to be filed as exhibits hereto.

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Item 1A.  Risk Factors

Investing in our common stock involves a high degree of 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 us. 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.

The recent economic downturn could result in our customers using fewer staffing services, which could materially adversely affect our business.

Demand for staffing services is significantly affected by the general level of economic activity.  We expect that the recent downturn in the economy will continue to impact the demand for staffing services and the Company’s performance.  As economic activity slows, many customers reduce their utilization of temporary employees before undertaking layoffs of their regular full-time employees.  Further, demand for permanent placement services also slows as the labor pool directly available to our customers increases, making it easier for them to identify new employees directly.  Typically, we may experience increased pricing pressures from other staffing companies during periods of economic downturn, which could have a material adverse effect on our financial condition. Additionally, in geographic areas where we derive a significant amount of business, a regional or localized economic downturn could adversely affect our operating results and financial position.

We have significant working capital requirements and are heavily dependent upon our ability to borrow money to meet these working capital requirements.

We 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.

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 up to $33.0 million.  In addition, our Australian subsidiary maintains an A$12.0 million Australian dollar facility agreement with GE Capital that expires in May 2009.  As of July 12, 2008, our total borrowing capacity was $13.2 million, consisting of $5.3 million for our domestic operations and $7.9 million for our Australian operations.

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.

We typically experience significant seasonal and other 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.

We have historically experienced periods of negative cash flow from operations and investment activities, especially during seasonal peaks in revenue experienced in the third and fourth fiscal quarters of the year.  In addition, we are required to pledge amounts to secure letters of credit that collateralize certain workers’ compensation obligations, and these amounts may increase in future periods.  Any such increase in pledged amounts or sustained negative cash flows would decrease amounts available for working capital purposes and could have a material adverse effect on our liquidity and financial condition.

We are currently in default under the primary credit facility that we use to finance our operations.  If we are unable to obtain a waiver or continued forbearance with respect to this default, we may be unable to satisfy our liquidity requirements and continue our operations as a going concern.

We finance our operations 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 to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for our 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 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.

On July 31, 2008, we 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) we agreed to a reduction in the aggregate amount of the commitments under our line of credit 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 our payroll and payroll tax obligations.

                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.

On August 25, 2008, we entered into a Subordinated 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”).

The unpaid principal balance due 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 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.  Our obligations under the Subordinated Loan Agreement are secured by a security interest in substantially all of our existing and future assets (the “Subordinated Collateral”).  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.  We may use the Subordinated Loan for working capital and general business purposes.  Any borrowings in excess of $1.0 million require 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.

Under certain circumstances, we must prepay all or a portion of any amounts outstanding under the Subordinated Loan Agreement, subject to the terms of the Intercreditor Agreement.

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Under the terms of the Subordinated Loan Agreement, the Company has agreed to pay to the Subordinated Lender a facility fee at the closing which will be added to the principal of the Subordinated Loans at the closing, but will not reduce the availability of the $3.0 million facility.

We may be unable to adequately collateralize our workers’ compensation obligations at their current levels or at all.

We are contractually obligated to collateralize our workers’ compensation obligations under our workers’ compensation program through irrevocable letters of credit, surety bonds or cash.  As of July 12, 2008, our aggregate collateral 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 collateral.  These collateral requirements are significant and place pressure on our liquidity and working capital capacity.  If we are not able to obtain a renewal of our letters of credit at a level sufficient to meet our collateral requirements, we could be unable to obtain sufficient workers’ compensation coverage to support our operations.

We have had significant turnover in our management team and further loss of any of our key personnel or failure to recruit  for key open positions could harm our business.

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.

On June 4, 2008, we announced the appointment of 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.

Our future financial performance is significantly impacted by our ability to attract, motivate and retain key management personnel and other members of the senior management team.  Competition for qualified management personnel is intense and in the event that we 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 within our organization to achieve our operating objectives.  Even if we are successful, turnover in key management positions could temporarily harm our financial performance and results of operations until the new management becomes familiar with our business.

The staffing industry is highly competitive with limited barriers to entry which could limit our ability to maintain or increase market share.

