##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


(Mark One)



|  |                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------
|þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
    THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
    OCTOBER 3, 2004 OR
| 
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
    (d) OF THE SECURITIES EXCHANGE ACT OF 1934                                             

For the transition period
from                         to

Commission file number 0-5260

REMEDYTEMP, INC.


(Exact Name of Registrant as Specified in Its
Charter)


|                                                                             |  |                                                   
|---------------------------------------------------------------------------- |  | --------------------------------------------------
|California(State or Other Jurisdiction of
    Incorporation or Organization) |  | 95-2890471(I.R.S. Employer
    Identification No.)

101 Enterprise

Aliso Viejo, California 92656


(Address of Principal Executive Offices) (Zip
Code)


Registrants Telephone Number, Including
Area Code

(949) 425-7600


Securities Registered Pursuant to
Section 12(b) of the Act: None

Securities Registered Pursuant to
Section 12(g) of the Act:

|                                    |  |                                          
|----------------------------------- |  | -----------------------------------------
|Title of Each Class                 |  | Name of Each Exchange on Which Registered
|                                    |  |                                          
|Class A Common Stock $.01 par value |  | NASDAQ National Market                   

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    þ    No    o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.    þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).    Yes    þ    No    o

The aggregate market value of the Class A
Common Stock held by non-affiliates of the registrant based upon
the closing sales price of its Class A Common Stock on
March 28, 2004 on the NASDAQ National Market was
$87,547,295. The aggregate market value of the Class B
Common Stock (which converts to Class A upon certain
transactions) held by non-affiliates of the registrant based
upon the closing sales price of its Class A Common Stock on
March 28, 2004 on the NASDAQ National Market was $563,338.

The number of shares of Class A Common Stock
outstanding as of December 1, 2004 was 8,778,131 and the
number of shares of Class B Common Stock outstanding as of
December 1, 2004 was 800,312.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant will file a definitive Proxy
Statement pursuant to Regulation 14A within 120 days
of the end of the fiscal year ended October 3, 2004.
Portions of the Companys Proxy Statement, to be mailed to
the shareholders in connection with the Annual Meeting, are
incorporated by reference in Part III, Items 10-14, of this
report on Form 10-K. Except for the portions expressly
incorporated by reference, the Companys Proxy Statement
shall not be deemed to be part of this report.



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REMEDYTEMP, INC.

2004 FORM 10-K ANNUAL REPORT


TABLE OF CONTENTS

|             |  |                                                                                                                      |  |          |    | 
|------------ |  | -------------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|             |  |                                                                                                                      |  | Page No.
|             |  |                                                                                                                      |  |         
|PART I      
|Item 1.      |  | Business                                                                                                             |  |          | 3  | 
|Item 2.      |  | Properties                                                                                                           |  |          | 14 | 
|Item 3.      |  | Legal Proceedings                                                                                                    |  |          | 14 | 
|Item 4.      |  | Submission of Matters to a
    Vote of Security Holders                                                              |  |          | 16 | 
|             |  | Executive Officers of the
    Registrant                                                                             |  |          | 16 | 
|PART II     
|Item 5.      |  | Market for Registrants
    Common Equity, Related Shareholder Matters and Issuer Purchases
    of Equity Securities |  |          | 17 | 
|Item 6.      |  | Selected Financial Data                                                                                              |  |          | 18 | 
|Item 7.      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |  |          | 20 | 
|Item 7A.     |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |  |          | 34 | 
|Item 8.      |  | Financial Statements and
    Supplementary Data                                                                      |  |          | 34 | 
|Item 9.      |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosure                             |  |          | 35 | 
|Item 9A.     |  | Controls and Procedures                                                                                              |  |          | 35 | 
|Item 9B.     |  | Other Information                                                                                                    |  |          | 35 | 
|PART III    
|Item 10.     |  | Directors and Executive
    Officers of the Registrant                                                               |  |          | 35 | 
|Item 11.     |  | Executive Compensation                                                                                               |  |          | 36 | 
|Item 12.     |  | Security Ownership of
    Certain Beneficial Owners and Management and Related
    Shareholders Matters              |  |          | 36 | 
|Item 13.     |  | Certain Relationships and
    Related Transactions                                                                   |  |          | 36 | 
|Item 14.     |  | Principal Accountant Fees
    and Services                                                                           |  |          | 36 | 
|PART IV     
|Item 15.     |  | Exhibits and Financial
    Statement Schedules                                                                       |  |          | 36 | 
|             |  | Signatures                                                                                                           |  |          | 39 | 
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32  



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PART I






|        |         
|------- | --------
|Item 1. | Business

In addition to historical information, the
description of business below, managements discussion and
analysis in Part II and other statements contained elsewhere in
this Annual Report on Form 10-K, include certain
forward-looking statements, including, but not limited to, those
related to the growth and strategies, future operating results
and financial position as well as economic and market events and
trends of RemedyTemp, Inc., including its wholly-owned
subsidiaries (collectively, the Company). All
forward-looking statements made by the Company, including such
statements herein, include material risks and uncertainties and
are subject to change based on factors beyond the control of the
Company (certain of such statements are identified by the use of
words such as anticipate, believe,
estimate, intend, plan,
expect, will, or future).
Accordingly, the Companys actual results may differ
materially from those expressed or implied in any such
forward-looking statements as a result of various factors,
including, without limitation, the success of certain cost
reduction efforts, the continued performance of the RemX®
specialty division, the Companys ability to realize
improvements in the months ahead, changes in general or local
economic conditions that could impact the Companys
expected financial results, the availability of sufficient
personnel, various costs relating to temporary workers and
personnel, including but not limited to workers
compensation and state unemployment rates, the Companys
ability to expand its sales capacity and channels, to open new
points of distribution and expand in core geographic markets,
attract and retain clients and franchisees/licensees, the
outcome of litigation, software integration and implementation,
application of deferred tax assets and other factors described
in the Companys filings with the Securities and Exchange
Commission regarding risks affecting the Companys
financial condition and results of operations. The Company does
not undertake to publicly update or revise its forward-looking
statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not
be realized. The following should be read in conjunction with
the Consolidated Financial Statements of the Company and Notes
thereto.

General

RemedyTemp, Inc. (Remedy or the
Company), founded in 1965 and incorporated in
California in 1974, is a national provider of clerical, light
industrial, information technology and financial temporary
staffing services to industrial, service and technology
companies, professional organizations and governmental agencies.
The Company provides its services in 35 states, Puerto Rico and
Canada through a network of 238 offices, of which 130 are
Company-owned and 108 are independently-managed franchises.
During the twelve months ended October 3, 2004, the Company
placed approximately 124,000 temporary workers, known as
associates, and provided approximately
39 million hours of staffing services to over 10,000
clients.

The Company has positioned itself to take
advantage of trends in the temporary staffing industry, such as
increased integration of temporary workers as a significant,
long-term workforce component in both manufacturing and
service-oriented companies and increased outsourcing by clients
of certain staffing functions. Historically, the Company focused
on the clerical and light industrial sectors of the
nations temporary workforce. Beginning in November 1998,
the Company began servicing the information technology sector,
and in fiscal 2002 began servicing the financial and accounting
sector. The clerical, light industrial, information technology
and financial sectors comprise approximately 83.0% of the
nations temporary staffing industry revenues, according to
the Staffing Industry Analysts, Inc. (SIA), an
independent staffing industry publication. Additionally, the
Company intends to continue focusing its efforts in these areas.
Through the use of innovative technologies and value-added
services, the Company strives to partner with its clients to
deliver total solutions to their temporary staffing needs. The
Companys expertise in providing associates who possess the
skills and attitudinal characteristics necessary to
fit into its clients organizations and perform
at a superior level distinguishes the Company as a premium
provider of temporary staffing services and technologies.

The Company has invested significant human and
financial resources in the development of proprietary
technologies designed to enable the Company to provide its
clients with premium temporary workers and

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unique value-added services. The Companys
primary proprietary technologies are maintained and offered in
the following three interactive systems: Human Performance
Technology (HPT®), an innovative series of
multimedia evaluations used to profile the behavioral
characteristics of the Companys associates; i/search
2000®, an integrated front office and back office
database system that is used to pay temporary associates and
bill clients as well as to classify, search and match the
Companys associates to job openings using parameters based
upon client needs; and Employee Data Gathering and Evaluation
(EDGE®), a proprietary computer system used by
the Company at certain client locations to coordinate
scheduling, track job performance and generate customized
utilization reports for the clients entire temporary
workforce. The EDGE® system is installed at the beginning
of a temporary assignment and is removed upon completion of that
assignment. The EDGE® system, including the related
hardware, is the property of the Company and is not sold or
leased to its clients. The Companys integrated i/search
2000® has enabled its Company-owned and
independently-managed offices to streamline operational
efficiencies and enhance client service levels.


Additionally, the Company provides master vendor
and on-site management programs to its clients in an effort to
streamline the management of the temporary workforce and reduce
the overall costs. As a master vendor, Remedy provides clients
with centralized order processing, sub-contractor management and
regular business reviews to track performance. The on-site
management program provides a dedicated representative
on-site at the client location to manage
Remedys temporary workforce including developing,
coordinating and managing associate orientation, order
fulfillment, payroll tracking and other personnel issues.

Management believes that the Companys
proprietary technologies and workforce management programs give
the Company advantages over competing temporary staffing
companies that do not provide similar value-added services.

This Annual Report, and each of the
Companys other periodic and current reports, including any
amendments, are available, free of charge, on our website,
www.remedytemp.com, as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the
Securities and Exchange Commission. The information contained on
the website is not incorporated by reference into this Annual
Report on Form 10-K and should not be considered part of
this report.

The Staffing Industry

According to the SIA July 2004 report, temporary
help revenues in the United States staffing industry averaged
approximately a 0.1% decline from 1999 to 2002 as compared to
projected revenue growth of 7.4% from $76.0 billion in 2003
to $81.6 billion in 2004. This is the second year of
consecutive growth in temporary help revenue resulting from the
overall economic growth in the United States during the last
twelve months. Historically, the temporary staffing industry has
experienced its greatest growth during economic recoveries.
During fiscal 2003, growth was slow to materialize out of this
recovery, apparently due to high productivity gains, which kept
job creation to a minimum. However, fiscal 2004 showed signs of
stronger growth as evidenced not only by the Companys
revenue growth but growth throughout the staffing industry.

The staffing services industry was once used
predominately as a short-term solution for greater workforce
needs during peak production periods and to replace workers who
were abruptly terminated or who were absent due to illness or
vacation. Since the late 1980s, the use of temporary services
has evolved into a permanent and significant component of the
staffing plans of many employers. Corporate restructuring,
government regulations, advances in technology and the desire by
many business entities to shift employee costs from a fixed to a
variable expense have resulted in the use of a wide range of
staffing alternatives by businesses. Flexible staffing
alternatives allow businesses to respond quickly and
aggressively to changing market conditions which many economists
and analysts believe is critical to future economic growth.

Additionally, it is widely accepted by economists
that temporary staffing also encourages greater work force
participation, which is critical as the U.S. faces a labor
shortage. Temporary staffing provides employment flexibility and
options to people who might otherwise choose not to work.
Flexible work arrangements offer choices that fit the diverse
needs and preferences of potential employees thereby
contributing to increased participation and enhanced
productivity. These, along with various other economic and
social factors, have increased the help supply services
employment rate from 1.1% of the non-farm U.S.

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workforce in 1990 to 1.7% in 2003, according to
U.S. Department of Labor statistics. The American Staffing
Association estimates that the average daily employment in
temporary help services approximated 2.3 million nationwide
in 2003.


The clerical, light industrial, information
technology and financial sectors represent the largest four
sectors of the temporary staffing industry. A staffing industry
report by SIA, based on 2003 revenues, reported that the office
and clerical sector accounted for $19.7 billion or
approximately 26.0% of the temporary staffing industry revenues,
the light industrial sector accounted for $16.5 billion or
approximately 21.8% of industry revenues, the
technical/information technology sectors accounted for
$19.4 billion or approximately 25.6% of industry revenues,
and the financial sector accounted for $7.3 billion or
approximately 9.6% of industry revenues. Historically, the
overall growth in temporary staffing revenues has resulted
primarily from growth in these four sectors. While all sectors
in the temporary staffing industry experienced contraction in
2002 and 2003, industry reports currently project modest growth
in 2004 and higher growth in 2005.

Operations

The Company provides temporary personnel in the
following three industry sectors: clerical, light industrial,
and specialty staffing.

Clerical
Services As the
use of temporary staffing has become more prevalent, the range
of clerical positions provided by the Company has expanded
beyond traditional secretarial staff to include a broad range of
general business environment personnel. Clerical services
include executive assistants, word processors, customer service
representatives, data entry operators, hosts, telemarketers,
other general office staff and call center agents, including
customer service, help desk/product support, order takers,
market surveyors, collection agents and telesales.

Light Industrial
Services Light
industrial services personnel are furnished for a variety of
assignments including assembly work (such as mechanical
assemblers, general assemblers, solderers and electronic
assemblers), factory work (including merchandise packagers,
machine operators and pricing and tagging personnel), warehouse
work (such as general laborers, stock clerks, material handlers,
order pullers, forklift operators, palletizers and
shipping/receiving clerks), technical work (such as lab
technicians, quality control technicians, bench technicians,
test operators, electronic technicians, inspectors, drafters,
checkers, designers, expediters and buyers) and general services
(such as maintenance and repair personnel, janitors and food
service workers).

The Company also provides solutions for
clients logistics staffing needs, including distribution
and fulfillment. Logistics is the management of inventory, and
includes warehousing, transportation, distribution and supply of
goods. The Company supplies temporary associates in the
following categories: inventory takers, material processors,
warehouse workers, boxers, mail clerks, expeditors and inventory
control clerks.

Specialty
Services The
Company provides specialty staffing services in the areas of
information technology, finance and accounting and high level
office staffing through its RemX® division. The RemX®
division and brands are exclusively a Company owned operation.
The Company now operates 37 offices within the
RemX®division in the following specialty areas:

Information Technology Services.In November 1998, the Company began
providing information technology temporary staffing and
consulting services under the name RemX Technology Group®.
RemX Technology Group®, now known as RemX® IT
Staffing, supplies contract staffing and consulting
professionals on a temporary, temp-to-hire or direct hire basis
in key technology categories including hardware and software
engineering, database design development, application
development, Internet/ Intranet site development, networking,
software quality assurance and technical support. The Company
currently has 11 RemX® IT Staffing offices.

Financial Staffing.RemX® Financial Staffing was
launched during fiscal 2002 with ten office openings. RemX®
Financial Staffing is a highly specialized division focusing on
placing financial and accounting personnel in key positions
within the financial sector. RemX® Financial Staffing
provides its clients with controllers, financial analysts,
certified public accountants, auditors, senior/staff accountants
and a variety of

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other positions on a temporary, temp-to-hire or
direct hire basis. The Company currently has 20 RemX®
Financial Staffing offices.


OfficeStaff Services.The Companys newest division was
launched during fiscal 2003 with its first RemX®
OfficeStaff office opening. RemX® OfficeStaff specializes
in the recruitment and placement of high level administrative
support personnel, including administrative assistants, office
managers and corporate receptionists on a temporary,
temp-to-hire or direct hire basis. The Company currently has six
RemX® OfficeStaff offices.

Office
Organization.

The Company provides its services through a
network of 238 office locations, 130 of which are owned and
operated by the Company and 108 of which are operated as
independently-managed franchised offices. The table below sets
forth the geographic distribution of the Company-owned and
independently-managed offices as of October 3, 2004.

|                       |  |               |     |                       |  |          |    |         |  |  |    |  |  |  |     | 
|---------------------- |  | ------------- | --- | --------------------- |  | -------- | -- | ------- |  |  | -- |  |  |  | --- | 
|                       |  |               |     |                       |  |         
|                       |  |               |     | Independently-Managed |  |         
|                       |  |               |     | Franchised Offices    |  |         
|                       |  | Company-Owned |     |                       |  | Total   
|                       |  | Offices       |     | Traditional           |  | Licensed |    | Offices
|                       |  |               |     |                       |  |          |    |        
|California             |  |               | 67  |                       |  |          |   |         |  |  | 2  |  |  |  | 69  | 
|Western Region(1)      |  |               | 7   |                       |  |          | 3  |         |  |  | 16 |  |  |  | 26  | 
|Midwestern Region(2)   |  |               | 10  |                       |  |          | 4  |         |  |  | 26 |  |  |  | 40  | 
|Southeastern Region(3) |  |               | 32  |                       |  |          | 3  |         |  |  | 42 |  |  |  | 77  | 
|Northeastern Region(4) |  |               | 14  |                       |  |          |   |         |  |  | 10 |  |  |  | 24  | 
|Puerto Rico            |  |               |    |                       |  |          |   |         |  |  | 1  |  |  |  | 1   | 
|Canada                 |  |               |    |                       |  |          |   |         |  |  | 1  |  |  |  | 1   | 
|                       |  |               |     |                       |  |          |    |         |  |  |    |  |  |  |     | 
|Total                  |  |               | 130 |                       |  |          | 10 |         |  |  | 98 |  |  |  | 238 | 
|                       |  |               |     |                       |  |          |    |         |  |  |    |  |  |  |     | 



---



|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes Arizona, Colorado, Hawaii, Idaho,
    Nevada, Oregon, Utah and Washington.                                                       
|   
|(2) | Includes Illinois, Indiana, Iowa, Michigan,
    Missouri, Nebraska, Ohio and Wisconsin.                                                   
|   
|(3) | Includes Arkansas, Florida, Georgia, Kentucky,
    Louisiana, North Carolina, Oklahoma, South Carolina, Tennessee,
    Texas and Virginia.
|   
|(4) | Includes Connecticut, Delaware, Maryland,
    Massachusetts, New Jersey, New York, Pennsylvania and the
    District of Columbia.         

Company-Owned
Offices.

The Company-owned offices provide clerical, light
industrial, information technology and financial staffing and
are primarily concentrated in California, with locations in 19
other states and the District of Columbia. These offices are
organized into five divisions; each managed by an Operational
Vice President and other regional staff who provide operational
support for the offices in their regions. Company-owned offices
are organized into different matrices based upon geographic
location and/or service offerings. Each matrix has an office
manager who is accountable for the day-to-day operations and
profitability of the offices within that matrix.

Managers report to their Operational Vice
Presidents, and together they are responsible for sales, client
development and retention, recruitment, placement and retention
of associates and general administration for their respective
offices and regions. The Company believes that this
decentralized structure contributes to the initiative and
commitment of its management team and that its incentive
compensation approach motivates managers to increase profits.

Company-owned offices had average sales per
office of approximately $2.6 million for fiscal 2004 and fiscal
2003. The density of Company-owned offices in certain areas
enables the Company to spread fixed costs

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such as advertising, recruiting and
administration over a larger revenue base, and also to share
associates and provide clients with superior coverage and
service capabilities. In addition, the Company has divided
highly successful Company-owned offices into separate clerical,
light industrial, information technology and financial offices,
allowing each to specialize and further penetrate its market.


Independently-Managed
Franchised Offices.

Independently-managed franchised offices provide
clerical and light industrial services and have been an
important element of the Companys growth strategy for more
than a decade. Such offices have enabled the Company to expand
into new markets with highly qualified franchisees without
significant capital expenditures. The majority of the
Companys offices outside California are
independently-managed franchises. Franchise agreements have
ten-year terms and are renewable for successive five-year or
ten-year terms, depending upon when such agreements originated.
Such agreements cover exclusive geographic territories and
contain minimum revenue performance standards. The
Companys franchise agreements are structured in either a
traditional franchise format or a
licensed franchise format.

In general, franchise offices opened from 1987 to
1990 are operated as traditional franchises, and
independently-managed offices opened since 1990 are operated as
licensed franchise offices. The Company moved from the
traditional to the licensed franchise format to exercise more
control over the collection and tracking of the receivables
generated by the independently-managed offices and to allow the
Company to grow without being limited by the financial resources
of traditional franchisees. Accordingly, the number of
traditional franchise offices is not anticipated to increase,
except in certain circumstances when a licensed franchise office
may convert to the traditional franchise format. Additionally,
existing traditional franchisees have the option under their
contract to open new franchise offices within their territory.
The number of licensed franchise offices is expected to increase
because new independently-managed offices will be opened in
licensed franchise format and offices currently operated as
traditional franchises may, depending upon various factors,
convert to the licensed franchise format. If the number of
traditional franchise offices is reduced, royalty revenues will
decrease.

Traditional Franchises.The Company employed a traditional
franchise model primarily from 1987 until 1990 (referred to as
both traditional franchise and traditional
franchisee). As of October 3, 2004, 10 of the
Companys 108 independently-managed offices were
traditional franchises. These traditional franchisees pay all
lease and working capital costs, fund payroll and collect
clients accounts. Generally, traditional franchisees pay
the Company an initial franchise fee and continuing franchise
fees, or royalties, equal to approximately 7.0% of gross
billings. Royalty fees are reduced when the franchisee serves a
national client as these clients typically have lower margins
and for franchisees that have renewed their franchise agreement
and qualify for a discounted rate (ranging from
5.5%  6.5%) based on gross billings. Traditional
franchisees employ all office management staff and all temporary
personnel affiliated with their offices. The Company provides
training, the right to use certain designated service marks and
trademarks, its business model, proprietary computer programs,
as well as operational support. Material rights and terms of the
form of the franchise agreement for traditional franchise
offices include the right to operate a Remedy franchise business
within an exclusive geographic territory, a non-exclusive
license of the Remedy trademarks and service marks designated
for use and operation of the franchised business, disclosure and
use of Remedys trade secrets and operating guidance from
Remedy. Furthermore, pursuant to the terms of the form of
franchise agreement for traditional franchise offices,
franchisees shall indemnify Remedy from any liability that may
arise in connection with the franchised business and must comply
with certain minimum performance standards and operating
procedures. The Company no longer offers this form of franchise
agreement.

Licensed Franchises.Since 1990, the Company has recruited
new franchisees under the licensed franchise format (referred to
as licensed franchise, licensed
franchisee and/or licensee). The Company moved
from the traditional franchise to the licensed franchise format
to exercise more control over the collection and tracking of the
receivables of the independently-managed offices and to allow
the Company to grow without being limited by the financial
resources of traditional franchisees. As of October 3,
2004, 98 of the Companys 108 independently-managed office
locations were licensed franchise offices. The licensed
franchise format differs from the traditional franchise format
in that the licensee employs all management

7



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staff affiliated with its office, but the Company
employs all temporary personnel affiliated with the licensed
franchise office. The Company funds payroll, collects
clients accounts and remits to the licensee
60%  70% of the offices gross profit,
based upon the level of hours billed during the licensees
contract year. However, the Companys share of the
licensees gross profit, representing its continuing
franchise fees, is generally not less than 7.5% of the
licensees gross billings; with the exception of national
accounts on which the Companys fee is reduced to
compensate for lower gross margins and for licensees that have
renewed their franchise agreement and qualify for a discounted
rate (ranging from 6.0%  7.0%) based on gross
revenues. Material rights and terms of the form of the franchise
agreement for licensed offices include the right to operate a
Remedy franchise business within an exclusive geographic
territory, a non-exclusive license of the Remedy trademarks and
service marks designated for use and operation of the franchised
business, disclosure and use of Remedys trade secrets and
operating guidance from Remedy. Furthermore, pursuant to the
terms of the form of franchise agreement for licensed offices,
licensees shall indemnify Remedy from any liability that may
arise in connection with the franchised business and must comply
with certain minimum performance standards and operating
procedures. Currently, the Company only offers this form of
franchise agreement to prospective franchisees.