4

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 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 we do that, among other things, could enable them to attempt to 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 to consolidate staffing services purchases has in some cases made it more difficult for us to obtain or retain business.

Price competition in the staffing industry continues to be intense, and pricing pressures from both competitors and customers could adversely impact our financial decisions.

We expect the level of competition to remain high in the future, and competitive pricing pressures will continue to make it difficult for us to raise our prices to immediately and fully offset increased costs of doing business, including increased labor costs, costs for workers’ compensation and, domestically, 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 prospective customers may decide to provide services internally.

Failure to implement our new strategies could impede our growth and result in significant added costs.

In fiscal 2007, we made significant changes to our field structure and hired several new key executives late in the fiscal year to seek to grow new business markets for the Company.  Our failure to implement these new strategies could impede our growth and result in significant added costs.  Even if our new strategies are successfully implemented, they may not have the favorable impact on our business and operations that we anticipate.

Our principal stockholder, together with its affiliates, controls a significant amount of our outstanding common stock thus allowing them to exert significant influence on our management and affairs.

As of July 12, 2008, our principal stockholder, DelStaff LLC (“DelStaff’), together with its affiliates, controls approximately 49.5% 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.

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

We maintain reserves to cover our estimated liabilities for workers’ compensation claims based upon actuarial estimates of the future cost of claims and related expenses which have been reported but not settled, and that have been incurred but not yet reported.  The determination of these reserves is based on a number of 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 as adverse development on existing claims, changes in medical costs, claims handling 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.  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’ compensation costs for temporary employees may continue to rise and reduce margins and require more liquidity.

In 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 has fallen in fiscal 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 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 that we will be able to successfully renew such policy.  Further, there are covenants associated with the continuation of the policy and there 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, 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.

We are exposed to credit risks on collections from our customers due to, among other things, our assumption of the obligation to make wage, tax, and regulatory payments to our temporary employees.

We are exposed 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 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 assigned makes payments required by our service agreement, which exposes us to credit 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 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 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.

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

Franchise agent operations comprise a significant portion of our revenue.  For the first 36 weeks of 2008, franchisees represented 30.0% of gross receipts.  In addition, our ten 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 new franchisees or that we will be able to retain our existing franchisees.  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.

We are subject to business risks associated with international operations and fluctuating exchange rates.

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:

·                   differences in cultures and business practices;

·                   overlapping or differing tax laws and regulations;

·                   economic and political uncertainties;

·                   differences in accounting and reporting requirements;

·                   changing, complex or ambiguous foreign laws and regulations, particularly as they relate to employment; and

·                   litigation and claims.

All of our sales outside of the United States are denominated in local currencies and, accordingly, we are subject to risks associated with fluctuations in exchange rates, which could cause a reduction in our profits.  There can be no assurance that any of these factors will not have a material adverse effect on our business, results of operations, cash flows or financial condition.

Our success is impacted by our ability to attract and retain qualified temporary and permanent candidates.

We 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 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 service agreements may be terminated on short notice, leaving us vulnerable to loss of a significant amount of customers in a short period of time.

Our service agreements are generally cancellable with little or no notice by 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.

The cost of unemployment insurance for temporary employees may rise and 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 government regulations.  Should these costs 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.

Our information technology systems are critical to the operations of our business.

Our information management systems are essential for data exchange and operational communications with branches spread across large geographical distances.  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.

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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 earnings.

We are in the business of employing people and placing them in the workplace of other 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 or tax requirements that could reduce our revenues and earnings.  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.

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

The risks related to engaging in our business include but are not limited to:

·                   claims by our placed personnel of discrimination and harassment directed at them, including claims arising from the actions of our customers;

·                   workers’ compensation claims and other similar claims;

·                   violations of wage and hour laws and requirements;

·                   claims of misconduct, including criminal activity or negligence on the part of our placed personnel;

·                   claims by our customers relating to actions by our placed personnel, including property damage and personal injury, misuse of proprietary information and misappropriation of assets or other similar claims; and

·                   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.

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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.

Item 6.    Exhibits

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

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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.

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