Generally, licensed franchisees pay the Company
an initial franchise fee of $10,000  $18,000 and
continuing franchise fees consist of the Companys share of
the licensees gross profit as discussed above. Licensed
franchise agreements entered into subsequent to January 2002
provide for deferred payment of a portion of the initial
franchise fee. Currently, the initial investment for a licensed
franchise business is estimated to be
$98,000  $211,000 as disclosed in the
Companys Uniform Franchise Offering Circular
(UFOC) to be issued by December 31, 2004 in
accordance with Federal Trade Commission regulations. As
outlined in the UFOC, this estimated initial investment includes
the initial franchise fee payable to the Company, as well as
estimated expenditures to various vendors for pre-operating
costs and operating costs for the initial six months of
operation. Continuing franchise fees are excluded from the total
estimated initial investment. Refer to the franchise agreement
for licensed offices, filed as an exhibit to this Annual Report
on Form 10-K, for additional rights and terms of the
franchise agreement currently offered by the Company.



| |                                 
| | --------------------------------
| | Acquisitions and Office Closures

From time to time, the Company may selectively
purchase traditional and licensed franchise operations for
strategic reasons, including facilitating its expansion plans of
increased market presence in identified geographic regions.
Refer to Note 6 to notes to consolidated financial
statements for further discussion on the Companys
acquisitions. The Company continually reassesses its current
operating structure and in view of its strategic plans will
consolidate or close certain Company-owned offices (see
Note 7 to notes to consolidated financial statements).

Seasonality

The Companys quarterly operating results
are affected by the number of billing days in the quarter and
the seasonality of its clients businesses. The first
fiscal quarter has historically been strong as a result of
manufacturing and retail emphasis on holiday sales.
Historically, the second fiscal quarter shows a slight decline
in comparable revenues from the first fiscal quarter. Revenue
growth has historically accelerated in each of the third and
fourth fiscal quarters as manufacturers, retailers and service
businesses increase their level of business activity.

Clients

The Company serves the needs of small,
medium-size and Fortune 500 businesses in a variety of
industries. During fiscal 2004 and 2003, the Company serviced
over 10,000 clients nationwide. The Companys ten highest
volume clients in fiscal 2004 and fiscal 2003 accounted for
approximately 23.4% and 21.8%, respectively, of the
Companys total revenues. No single client accounted for
more than 4.1% and 4.4% of the Companys total revenues for
fiscal 2004 and fiscal 2003, respectively.

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Competition

The temporary services industry is highly
competitive with limited barriers to entry. The Company believes
that its largest competitors in the clerical and light
industrial sectors include Adecco S.A., Kelly Services, Inc.,
Manpower Inc., Spherion Corporation, Labor Ready, Ablest, Inc.,
and Westaff, Inc. These and other large competitors have
nationwide operations with substantially greater resources than
the Company, which among other things could enable them to
attempt to maintain or increase their market share by reducing
prices. In addition, there are a number of other medium-sized
firms that are regional or emphasize specialized niches and
compete with the Company in certain markets where they have a
stronger presence. Finally, numerous small or single-office
firms compete effectively with the Companys offices in
their limited areas. In the information technology and financial
sectors, the Company believes that its competitors include MPS
Group, Inc., Robert Half International, Inc., Adecco S.A.,
Alternative Resources Corporation, On Assignment, Inc., KForce,
Comsys and CDI Corporation.

The Companys management believes that the
most important competitive factors in obtaining and retaining
its targeted clients are understanding the customers
specific job requirements, the ability to provide qualified
temporary personnel in a timely manner and the quality and price
of services. The primary competitive factors in obtaining
qualified candidates for temporary employment assignments are
wages, benefits and responsiveness to work schedules.

The Company expects ongoing vigorous competition
and pricing pressure from national, regional and local
providers, and there is no assurance that the Company will be
able to maintain or increase its market share or profitability.

Workers Compensation

Remedy provides workers compensation
insurance to its temporary associates and colleagues. Effective
April 1, 2001 and for workers compensation claims
originating in the majority of states (referred to as
non-monopolistic states), the Company has contracted with
independent, third-party carriers for workers compensation
insurance and claims administration. Each annual contract covers
all workers compensation claim costs greater than a
specified deductible amount, on a per occurrence
basis. The Company is self-insured for its deductible liability
($250,000 per individual claim incurred from April 1, 2001
to March 31, 2002 and $500,000 for all subsequent claims).
The insurance carrier is responsible for incremental losses in
excess of the applicable deductible amount.

Remedy establishes a reserve for the estimated
remaining deductible portion of its workers compensation
claims, representing the estimated ultimate cost of claims and
related expenses that have been reported but not settled, and
that have been incurred but not reported. The estimated ultimate
cost of a claim is determined by applying actuarially determined
loss development factors to current claims information. These
development factors are determined based upon a detailed
actuarial analysis of historical claims experience of both the
Company and the staffing industry. The Company periodically
updates the actuarial analysis supporting the development
factors utilized and revises those development factors, as
necessary. Adjustments to the claims reserve are charged or
credited to expense in the periods in which they occur. The
estimated remaining deductible liability under the
aforementioned contracts as of October 3, 2004 is
approximately $36.4 million, of which $12.3 million is
recorded as current and $24.1 million is recorded as
non-current in the accompanying consolidated balance sheets.

The Company also has an aggregate
$2.7 million current liability recorded at October 3,
2004 for amounts due to various state funds related to
workers compensation. At September 28, 2003, the
Company had an aggregate $5.3 million current liability
recorded for additional premiums due under previous guaranteed
cost policies in addition to amounts due to various state funds.

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The following table presents the classification
of the Companys workers compensation liability and
accrued CIGA litigation costs:

|          |                                                                             |                               |   |               |        |  |   |        |        | 
|--------- | --------------------------------------------------------------------------- | ----------------------------- | - | ------------- | ------ |  | - | ------ | ------ | 
|          |                                                                             | October 3,                    |   | September 28,
|          |                                                                             | 2004                          |   | 2003         
|          |                                                                             |                               |   |              
|          |                                                                             |                              
|          |                                                                             | (amounts in thousands)       
|Current   |                                                                             |                               |   |               |        |  |   |       
|          |                                                                             |                               |   |               |        |  |   |       
|          | Liability for various state funds and previous
    guaranteed cost policies |                               | $ | 2,677         |        |  | $ | 5,302  |       
|          | Accrued workers compensation                                               |                               |   | 12,359        |        |  |   | 9,961  |       
|          |                                                                             |                               |   |               |        |  |   |       
|          |                                                                             | Accrued workers compensation |   | $             | 15,036 |  |   | $      | 15,263 | 
|          |                                                                             |                               |   |               |        |  |   |       
|Long-term |                                                                             |                               |   |               |        |  |   |       
|          |                                                                             |                               |   |               |        |  |   |       
|          | Other liabilities                                                           |                               | $ | 300           |        |  | $ |       |       
|          | Accrued CIGA litigation costs                                               |                               |   | 5,877         |        |  |   |       |       
|          | Accrued workers compensation                                               |                               |   | 24,090        |        |  |   | 20,681 |       
|          |                                                                             |                               |   |               |        |  |   |       
|          |                                                                             | Other liabilities             |   | $             | 30,267 |  |   | $      | 20,681 | 
|          |                                                                             |                               |   |               |        |  |   |       

The Company is contractually required to
collateralize its remaining obligation under each of these
workers compensation insurance contracts through the use
of irrevocable letters of credit, pledged cash and securities or
a combination thereof. The level and type of collateral required
for each policy year is determined by the insurance carrier at
the inception of the policy year and may be modified
periodically. As of October 3, 2004, the Company has
outstanding letters of credit of $34.7 million
(collateralized with $16.0 million in cash) and pledged
cash and securities totaling $21.9 million. Subsequent to
year end, the $16.0 million in cash became unrestricted
under the new Credit Agreement (see Note 4 to the notes to
consolidated financial statements). The pledged cash and
securities are restricted and cannot be used for general
corporate purposes while the Companys remaining
obligations under the workers compensation program are
outstanding. Accordingly, the Company has classified these
pledged cash and securities as restricted in the accompanying
consolidated balance sheets.

From July 22, 1997 through March 31,
2001, the Company had a fully insured workers compensation
program with Reliance National Insurance Company
(Reliance). The annual premium for this program was
based upon actual payroll costs multiplied by a fixed rate. Each
year, the Company prepaid the premium based upon estimated
payroll levels and an adjustment was subsequently made for
differences between the estimated and actual amounts. Subsequent
to March 31, 2001 (the end of Companys final policy
year with Reliance), Reliance became insolvent and was
liquidated. The Company is currently in litigation with the
California Insurance Guaranty Association regarding financial
responsibility for all remaining open California claims under
the Reliance workers compensation program. The Company
recorded a $5.9 million charge to operating income during
the fourth quarter of fiscal 2004 as a result of the October
2004 Court of Appeals decision (see further discussion
under Item 3. Legal Proceedings).

Employees

As of October 3, 2004, the Company employed
a staff of approximately 700 individuals (excluding
temporary associates). During fiscal 2004, approximately 124,000
temporary associates were placed by the Company through
Company-owned and independently-managed franchised offices.
Approximately 72,000 of the temporary associates were employed
by Company-owned offices and approximately 45,000 were employed
by the Company, through licensed franchise offices.
Approximately 7,000 of the temporary associates were placed by
traditional franchise offices and as such are not employed by
the Company but rather are legal employees of the traditional
franchisees. At any given time during 2004, only a portion of
these employees were placed on temporary assignments. The
Company has no collective bargaining agreements and believes its
employee relations are good.

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Governmental Regulation

The Companys marketing and sale of
franchises is regulated by the Federal Trade Commission and by
authorities in 19 states. In those states, the Company is
required to file a registration application, provide notice or
qualify for an exemption from registration. The Company has
filed, or is in the process of filing, the appropriate
registration applications, or has obtained an exemption from
such registration requirements. The Company files and
distributes, to prospective franchisees, Franchise Offering
Circulars and other materials in order to comply with such
registration and disclosure requirements. In addition, the
Companys ongoing relationships with its franchisees are
regulated by applicable federal and state franchise laws.

Proprietary Rights and Systems

The Company has developed, either internally or
through hired consultants, its HPT®, EDGE® and
i/search 2000® computer systems. These and other
proprietary systems are trade secrets of the Company and the
Company has copyrights to certain software used in these systems.

The Company has registered the following
trademarks and service marks with the U.S. Patent &
Trademark Office for use in its operation: REMEDY®, REMEDY
TEMPORARY SERVICES®, REMEDYTEMP®, REMEDY
TECHNICAL®, CALLER ACCESS®, INTELLISEARCH®,
INTELLIGENT STAFFING®, HIRE INTELLIGENCE®, EDGE®,
VSM®, HPT®, THE INTELLIGENT TEMPORARY®, REMEDY
LOGISTICS GROUP®, REMX TECHNOLOGY GROUP®, REMX®
Financial Staffing, REMX® IT Staffing, AXCESS INTERACTIVE
CUSTOMER CARE®, RECRUITRAC®, I/SEARCH
2000®, MAPS® and REMX® OfficeStaffing. In
addition, the Company asserts ownership of, and has filed
applications with the U.S. Patent & Trademark Office to
register the service mark MEGABLASTSM,
RemXFactor, Remedy Manager Match, Remedy Talent
Magnet, and Remedy Knowledge Bank. In general, these
marks are used by the Company and its licensees and franchisees,
except that REMX TECHNOLOGY GROUP®, REMX® Financial
Staffing, REMX® IT Staffing, REMX® OfficeStaff and
RemXFactor are used exclusively by the Company.

Risk Factors

In evaluating Remedys business, you should
carefully consider the following risk factors in addition to
information contained elsewhere in this Annual Report on
Form 10-K.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any significant economic downturn could
    result in our clients using fewer temporary employees, which
    could materially adversely affect the Company.

Demand for temporary services is significantly
affected by the general level of economic activity. As economic
activity slows, businesses may reduce their use of temporary
employees before undertaking layoffs of their full-time
employees, resulting in decreased demand for Remedys
temporary personnel. Further, in an economic downturn, the
Company may face pricing pressure from its clients and increased
competition from other staffing companies, which could have a
material adverse effect on the Companys business. The
overall slowdown in the U.S. economy in 2001 and 2002 had a
significant adverse impact on the Companys revenues.
Additionally, because the Company currently derives a
significant portion of its revenues from the California market
(approximately 44.0% in fiscal 2004), an economic downturn in
California would have a greater impact on the Company than if
the Company had a more widely dispersed revenue base.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Remedy operates in highly competitive
    markets with low barriers to entry, potentially limiting its
    ability to maintain or increase its market share or profit
    margins.

The temporary services industry is highly
competitive with limited barriers to entry and in recent years
has been undergoing significant consolidation. The Company
competes in national, regional and local markets with full
service agencies and with specialized temporary service
agencies. Many competitors are smaller than the Company but have
an advantage over the Company in discrete geographic markets
because of their stronger local presence. Other competitors are
more well-known and have greater marketing and financial
resources than the Company, which among other things could
enable them to attempt to maintain or increase

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their market share by reducing prices. The
Company expects the level of competition to remain high in the
future, and competitive pricing pressures may have an adverse
effect on the Companys operating margins.




| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Remedys success depends upon its
    ability to attract and retain qualified temporary
    personnel.

Remedy depends upon its ability to attract
qualified temporary personnel who possess the skills and
experience necessary to meet the staffing requirements of its
clients. Remedy must continually evaluate and upgrade its base
of available qualified personnel to keep pace with changing
client needs and emerging technologies. Competition for
individuals with proven skills is intense, and demand for these
individuals is expected to remain very strong for the
foreseeable future. There can be no assurance that qualified
personnel will continue to be available to Remedy in sufficient
numbers and on terms of employment acceptable to the Company.
Remedys success will depend on its ability to recruit
qualified temporary personnel and retain them.



| |                                                                
| | ---------------------------------------------------------------
| | Remedys business may suffer if it
    loses its key personnel.

Remedys operations are dependent on the
continued efforts of its executive officers and senior
management. Additionally, Remedy is dependent on the performance
and productivity of its local managers and field personnel.
Remedys ability to attract and retain business is
significantly affected by local relationships and the quality of
service rendered. The loss of those key executive officers and
senior management who have acquired experience in operating a
staffing service company may cause a significant disruption to
Remedys business. Moreover, the loss of Remedys key
local managers and field personnel may jeopardize existing
customer relationships with businesses that continue to use
Remedys staffing services based upon past direct
relationships with these local managers and field personnel.
Either of these types of losses could adversely affect
Remedys operations, including Remedys ability to
establish and maintain customer relationships.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Remedy may be exposed to employment-related
    claims and costs that could materially adversely affect its
    business.

Remedy is in the business of employing people and
placing them in the workplace of other businesses. Attendant
risks of these activities include possible claims by clients of
employee misconduct or negligence, claims by employees of
discrimination or harassment (including claims relating to
actions of Remedys clients), claims related to the
inadvertent employment of illegal aliens or unlicensed
personnel, payment of workers compensation claims and
other similar claims. Remedy has policies and guidelines in
place to help reduce its exposure to these risks and has
purchased insurance policies against certain risks in amounts
that it believes to be adequate. However, there can be no
assurances that Remedy will not experience these problems in the
future or that Remedy may not incur fines or other losses or
negative publicity with respect to these problems that could
have a material adverse effect on Remedys business.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The cost of unemployment insurance premiums
    and workers compensation costs for Remedys temporary
    employees may rise and reduce Remedys profit
    margins.

Businesses use temporary staffing in part to
shift certain employment costs and risks to personnel services
companies. For example, Remedy is responsible for, and pays
unemployment insurance premiums and workers compensation
for, its temporary employees. These costs have generally risen
as a result of increased claims, general economic conditions and
governmental regulation. There can be no assurance that Remedy
will be able to increase the fees charged to its clients in the
future to keep pace with increased costs. Price competition in
the personnel services industry is intense. If Remedy is unable
to maintain its margins, it expects that it may choose to stop
servicing certain clients. Further, there can be no assurance
that certain clients will continue to use Remedy at increased
cost. There can be no assurance that Remedy will maintain its
margins, and if it does not; its results of operations,
financial condition and liquidity could be adversely affected.

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On November 18, 2003, the Company was
notified by the State of California Employment Development
Department (the EDD) that the Company allegedly
underpaid its state unemployment insurance by approximately
$2.0 million for the period January 1, 2003 through
September 30, 2003. Based on preliminary evaluations and on
advice of its outside counsel, the Company believes that its
methodology in calculating its state unemployment insurance is
in compliance with all applicable laws and regulations. The
Company is currently working with outside counsel to resolve
this issue, and has not accrued for this amount as of
October 3, 2004.

Remedy retains a portion of the risk under its
workers compensation program (see
Business  Workers Compensation).
The estimated remaining deductible liability for all existing
and incurred but not reported claims is accrued based upon
actuarial methods using current claims information, as well as
prior experience, and may be subsequently revised based on new
developments related to such claims. Changes in the estimates
underlying the claims reserve are charged or credited to
earnings in the period determined, and therefore large
fluctuations in any given quarter could materially adversely
affect earnings in that period.

The Company is contractually required to maintain
irrevocable letters of credit and pledged cash and securities,
currently aggregating $34.7 million and $21.9 million,
respectively, to collateralize its remaining recorded
obligations under these workers compensation insurance
contracts. Remedy expects the amount of collateral required will
continue to increase. In the event that Remedy loses its current
credit facilities, or cash flow and borrowing capacity under the
existing credit facilities are insufficient to meet this
increasing obligation, the Company will be required to seek
additional sources of capital to satisfy its liquidity needs
which could have a material adverse effect on the Companys
business.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Remedy derives a significant portion of its
    revenues from licensed franchised operations.

The Company derives a substantial amount of its
revenues (34.0% in fiscal 2004) from licensed franchise
operations. The ownership of the Companys licensed
franchise offices is concentrated, with the ten largest licensed
franchisees together accounting for approximately 17.7% of the
Companys revenues in fiscal 2004. There can be no
assurance that the Company will be able to attract new
franchisees or that the Company will be able to retain its
existing franchisees. The loss of one or more of these
relationships, or other franchisees who may in the future
account for a significant portion of the Companys
revenues, could have a material adverse effect on the
Companys results of operations.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | The Company is continually subject to the
    risk of new regulations, which could harm its
    business.

The Company is subject to bills introduced in
Congress and various state legislatures, which, if enacted,
could impose conditions that could have a negative financial
impact on the Company and harm its business operations. Remedy
takes an active role (through its affiliations with, and
participation in, various staffing industry organizations) in
opposing proposed legislation adverse to its business and in
informing policy makers as to the social and economic benefits
of its business. However, there can be no assurance or
guarantees that any of these bills (or future bills) will not be
enacted, in which case, demand for the Companys services
or its financial condition, or both, may suffer.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | The Company faces litigation that could
    have a material adverse effect on its business, financial
    condition and results of operations.

In the ordinary conduct of business, the Company
is subject to various lawsuits, investigations and claims,
covering a wide range of matters, including, but not limited to,
employment matters. It is possible that the Company may be
required to pay substantial damages or settlement costs in
excess of its insurance coverage, which could have a material
adverse effect on its financial condition or results of
operations. The Company could also incur substantial legal
costs, and managements attention and resources could be
diverted from the business. Please see Item 3. Legal
Proceedings, for more detailed information on these litigation
risks.

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|        |           
|------- | ----------
|Item 2. | Properties

The Company does not own any real property. The
Company leases its corporate headquarters in Aliso Viejo,
California, from OTR, an Ohio general partnership. The lease
agreement, as amended, provides for leased premises, totaling
approximately 51,202 square feet in size, at a fixed rate of
$1.80 per square foot per month until September 30, 2007
and $2.05 per square foot per month from October 1, 2007
until September 30, 2010. The base rent includes amounts
for operating costs, which include, but are not limited to,
property taxes, utilities, supplies, repairs and maintenance,
janitorial staff, security staff and insurance premiums on the
building. In addition to base rent, the Company is obligated to
pay a portion of the increase in operating costs and real
property taxes for the leased premises. The Company has an
option to renew the lease for an additional term of five years.
The Company moved into its current corporate headquarters in
September 1998, and the initial term of its lease, as amended,
expires on September 30, 2010.

As of October 3, 2004, the Company leased
the space occupied by all of its Company-owned offices. The
Company selects the sites for these offices by evaluating
proximity to potential clients and available temporary
personnel. The company-owned office lease agreements generally
provide for terms of three to five years. The inability to renew
all or a majority of the leases on similar or favorable terms to
the Company could have a material impact on the financial
condition of the Company. The Company assists its franchisees in
selecting sites for independently-managed offices, but presently
does not own and is not obligated under any leases at these
sites.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Litigation

Class Action

On October 16, 2001, GLF Holding Company,
Inc. and Fredrick S. Pallas filed a Complaint in the Superior
Court of the State of California, County of Los Angeles, against
RemedyTemp, Inc., Remedy Intelligent Staffing, Inc., Remedy
Temporary Services, Inc., Karin Somogyi, Paul W. Mikos, and Greg
Palmer. The Complaint purported to be a class action brought by
the individual plaintiffs on behalf of all of the Companys
franchisees. The Complaint alleged claims for fraud and deceit,
negligent misrepresentation, negligence, breach of contract,
breach of warranty, conversion, an accounting, unfair and
deceptive practices, restitution and equitable relief. On or
about December 3, 2002, plaintiffs filed an Amended
Complaint alleging these same causes of action, but adding
additional facts to the Complaint particularly with respect to
the Companys workers compensation program and adding
claims regarding unfair competition on behalf of the general
public in addition to their existing class action claim. The
plaintiffs claimed that Remedy wrongfully induced its
franchisees into signing franchise agreements and took other
action that caused the franchisees damage.

The Company believed that plaintiffs claims
fell within the arbitration clause contained in the franchise
agreements signed by plaintiffs. As a result, immediately after
plaintiffs filed suit, the Company filed arbitration demands
against plaintiffs with the American Arbitration Association. On
or about April 1, 2003, the Company amended its arbitration
demands to add claims against plaintiffs relating to
workers compensation.

The Company denied and continues to deny the
allegations in the Complaint. There has been no finding of
wrongdoing by the Company. Nevertheless, to avoid costly,
disruptive, and time-consuming litigation, and without admitting
any wrongdoing or liability, the Company negotiated and agreed
to a settlement with plaintiffs and stipulated to the
certification of a settlement class comprised of all individuals
or entities that entered into a Franchise Agreement (including
renewals or amendments thereof) with RemedyTemp, Inc. and/or
Remedy Intelligent Staffing, Inc. anytime prior to
March 29, 2004.

On April 6, 2004, the Court preliminarily
approved the parties settlement agreement and
conditionally certified the Settlement Class. All discovery and
other proceedings in this action were stayed, except as may be
necessary to implement the Settlement Agreement. On
September 9, 2004, the Court issued a final approval of the
Settlement Agreement. The exposure is deemed immaterial to the
Companys consolidated

14



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##### Table of Contents



financial statements and is included in the
consolidated statements of operations for the fiscal year ended
October 3, 2004.


CIGA

In early 2002, as a result of the liquidation of
Remedys former workers compensation insurance
carrier, Reliance National Insurance Company
(Reliance), the California Insurance Guarantee
Association (CIGA) began making efforts to join some
of the Companys clients and their workers
compensation insurance carriers (collectively,
Clients), in pending workers compensation
claims filed by Remedy employees. At the time of these injuries,
from July 22, 1997 through March 31, 2001, Remedy was
covered by workers compensation policies issued by
Reliance. The Company believes that, under California law, CIGA
is responsible for Reliances outstanding liabilities. On
April 5, 2002, the California Workers Compensation
Appeals Board (WCAB), at Remedys request,
consolidated the various workers compensation claims in
which CIGA sought to join Remedys Clients, and agreed to
stay proceedings on those claims pending resolution of the issue
of CIGAs obligations to satisfy Reliances
obligations to Remedys employees. The WCAB selected a
single test case from the consolidated pending cases in which to
decide whether CIGA is responsible for the claims of
Remedys employees, or can shift such responsibility to the
Clients. The trial occurred on September 20, 2002. The WCAB
Administrative Law Judge ruled in favor of CIGA, thus allowing
the pending workers compensation matters to proceed
against the Clients. Remedy then filed a motion for
reconsideration of the Administrative Law Judges decision
by the entire WCAB. On March 28, 2003, the WCAB, en banc,
affirmed the ruling of the Administrative Law Judge. Thereafter,
in May 2003, the Company filed a petition for writ of review of
the WCABs decision in the California Court of Appeal. The
WCAB continued the stay in effect since
April 5, 2002, thus preventing CIGA from proceeding until
the writ proceeding was concluded. In January 2004, the Court of
Appeal granted the Companys petition and undertook to
review the WCABs decision. The Court heard oral argument
in the matter on July 9, 2004.

On October 20, 2004, the Court of Appeal
affirmed the WCABs decision. The Company intends to seek
further review of that decision by way of rehearing by the Court
of Appeal and/or review by the California Supreme Court. On
November 18, 2004, the Court of Appeal granted the
Companys petition for rehearing and requested additional
briefing on this matter. Both avenues of further review are
discretionary with the court such that the Company does not have
an absolute right to such review.

Despite the Companys determination to
further pursue the appellate review process, there can be no
assurance that such efforts will be successful in overturning
the Court of Appeals decision. In the event of a final
unfavorable outcome, Remedy may be obligated to reimburse
certain clients and believes that it would consider
reimbursement of other clients for actual losses incurred as a
result of an unfavorable ruling in this matter. If CIGA is
permitted to join Remedys clients, thus triggering the
clients insurance carriers obligation to respond to
the claims of Remedys employees, the Company believes that
the direct financial exposure to Remedy becomes a function of
the ultimate losses on the claims and the impact of such claims,
if any, on the clients insurance coverage, potentially
including but not limited to the clients responsibility
for any deductibles or retentions under their own workers
compensation insurance. The Company has received data from the
Third Party Administrator (TPA) handling the claims for CIGA,
for the claims in question, which totals $31.4 million at
October 3, 2004 revised from $40.0 million at
June 27, 2004 due to additional information provided to the
Company by the TPA. The losses incurred to date represent
amounts paid to date by the trustee and the remaining claim
reserves on open files.

Based on the Court of Appeals decision, the
Company has recorded a $5.9 million charge to operating
income. This amount represents the Companys current
estimate based on review of known information and was
established for costs associated with the indemnification of
certain clients for losses they may suffer as a result of the
ruling. The $5.9 million charge was based on the
Companys review of customer contracts, review of the Loss
Run received from the TPA handling the claims, actuarial
development of the reported claim losses, estimates of customer
insurance coverage, and other applicable information. The amount
of the charge is therefore subject to change as more information
becomes available to the Company. Additionally, the Company
reclassified $0.2 million, $0.8 million and
$0.4 million of legal expenses incurred in fiscal 2004,
2003, and 2002, respectively, related to the CIGA matter from
selling and administrative expense to CIGA

15



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##### Table of Contents



litigation costs. The Company may also choose to
reimburse clients that did not enter into contracts with the
Company or whose contracts may not have included indemnification
language. These costs will be treated as period costs and will
be charged to the consolidated statements of operations in the
period management decides to make any goodwill
payments to clients. Managements current estimate of
future goodwill payments is a range of $2.0 million to
$3.0 million. This estimate is subject to change.


Other
Litigation

From time to time, the Company becomes a party to
other litigation incidental to its business and operations. The
Company maintains insurance coverage that management believes is
reasonable and prudent for the business risks that the Company
faces. Based on current available information, management does
not believe the Company is party to any other legal proceedings
that are likely to have a material adverse effect on its
business, financial condition, cash flows or results of
operations.

Other
Contingency

On November 18, 2003, the Company was
notified by the State of California Employment Development
Department (the EDD) that the Company allegedly
underpaid its state unemployment insurance by approximately
$2.0 million for the period January 1, 2003 through
September 30, 2003. Based on preliminary evaluations and on
advice of its outside counsel, the Company believes that its
methodology in calculating its state unemployment insurance is
in compliance with all applicable laws and regulations. The
Company is currently working with outside counsel to resolve
this issue, and has not accrued for this amount as of
October 3, 2004.






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

No matters were submitted to a vote of the
Companys security holders during the Companys fourth
quarter of the fiscal year ended October 3, 2004.




Executive Officers of the Registrant

The executive officers of the Company hold their
respective positions at the pleasure of the Companys Board
of Directors. The executive officers and their respective ages
as of October 3, 2004 are set forth below.

|                    |  |     |    |                  |  |                                                  
|------------------- |  | --- | -- | ---------------- |  | -------------------------------------------------
|Name                |  | Age |    | Position(s) Held
|                    |  |     |    |                 
|Greg D. Palmer      |  |     | 48 |                  |  | President and Chief Executive Officer            
|Monty A. Houdeshell |  |     | 56 |                  |  | Senior Vice President and Chief Financial Officer
|Janet L. Hawkins    |  |     | 49 |                  |  | Senior Vice President, Sales and Marketing       
|Gunnar B. Gooding   |  |     | 41 |                  |  | Vice President, Human Resources and Legal Affairs

Greg D. Palmerhas
served as President and Chief Executive Officer of the Company
since January 2001. From January 1998 to January 2001,
Mr. Palmer served as Executive Vice President and Chief
Operations Officer of the Company. From 1985 to December 1997,
and prior to joining the Company, Mr. Palmer served in senior
level management positions in the southeast and northeast
divisions and previously as Senior Vice President in charge of
managing operations in the western United States for Olsten
Corporation, formerly a provider of staffing and health care
services

Monty A. Houdeshellhas served as Senior Vice President,
Chief Financial Officer of the Company since of January 1,
2003. From 1988 until November 1999 he was Vice President, Chief
Financial Officer of Furon Company. Prior to 1988, he was Vice
President, Chief Financial Officer of Oak Industries, Inc.

Janet L. Hawkinshas
served as the Senior Vice President of Sales and Marketing for
the Company since July 2003. From 1978 to June 2003, and prior
to joining the Company, Ms. Hawkins served as President of
Hawkins Advertising and Public Relations.

16



---



##### Table of Contents



Gunnar B. Goodinghas served as Vice President, Human
Resources and Legal Affairs of the Company since April 2000 and
prior to that as Vice President, General Counsel since September
1998. From September 1989 to September 1998, Mr. Gooding
worked as an attorney at Gibson, Dunn & Crutcher LLP where
he specialized in employment litigation.




PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer Purchases of Equity
    Securities

Since July 11, 1996, the Companys
Class A Common Stock has been traded on the NASDAQ National
Market under the symbol REMX. Prior to July 11,
1996, the Companys stock was not publicly traded. The
following table sets forth the high and low sales prices for the
Class A Common Stock for fiscal 2004 and fiscal 2003:

|     |  |                            |       |           |  |          |       |            |  |   |       |  |  |   |       | 
|---- |  | -------------------------- | ----- | --------- |  | -------- | ----- | ---------- |  | - | ----- |  |  | - | ----- | 
|     |  |                           
|     |  | For the Three Months Ended
|     |  |                           
|     |  | December 28,               |       | March 28, |  | June 27, |       | October 3,
|     |  | 2003                       |       | 2004      |  | 2004     |       | 2004      
|     |  |                            |       |           |  |          |       |           
|High |  | $                          | 13.41 |           |  | $        | 13.82 |            |  | $ | 14.49 |  |  | $ | 12.31 | 
|Low  |  | $                          | 10.60 |           |  | $        | 10.88 |            |  | $ | 11.28 |  |  | $ | 7.72  | 

|     |  |              |       |           |  |          |       |               |  |   |       |  |  |   |       | 
|---- |  | ------------ | ----- | --------- |  | -------- | ----- | ------------- |  | - | ----- |  |  | - | ----- | 
|     |  | December 29, |       | March 30, |  | June 29, |       | September 28,
|     |  | 2002         |       | 2003      |  | 2003     |       | 2003         
|     |  |              |       |           |  |          |       |              
|High |  | $            | 15.85 |           |  | $        | 14.10 |               |  | $ | 12.56 |  |  | $ | 13.02 | 
|Low  |  | $            | 12.53 |           |  | $        | 10.02 |               |  | $ | 8.60  |  |  | $ | 9.27  | 

As of December 1, 2004, there were an
estimated 68 shareholders of record of the Companys
Class A Common Stock and five shareholders of record of the
Companys Class B Common Stock.

Subsequent to the Companys initial public
offering in fiscal 1996, the Company has not declared or paid
cash dividends on its Class A or Class B Common Stock
and does not anticipate that it will do so in the foreseeable
future. The present policy of the Company is to retain earnings
for use in its operations and the expansion of its business.

Securities Available for Issuance Under Our
Equity Compensation Plans

The following table provides information with
respect to the Companys equity compensation plans as of
October 3, 2004, which plans were as follows: the
Companys 1996 Amended and Restated Stock Incentive Plan,
1996 Employee Stock Purchase Plan and the Non-Employee Director
Plan.

|                                                               |       |                      |         |                   |  |                       |       |       |  |  |         |         | 
|-------------------------------------------------------------- | ----- | -------------------- | ------- | ----------------- |  | --------------------- | ----- | ----- |  |  | ------- | ------- | 
|                                                               |       |                      |         |                   |  | Number of securities 
|                                                               |       |                      |         |                   |  | remaining available  
|                                                               |       |                      |         |                   |  | for future issuance  
|                                                               |       | Number of securities |         | Weighted-average  |  | under equity         
|                                                               |       | to be issued upon    |         | exercise price of |  | compensation plans   
|                                                               |       | exercise of          |         | outstanding       |  | (excluding securities
|                                                               |       | outstanding options, |         | options, warrants |  | reflected in         
|                                                               |       | warrants and rights  |         | and rights        |  | column (a))          
|Plan category                                                  |       | (a)                  |         | (b)               |  | (c)                  
|                                                               |       |                      |         |                   |  |                      
|Equity compensation plans approved by security
    holders     |       |                      | 678,578 |                   |  | $                     | 14.99 |       |  |  | 478,051 | (1)    
|Equity compensation plans not approved by
    security holders |       |                      |        |                   |  |                       |      |       |  |  | 29,362  | (2)    
|                                                               |       |                      |         |                   |  |                       |       |       |  |  |         |        
|                                                               | Total |                      |         | 678,578           |  |                       | $     | 14.99 |  |  |         | 507,413 | 
|                                                               |       |                      |         |                   |  |                       |       |       |  |  |         |        



---



|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 122,978 shares of Common Stock that may
    be issued under the Companys 1996 Employee Stock Purchase
    Plan and 355,073 shares of Common Stock that may be issued under
    the Companys 1996 Amended and Restated Stock Incentive
    Plan.

17



---



##### Table of Contents





|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(2) | Pertains to shares of Common Stock that may be
    issued under the Non-Employee Director Plan discussed below.

Non-Employee Director Plan

Directors who are also employees or officers of
the Company receive no extra compensation for their service on
the Board. Pursuant to the Non-Employee Director Plan, effective
March 16, 1998, and amended by the Board on October 1,
2003, independent directors receive an annual retainer in the
form of cash or shares of Common Stock valued at $25,000 on the
date of their election or re-election to the Board. For those
directors electing to receive their retainer in stock, the
shares that are issued under the Non-Employee Director Plan are
held in trust, on a deferred basis (subject to an exception for
financial hardship) until a director is no longer a director of
the Company. Such shares are issued in trust no later than ten
business days after the next annual meeting of shareholders
following election or re-election, provided that the director
has remained a director during such time. The maximum aggregate
number of shares that have been authorized for issuance under
the Non-Employee Director Plan is 75,000 shares, subject to
adjustment upon recapitalization, stock dividends, stock splits
and similar changes in the Companys capitalization as
provided in the plan.




Item 6.     Selected
Financial Data

The selected financial data with respect to the
Company set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and Notes thereto. The fiscal year end of
the Company is a 52 or 53 week period ending the Sunday closest
to September 30. Fiscal year 2004 consisted of
53 weeks, all other fiscal years presented consisted of
52 weeks. The following selected financial information as
of and for the fiscal

18



---



##### Table of Contents



years ended October 3, 2004,
September 28, 2003, September 29, 2002,
September 30, 2001 and October 1, 2000 has been
derived from the audited financial statements of the Company.


|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|---------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                                     |  |                                              
|                                                                                                     |  | Fiscal Year                                  
|                                                                                                     |  |                                              
|                                                                                                     |  | 2004                                          |         | 2003 |  | 2002 |         | 2001 |  | 2000
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |     
|                                                                                                     |  |                                              
|                                                                                                     |  | (Amounts in thousands, except per share data)
|Statement of Operation Data:                                                                         |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total revenues                                                                                       |  | $                                             | 519,928 |      |  | $    | 481,965 |      |  | $    | 464,538 |  |  | $ | 519,223 |  |  | $ | 557,860 | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|(Loss) income before income taxes and cumulative
    effect of adoption of a new accounting standard |  | $                                             | (13,115 | )    |  | $    | (18,542 | )    |  | $    | 2,514   |  |  | $ | 12,356  |  |  | $ | 22,515  | 
|(Benefit from) provision for income taxes                                                            |  |                                               | (323    | )    |  |      | 8,280   |      |  |      | 377     |  |  |   | 3,960   |  |  |   | 8,151   | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|(Loss) income before cumulative effect of
    adoption of a new accounting standard(1)               |  |                                               | (12,792 | )    |  |      | (26,822 | )    |  |      | 2,137   |  |  |   | 8,396   |  |  |   | 14,364  | 
|Cumulative effect of adoption of a new accounting
    standard, net of tax(2)                        |  |                                               |        |      |  |      | 2,421   |      |  |      |        |  |  |   |        |  |  |   |        | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Net (loss) income                                                                                    |  | $                                             | (12,792 | )    |  | $    | (29,243 | )    |  | $    | 2,137   |  |  | $ | 8,396   |  |  | $ | 14,364  | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Earnings per share 
    basic:                                                                      |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|(Loss) income before cumulative effect of
    adoption of a new accounting standard ares, basic      |  | $                                             | (1.42   | )    |  | $    | (2.98   | )    |  | $    | 0.24    |  |  | $ | 0.94    |  |  | $ | 1.62    | 
|Cumulative effect of adoption of a new accounting
    standard, net of taxes                         |  |                                               |        |      |  |      | (0.27   | )    |  |      |        |  |  |   |        |  |  |   |        | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Net (loss) income  basic                                                                            |  | $                                             | (1.42   | )    |  | $    | (3.25   | )    |  | $    | 0.24    |  |  | $ | 0.94    |  |  | $ | 1.62    | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Earnings per share 
    diluted:                                                                    |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|(Loss) income before cumulative effect of
    adoption of a new accounting standard                  |  | $                                             | (1.42   | )    |  | $    | (2.98   | )    |  | $    | 0.24    |  |  | $ | 0.94    |  |  | $ | 1.59    | 
|Cumulative effect of adoption of a new accounting
    standard, net of taxes                         |  |                                               |        |      |  |      | (0.27   | )    |  |      |        |  |  |   |        |  |  |   |        | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Net (loss) income  diluted                                                                          |  | $                                             | (1.42   | )    |  | $    | (3.25   | )    |  | $    | 0.24    |  |  | $ | 0.94    |  |  | $ | 1.59    | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Weighted-average number of shares:                                                                   |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Basic                                                                                                |  |                                               | 9,022   |      |  |      | 9,010   |      |  |      | 8,973   |  |  |   | 8,917   |  |  |   | 8,878   | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Diluted                                                                                              |  |                                               | 9,022   |      |  |      | 9,010   |      |  |      | 9,076   |  |  |   | 8,940   |  |  |   | 9,020   | 
|                                                                                                     |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Balance Sheet Data:(3)                                                                               |  |                                               |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents                                                                            |  | $                                             | 7,348   |      |  | $    | 13,236  |      |  | $    | 26,101  |  |  | $ | 37,362  |  |  | $ | 1,084   | 
|Restricted cash and investments                                                                      |  | $                                             | 41,086  |      |  | $    | 24,269  |      |  | $    |        |  |  | $ |        |  |  | $ |        | 
|Investments                                                                                          |  | $                                             | 66      |      |  | $    | 15,730  |      |  | $    | 22,955  |  |  | $ | 1,708   |  |  | $ | 1,960   | 
|Working capital                                                                                      |  | $                                             | 54,957  |      |  | $    | 56,074  |      |  | $    | 83,822  |  |  | $ | 74,496  |  |  | $ | 62,983  | 
|Total assets                                                                                         |  | $                                             | 137,621 |      |  | $    | 139,194 |      |  | $    | 146,544 |  |  | $ | 137,302 |  |  | $ | 119,534 | 
|Shareholders equity                                                                                 |  | $                                             | 63,511  |      |  | $    | 75,364  |      |  | $    | 102,984 |  |  | $ | 99,575  |  |  | $ | 90,471  | 



---



|    |                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company recorded a full valuation allowance
    of $22,581 and $16,879 against the deferred tax assets for
    fiscal 2004 and 2003, respectively (see Note 5 to the notes to
    consolidated financial statements).                                                           
|   
|(2) | Effective September 30, 2002 the Company
    adopted SFAS No. 142, Goodwill and Other Intangible
    Assets. As a result, the Company recorded at non-cash
    charge of $2,421, net of income taxes of $1,634 (see Note 1 to
    the notes to consolidated financial statements).
|   
|(3) | Certain items in prior periods have been
    reclassified to conform to current year classifications.                                                                                                                                                                               

19



---



##### Table of Contents






Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Company Overview

The Company provides temporary staffing services
to industrial, service and technology businesses, professional
organizations and governmental agencies. During the twelve
fiscal months ended October 3, 2004, the Company placed
approximately 124,000 temporary workers and provided
approximately 39 million hours of staffing services to over
10,000 clients. The Companys revenue was
$519.9 million, $482.0 million, and
$464.5 million for fiscal years 2004, 2003, and 2002,
respectively.

Executive Summary

The staffing industry is a highly competitive
industry, which has contributed to significant price competition
and lower margins as major staffing companies have attempted to
maintain or gain market share. During the last twelve months,
global economic conditions have continued to improve which
appears to signal a sustainable job-creating recovery. The
demand for temporary staffing has also continued to grow as
demonstrated by recent reports from the Bureau of Labor
Statistics (the BLS) stating that staffing industry
companies employed 9.7% more workers in September 2004 than in
the same period of 2003 resulting in the sixteenth consecutive
month of year-over-year improvements. Management continues to be
encouraged by the recent economic data, as well as the steady
job growth in the staffing industry. Historic trends in
employment growth following a recession have been slowed, due in
part to productivity gains and modest new job growth.

The increases in workers compensation costs
and state unemployment insurance costs the Company experienced
in fiscal 2003 and 2004 have been significant. However, the
Company does not expect the increases in state unemployment
costs to continue at such a significant rate throughout fiscal
2005 and expects workers compensation costs to continue to
stabilize throughout fiscal 2005 as seen in the last six months
of fiscal 2004. During the fourth quarter of fiscal 2004, the
Company recorded a $5.9 million charge to operating income
as a result of an October 2004 Court of Appeals decision
(see further discussion under Item 3. Legal Proceedings).

With long-term positive prospects, the staffing
industry has always been inherently difficult to forecast due to
its dependence on economic factors and the strength of the labor
market. However, the Company has developed a forecasting tool
jointly with the A. Gary Anderson Center for Economic Research
at Chapman University. The Quarterly Labor Forecast Report,
which is based upon BLS and other economic factors, helps to
predict total demand for temporary labor. The Company has been
utilizing this tool for several years and has recently begun to
publish the results on a quarterly basis.

Taking advantage of its strong brand name and
infrastructure, the Company has positioned itself for profitable
growth in fiscal 2005. The Companys long-term growth
strategies include:



| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increasing the proportion of revenue from its
    Company-owned offices;                                                                                                                 
|
| |  | Increasing the proportion of revenue generated
    from outside of California to mitigate rising state unemployment
    costs and workers compensation costs;                           
|
| |  | Increasing Company-owned office revenues
    (Company-owned office revenue or direct
    revenue) in its higher margin clerical business;                                            
|
| |  | Increasing direct hire revenue (whereby the
    Company earns a fee for placing an associate in a permanent
    position);                                                               
|
| |  | Targeting small (retail) to midsize
    clients which typically generate higher margins; and                                                                                           
|
| |  | Increasing the number of sales representatives in
    the field in the next several years (referred to as the
    Companys investment hire goal).                                       
|
| |  | Growing the niche sectors of the Companys
    business (financial staffing, information technology services
    and officestaff services) to take advantage of higher gross
    margins.

20



---



##### Table of Contents



The following table sets forth for the last five
fiscal years, the number of Company-owned, traditional and
licensed franchise offices and revenues associated with each.
For traditional franchised offices, Company revenues are limited
to the royalties revenues earned on gross billings. Average
revenues per office are computed by dividing the relevant
revenues by the number of related offices. The Companys
long-term revenue growth depends in part upon its ability to
continue to attract new clients, retain existing clients and
open new offices, as well as its ability to enhance the sales of
existing offices beyond historical levels.

|                                              |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                              |  |                       
|                                              |  | Fiscal Year           
|                                              |  |                       
|                                              |  | 2004                   |         | 2003 |  | 2002 |         | 2001 |  | 2000
|                                              |  |                        |         |      |  |      |         |      |  |     
|                                              |  |                       
|                                              |  | (Dollars in thousands)
|Company-Owned Offices                         |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Number of offices                             |  |                        | 130     |      |  |      | 116     |      |  |      | 126     |  |  |   | 117     |  |  |   | 114     | 
|Average hours billed per office               |  |                        | 190,974 |      |  |      | 193,492 |      |  |      | 168,258 |  |  |   | 204,782 |  |  |   | 225,682 | 
|Total revenue                                 |  | $                      | 341,691 |      |  | $    | 300,070 |      |  | $    | 267,207 |  |  | $ | 288,396 |  |  | $ | 306,955 | 
|Average revenue per office                    |  | $                      | 2,628   |      |  | $    | 2,587   |      |  | $    | 2,121   |  |  | $ | 2,465   |  |  | $ | 2,693   | 
|Licensed Franchise Offices                    |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Number of offices                             |  |                        | 98      |      |  |      | 109     |      |  |      | 126     |  |  |   | 156     |  |  |   | 141     | 
|Average hours billed per office               |  |                        | 128,365 |      |  |      | 125,072 |      |  |      | 115,617 |  |  |   | 106,185 |  |  |   | 130,303 | 
|Total revenue                                 |  | $                      | 176,699 |      |  | $    | 180,262 |      |  | $    | 195,588 |  |  | $ | 228,236 |  |  | $ | 247,246 | 
|Average revenue per office                    |  | $                      | 1,803   |      |  | $    | 1,654   |      |  | $    | 1,552   |  |  | $ | 1,463   |  |  | $ | 1,754   | 
|Traditional Franchise Offices                 |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Number of offices                             |  |                        | 10      |      |  |      | 13      |      |  |      | 14      |  |  |   | 17      |  |  |   | 27      | 
|Average hours billed per office               |  |                        | 167,724 |      |  |      | 124,696 |      |  |      | 137,904 |  |  |   | 180,973 |  |  |   | 154,869 | 
|Total billings                                |  | $                      | 23,846  |      |  | $    | 23,255  |      |  | $    | 26,776  |  |  | $ | 40,420  |  |  | $ | 55,906  | 
|Average billings per office                   |  | $                      | 2,385   |      |  | $    | 1,789   |      |  | $    | 1,913   |  |  | $ | 2,378   |  |  | $ | 2,071   | 
|Royalties revenues and initial franchise fees |  | $                      | 1,538   |      |  | $    | 1,633   |      |  | $    | 1,743   |  |  | $ | 2,591   |  |  | $ | 3,659   | 
|Total Offices                                 |  |                        | 238     |      |  |      | 238     |      |  |      | 266     |  |  |   | 290     |  |  |   | 282     | 
|Average Hours Billed Per Office               |  |                        | 164,217 |      |  |      | 158,399 |      |  |      | 141,726 |  |  |   | 150,348 |  |  |   | 171,212 | 
|Total Company Revenues                        |  | $                      | 519,928 |      |  | $    | 481,965 |      |  | $    | 464,538 |  |  | $ | 519,223 |  |  | $ | 557,860 | 

Results of Operations (amounts in
thousands)

Fiscal 2004
Compared to Fiscal 2003

Revenue

|                                               |                |                           |         |               |  |          |         |          |  |   |        |        |  |  |      |     |  
|---------------------------------------------- | -------------- | ------------------------- | ------- | ------------- |  | -------- | ------- | -------- |  | - | ------ | ------ |  |  | ---- | --- | -
|                                               |                |                           |         |              
|                                               |                | For the Fiscal Year Ended |         | Favorable    
|                                               |                |                           |         | (Unfavorable)
|                                               |                | October 3,                |         | September 28, |  |         
|                                               |                | 2004                      |         | 2003          |  | $ Change |         | % Change
|                                               |                |                           |         |               |  |          |         |         
|Company-owned office revenues                  |                | $                         | 341,691 |               |  | $        | 300,070 |          |  | $ | 41,621 |        |  |  | 13.9 | %  
|Licensed franchise revenues                    |                |                           | 176,699 |               |  |          | 180,262 |          |  |   | (3,563 | )      |  |  | (2.0 | %) 
|Franchise royalties and initial franchise fees |                |                           | 1,538   |               |  |          | 1,633   |          |  |   | (95    | )      |  |  | (5.8 | %) 
|                                               |                |                           |         |               |  |          |         |          |  |   |        |        |  |  |      |    
|                                               | Total revenues |                           | $       | 519,928       |  |          | $       | 481,965  |  |   | $      | 37,963 |  |  |      | 7.9 | %
|                                               |                |                           |         |               |  |          |         |          |  |   |        |        |  |  |      |    



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The mix between direct, licensed franchise and
    traditional franchise royalty revenues shifted with direct
    revenues accounting for 65.7% of total revenues for fiscal 2004
    up from 62.3% for fiscal 2003. This overall shift in business
    mix is consistent with the Companys long-term strategy of
    generating a higher proportion of its overall revenues from its
    Company-owned offices.
|
| |  | Direct revenue increased 13.9% to $341,691 in
    fiscal 2004 from $300,070 in fiscal 2003. Fiscal 2004 consisted
    of 53 weeks as compared to 52 weeks in fiscal 2003. The
    acquisition of two licensed franchises during the second and
    third quarters of fiscal 2003 and a traditional franchise during
    the                                                                                      

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | second quarter of fiscal 2004 contributed to the
    increase in direct revenues (see Note 6 to the consolidated
    financial statements). Exclusive of the acquisitions, direct
    revenue increased $19,419. The Companys RemX®
    specialty staffing division increased $12,004 to $28,953 for
    fiscal 2004 from $16,949 for fiscal 2003; $2,645 of the increase
    in RemX® is attributable to the acquisition of the
    traditional franchise office during the second quarter of fiscal
    2004 as noted above. The Company also experienced increased
    revenue from the addition of several large new clients and
    increased revenue from existing clients.
|
| |  | The decrease in licensed franchise revenue is
    primarily related to the acquisitions of the licensed franchise
    offices as described above. The acquired offices generated
    licensed franchise revenue of $12,098 during fiscal 2003 prior
    to the acquisition dates. Exclusive of these acquisitions,
    licensed franchise revenue increased $8,535 in fiscal 2004 as a
    result of increased revenue from new and existing clients.                                                                                                                                                                                                                             
|
| |  | The Companys focus on smaller retail
    clients during fiscal 2004 also contributed to the
    Companys revenue growth and improved margins. The Company
    defines retail clients as clients with annual sales volume under
    $250 or clerical and RemX® clients with gross margin over
    25.0% and light industrial clients with gross margin over 18.0%.                                                                                                                                                                                                                                                                                                               
|
| |  | The Companys investment hire goal had a
    positive impact on the fiscal 2004 revenue growth with the
    addition of 101 sales colleagues during the year representing a
    68.7% increase in the Companys sales force over the prior
    year.                                                                                                                                                                                                                                                                                                                                                                                                                              

The following table summarizes the Companys
business mix as a percent of total revenue:

|                 |  |                           |      |               |  |  |      |  
|---------------- |  | ------------------------- | ---- | ------------- |  |  | ---- | -
|                 |  |                          
|                 |  | For the Fiscal Year Ended
|                 |  |                          
|                 |  | October 3,                |      | September 28,
|                 |  | 2004                      |      | 2003         
|                 |  |                           |      |              
|Light Industrial |  |                           | 67.7 | %             |  |  | 67.1 | %
|Clerical         |  |                           | 26.3 | %             |  |  | 29.0 | %
|RemX®            |  |                           | 5.6  | %             |  |  | 3.5  | %



| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The increase in percentage of revenues generated
    from the light industrial sector during fiscal 2004 is due to
    the addition of several new large clients and increased volume
    from existing clients. The increase was offset slightly by the
    loss of several smaller clients.
|
| |  | The decreased mix of revenue from the clerical
    sector is a result of decreased business with existing large
    volume clients; a significant portion was attributed to the
    financial services industry, offset somewhat by increased
    business with existing retail clients.     
|
| |  | The continued increase in the revenues generated
    from the RemX® division and direct hire revenues is
    consistent with the Companys long-term strategic plan to
    shift its overall business mix to higher margin services.                                                         

Cost of
Revenues

|                                      |                        |                           |         |                         |  |          |         |          |  |   |         |         |   |  |      |      |   
|------------------------------------- | ---------------------- | ------------------------- | ------- | ----------------------- |  | -------- | ------- | -------- |  | - | ------- | ------- | - |  | ---- | ---- | --
|                                      |                        |                           |         |                        
|                                      |                        | For the Fiscal Year Ended |         | Favorable (Unfavorable)
|                                      |                        |                           |         |                        
|                                      |                        | October 3,                |         | September 28,           |  |         
|                                      |                        | 2004                      |         | 2003                    |  | $ Change |         | % Change
|                                      |                        |                           |         |                         |  |          |         |         
|Cost of Company-owned office revenues |                        | $                         | 286,158 |                         |  | $        | 261,628 |          |  | $ | (24,530 | )       |   |  | (9.4 | )%  
|Cost of licensed franchise revenues   |                        |                           | 141,224 |                         |  |          | 143,577 |          |  |   | 2,353   |         |   |  | 1.6  | %   
|                                      |                        |                           |         |                         |  |          |         |          |  |   |         |         |   |  |      |     
|                                      | Total cost of revenues |                           | $       | 427,382                 |  |          | $       | 405,205  |  |   | $       | (22,177 | ) |  |      | (5.5 | )%
|                                      |                        |                           |         |                         |  |          |         |          |  |   |         |         |   |  |      |     



| |   |                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Total cost of direct and licensed franchise
    revenues consists of wages and other expenses related to
    temporary associates and as a percentage of revenues was 82.2%
    and 84.1% for fiscal 2004 and 2003, respectively. The 5.5%
    increase in total cost of revenue is consistent with the growth
    in total revenue with a 1.9% improvement in gross margin.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The increase in cost of direct revenues is
    consistent with the 13.9% increase in direct revenue offset with
    significant improvements in gross margin despite an increase in
    the state unemployment insurance costs during fiscal 2004. The
    Company believes that the increase in state unemployment
    insurance costs will continue primarily outside of California
    throughout fiscal 2005. The Company experienced a decrease in
    workers compensation expense, which directly contributed
    to the improvement in direct gross margin of 16.3% for fiscal
    2004 as compared to 12.8% for fiscal 2003. The increase in gross
    margin is also attributable to the Companys success in its
    efforts to increase markup (defined as the bill rate/wage rate)
    and the continued growth in the RemX® division which
    traditionally generates higher gross margins.                        
|
| |  | The decrease in cost of licensed franchise
    revenues is consistent with the 2.0% decrease in licensed
    franchise revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Overall consolidated gross margin improved to
    17.8% as compared to 15.9% for fiscal 2003 and was primarily
    attributable to the decrease in workers compensation
    expense from $33,197 in fiscal 2003 as compared to $27,944 in
    fiscal 2004. Increases in the Companys markup during
    fiscal 2004, the continued growth in the RemX® division,
    and increased revenues from retail customers also contributed to
    the improved gross margins in fiscal 2004. The increase in gross
    margin was also enhanced with increases in direct hire revenues,
    whereby the Company earns a fee for placing an associate in a
    permanent position. The improvements in gross margin were
    partially offset by increases in state unemployment insurance
    costs. State unemployment insurance costs represented 2.7% and
    1.5% of total cost of revenue for fiscal 2004 and 2003,
    respectively.

Operating
Expenses

|                                    |                          |                           |        |                         |  |          |        |          |  |   |        |         |   |  |        |        |   
|----------------------------------- | ------------------------ | ------------------------- | ------ | ----------------------- |  | -------- | ------ | -------- |  | - | ------ | ------- | - |  | ------ | ------ | --
|                                    |                          |                           |        |                        
|                                    |                          | For the Fiscal Year Ended |        | Favorable (Unfavorable)
|                                    |                          |                           |        |                        
|                                    |                          | October 3,                |        | September 28,           |  |         
|                                    |                          | 2004                      |        | 2003                    |  | $ Change |        | % Change
|                                    |                          |                           |        |                         |  |          |        |         
|Licensees share of gross profit    |                          | $                         | 23,818 |                         |  | $        | 24,431 |          |  | $ | 613    |         |   |  | 2.5    | %     
|Selling and administrative expenses |                          |                           | 71,251 |                         |  |          | 64,622 |          |  |   | (6,629 | )       |   |  | (10.3  | )%    
|CIGA litigation costs               |                          |                           | 6,080  |                         |  |          | 796    |          |  |   | (5,284 | )       |   |  | (664.0 | )%    
|Depreciation and amortization       |                          |                           | 5,844  |                         |  |          | 6,748  |          |  |   | 904    |         |   |  | 13.4   | %     
|                                    |                          |                           |        |                         |  |          |        |          |  |   |        |         |   |  |        |       
|                                    | Total operating expenses |                           | $      | 106,993                 |  |          | $      | 96,597   |  |   | $      | (10,396 | ) |  |        | (107.6 | )%
|                                    |                          |                           |        |                         |  |          |        |          |  |   |        |         |   |  |        |       



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Licensees share of gross profit represents
    the net payments to licensed franchisees based upon a percentage
    of gross profit generated by the licensed franchise operation.
    The decrease in licensees share of gross profit is
    consistent with the decrease in licensed franchise revenues and
    cost of licensed franchise revenues. Licensees share of
    gross profit as a percentage of licensed gross profit increased
    to 67.1% for fiscal 2004 as compared to 66.6% for fiscal 2003
    and primarily resulted from certain large franchisees renewing
    their licensed franchise agreements during the year, which
    incorporated certain revenue thresholds, resulting in higher
    gross profit payouts to the licensees, as well as an increase in
    direct hire revenue.

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| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The following table summarizes the significant
    changes in selling and administrative expenses for fiscal 2004
    as compared to fiscal 2003:

|                                          |            |                         |        |        |   |                |        |        |   |   |        |        |  
|----------------------------------------- | ---------- | ----------------------- | ------ | ------ | - | -------------- | ------ | ------ | - | - | ------ | ------ | -
|                                          |            |                        
|                                          |            | Favorable (Unfavorable)
|                                          |            |                        
|                                          |            | Consolidated            |        | RemX®  |   |               
|                                          |            | Change                  |        | Change |   | Other Offices*
|                                          |            |                         |        |        |   |               
|Colleague salary and related taxes        |            | $                       | (6,840 | )      |   | $              | (3,220 | )      |   | $ | (3,620 | )     
|Colleague travel and business conferences |            |                         | (434   | )      |   |                | (168   | )      |   |   | (266   | )     
|Royalty payments                          |            |                         | (369   | )      |   |                |       |        |   |   | (369   | )     
|Legal fees                                |            |                         | (140   | )      |   |                | 3      |        |   |   | (143   | )     
|Profit sharing                            |            |                         | (94    | )      |   |                | (652   | )      |   |   | 558    |       
|Other SG&A                                |            |                         | 157    |        |   |                | (819   | )      |   |   | 976    |       
|Rent                                      |            |                         | 1,091  |        |   |                | (218   | )      |   |   | 1,309  |       
|                                          |            |                         |        |        |   |                |        |        |   |   |        |       
|                                          | Net change |                         | $      | (6,629 | ) |                | $      | (5,074 | ) |   | $      | (1,555 | )
|                                          |            |                         |        |        |   |                |        |        |   |   |        |       



---



|  |                                                         
|- | --------------------------------------------------------
|* | Other Offices category includes the corporate
    office



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Selling and administrative expenses as a
    percentage of total revenues were 13.7% for fiscal 2004 as
    compared to 13.4% for fiscal 2003. The primary factor
    contributing to the net increase was a $6,840 increase in
    colleague salaries due to the Companys sales force
    investment hire goal and the expansion of the RemX®
    specialty staffing division, offset by a $1,091 decrease in rent
    expense resulting from the fiscal 2003 office closures.                                                                                                                                                                                                                                                                                                          
|
| |  | During the fourth quarter of fiscal 2004, the
    Company recorded a $5,877 charge for the costs of indemnifying
    certain clients for losses they may suffer as a result of the
    Court of Appeals October 2004 decision (see Item 3.
    Legal Proceedings, regarding CIGA litigation for further
    discussion). Additionally, the Company reclassified $203, $796,
    and $355 of legal expenses incurred in fiscal 2004, 2003, and
    2002, respectively, related to the CIGA litigation matter from
    selling and administrative expenses to CIGA litigation costs.                                                                                                                                                                                                       
|
| |  | The decrease in depreciation and amortization for
    fiscal 2004 as compared to fiscal 2003 is due to a $985
    amortization charge resulting from a change in accounting
    estimate related to the useful life of certain capitalized
    software costs during the fourth quarter of fiscal 2003.
    Additionally, the decrease resulted from an increase in fully
    depreciated fixed assets at October 3, 2004 as compared to
    September 28, 2003. The decrease in depreciation and
    amortization in fiscal 2004 was offset by the incremental
    amortization expense from identifiable intangible assets
    resulting from the franchise acquisition during the second
    quarter of fiscal 2004 (see Note 6 to the notes to consolidated
    financial statements).

Loss from operations decreased $5,390 to an
operating loss of $14,447 for fiscal 2004 from an operating loss
of $19,837 for fiscal 2003. Improvement in the Companys
operating loss is due to the increase in direct revenues in
conjunction with gross margin improvement. The decrease in
depreciation and amortization also contributed to the improved
operating profits.

An income tax benefit of $323 was recorded in
fiscal 2004 as compared to an income tax provision of $6,646 for
fiscal 2003. The Companys overall effective tax rate of
2.5% for fiscal 2004 differs from the statutory rate due
primarily to the current period valuation allowance against the
deferred tax asset. The effective tax rate of 29.4% for fiscal
2003 differs from the statutory rate due to the effect of the
valuation allowance recorded against the deferred tax asset. The
estimated annual effective tax rate is revised quarterly based
upon actual operating results, the tax credits earned to date as
well as current annual projections. The cumulative impact of any
change in the estimated annual effective tax rate is recognized
in the period the change in estimate occurs.

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Fiscal 2003
Compared to Fiscal 2002

Revenue

|                                               |                |                           |         |                         |  |          |         |          |  |   |         |        |  |  |      |     |  
|---------------------------------------------- | -------------- | ------------------------- | ------- | ----------------------- |  | -------- | ------- | -------- |  | - | ------- | ------ |  |  | ---- | --- | -
|                                               |                |                           |         |                        
|                                               |                | For the Fiscal Year Ended |         | Favorable (Unfavorable)
|                                               |                |                           |         |                        
|                                               |                | September 28,             |         | September 29,           |  |         
|                                               |                | 2003                      |         | 2002                    |  | $ Change |         | % Change
|                                               |                |                           |         |                         |  |          |         |         
|Company-owned office revenues                  |                | $                         | 300,070 |                         |  | $        | 267,207 |          |  | $ | 32,863  |        |  |  | 12.3 | %  
|Licensed franchise revenues                    |                |                           | 180,262 |                         |  |          | 195,588 |          |  |   | (15,326 | )      |  |  | (7.8 | )% 
|Franchise royalties and initial franchise fees |                |                           | 1,633   |                         |  |          | 1,743   |          |  |   | (110    | )      |  |  | (6.3 | )% 
|                                               |                |                           |         |                         |  |          |         |          |  |   |         |        |  |  |      |    
|                                               | Total revenues |                           | $       | 481,965                 |  |          | $       | 464,538  |  |   | $       | 17,427 |  |  |      | 3.8 | %
|                                               |                |                           |         |                         |  |          |         |          |  |   |         |        |  |  |      |    



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The mix between direct, licensed franchise and
    traditional royalty revenues shifted with direct revenues
    accounting for 62.3% of total revenues for fiscal 2003 as
    compared to 57.5% for fiscal 2002. This shift resulted primarily
    from (i) fewer licensed franchise offices in the current
    year as a result of the acquisition of a significant licensed
    franchise consisting of several offices (see Note 6 to the
    consolidated financial statements), closures due to reduced
    business and the non-renewal of expired licensed franchisee
    agreements, and (ii) incremental revenues generated from new
    Company-owned traditional and specialty staffing offices, as
    previously discussed. This overall shift in business mix is
    consistent with the Companys long-term strategy of
    generating a higher proportion of its overall revenues from its
    Company-owned offices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Total revenues increased 3.8% or $17,427 to
    $481,965 for fiscal 2003 from $464,538 for fiscal 2002. Direct
    revenues increased 12.3% to $300,070 from $267,207, licensed
    franchise revenues decreased 7.8% to $180,262 from $195,588 and
    traditional franchise royalties and initial franchise fees
    decreased 6.3% to $1,633 from $1,743 for fiscal 2003 compared to
    fiscal 2002, respectively. The main contributing factor
    ($17,733) for the shift between direct and franchise revenue is
    attributable to the acquisition of two franchises in Tennessee
    and Texas in the second and third quarters of fiscal 2003. The
    Companys fiscal 2003 fourth quarter revenue increased 0.9%
    over the corresponding quarter in fiscal 2002 and 6.4% over the
    preceding fiscal 2003 third quarter. Although modest, this
    overall growth continues to be a positive trend compared with
    the prior year. The Companys RemX® specialty staffing
    division, launched during fiscal 2002, increased revenues
    $12,533 to 3.5% of total consolidated revenue for fiscal 2003 as
    compared to 0.9% of total consolidated revenue for fiscal 2002.
    Additionally, the Company experienced a modest increase in the
    permanent placement revenues as compared to the prior year.
    Moreover, the Companys revenue growth resulted from the
    change in its strategic plan to shift its overall business mix
    to higher margin services, in addition to increasing its sales
    capacity and new sales channels.

The following table summarizes the Companys
business mix as a percent of total revenue:

|                 |  |                           |      |               |  |  |      |  
|---------------- |  | ------------------------- | ---- | ------------- |  |  | ---- | -
|                 |  |                          
|                 |  | For the Fiscal Year Ended
|                 |  |                          
|                 |  | September 28,             |      | September 29,
|                 |  | 2003                      |      | 2002         
|                 |  |                           |      |              
|Light Industrial |  |                           | 67.1 | %             |  |  | 68.9 | %
|Clerical         |  |                           | 29.0 | %             |  |  | 29.8 | %
|RemX®            |  |                           | 3.5  | %             |  |  | 0.9  | %



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenues from the light industrial sector
    decreased as a percentage of total revenues to 67.1% as compared
    to 68.9% in the prior year.                                                                
|
| |  | The percentage of revenues from the clerical
    business line decreased to 29.0% of revenue for fiscal 2003 as
    compared to 29.8% of revenue for fiscal 2002.                                             
|
| |  | As discussed earlier, the RemX® division
    increased to 3.5% of total consolidated revenue and is the
    Companys fastest growing business line. The Company opened
    seven and ten RemX® offices during

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | fiscal 2003 and 2002, respectively. RemX® is
    exclusively a Company-owned operation that provides specialized
    finance and accounting, IT staffing and office staffing services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The Company closed 31 marginally profitable or
    non-revenue generating Company-owned offices during fiscal 2003.
    Management continues to strategically evaluate its existing and
    target markets and will continue to open additional offices
    where market conditions appear favorable and to consolidate
    underutilized offices as deemed appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Our target customer is the small-to-mid size
    account, generating approximately $250 to $5,000 in annual
    revenue. The margins typically are higher on this type of
    business, and it lessens our dependence on individual
    large-scale accounts. For the fiscal 2003 fourth quarter, our
    single largest customer represented 5.1% of revenue and the
    Companys top ten clients combined comprised approximately
    26.0%. Our goal is to significantly lower this percentage over
    the next three years from 26.0% to less than 15.0%. The
    Companys ability to increase revenues depends
    significantly on the Companys ability to continue to
    attract new clients, retain existing clients, open new offices,
    find and retain licensed franchisees and office managers, and
    manage newly opened offices to maturity. There can be no
    assurance that the Companys revenues will increase.

Cost of
Revenues

|                                      |                        |                           |         |                         |  |          |         |          |  |   |         |         |   |  |       |      |   
|------------------------------------- | ---------------------- | ------------------------- | ------- | ----------------------- |  | -------- | ------- | -------- |  | - | ------- | ------- | - |  | ----- | ---- | --
|                                      |                        |                           |         |                        
|                                      |                        | For the Fiscal Year Ended |         | Favorable (Unfavorable)
|                                      |                        |                           |         |                        
|                                      |                        | September 28,             |         | September 29,           |  |         
|                                      |                        | 2003                      |         | 2002                    |  | $ Change |         | % Change
|                                      |                        |                           |         |                         |  |          |         |         
|Cost of Company-owned office revenues |                        | $                         | 261,628 |                         |  | $        | 219,418 |          |  | $ | (42,210 | )       |   |  | (19.2 | )%  
|Cost of licensed franchise revenues   |                        |                           | 143,577 |                         |  |          | 153,113 |          |  |   | 9,536   |         |   |  | 6.2   | %   
|                                      |                        |                           |         |                         |  |          |         |          |  |   |         |         |   |  |       |     
|                                      | Total cost of revenues |                           | $       | 405,205                 |  |          | $       | 372,531  |  |   | $       | (32,674 | ) |  |       | (8.8 | )%
|                                      |                        |                           |         |                         |  |          |         |          |  |   |         |         |   |  |       |     



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Total cost of direct and licensed franchise
    revenues, which consists of wages and other expenses related to
    temporary associates, increased 8.8% or $32,674 to $405,205 for
    fiscal 2003 from $372,531 for fiscal 2002. Total cost of direct
    and licensed revenues as a percentage of revenues was 84.1% for
    fiscal 2003 compared to 80.2% for fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The overall reduction in gross margin is a
    continued trend and is primarily related to an increase in
    workers compensation costs from $18,706 for fiscal 2002 to
    $33,197 for fiscal 2003. A substantial portion of the increase
    resulted from increases in medical costs in California. The
    decrease in the gross margin is also attributable to a lower
    markup resulting from continued pricing pressures experienced
    throughout the staffing industry and a sharp increase in state
    unemployment insurance costs that the Company believes will
    continue to increase in fiscal 2004, both within and outside of
    California. There can be no assurance that the Companys
    gross margin will improve in the future.

Operating
Expenses

|                                    |                          |                           |        |                         |  |          |        |          |  |   |        |        |   |  |        |      |   
|----------------------------------- | ------------------------ | ------------------------- | ------ | ----------------------- |  | -------- | ------ | -------- |  | - | ------ | ------ | - |  | ------ | ---- | --
|                                    |                          |                           |        |                        
|                                    |                          | For the Fiscal Year Ended |        | Favorable (Unfavorable)
|                                    |                          |                           |        |                        
|                                    |                          | September 28,             |        | September 29,           |  |         
|                                    |                          | 2003                      |        | 2002                    |  | $ Change |        | % Change
|                                    |                          |                           |        |                         |  |          |        |         
|Licensees share of gross profit    |                          | $                         | 24,431 |                         |  | $        | 28,741 |          |  | $ | 4,310  |        |   |  | 15.0   | %   
|Selling and administrative expenses |                          |                           | 64,622 |                         |  |          | 56,657 |          |  |   | (7,965 | )      |   |  | (14.1  | )%  
|CIGA litigation costs               |                          |                           | 796    |                         |  |          | 355    |          |  |   | (441   | )      |   |  | (124.2 | )%  
|Depreciation and amortization       |                          |                           | 6,748  |                         |  |          | 5,371  |          |  |   | (1,377 | )      |   |  | (25.6  | )%  
|                                    |                          |                           |        |                         |  |          |        |          |  |   |        |        |   |  |        |     
|                                    | Total operating expenses |                           | $      | 96,597                  |  |          | $      | 91,124   |  |   | $      | (5,473 | ) |  |        | (6.0 | )%
|                                    |                          |                           |        |                         |  |          |        |          |  |   |        |        |   |  |        |     



| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Licensees share of gross profit represents
    the net payments to licensed franchisees based upon a percentage
    of gross profit generated by the licensed franchise operation,
    as previously discussed. Licensees share of gross profit
    decreased 15.0% or $4,310 to $24,431 for fiscal 2003 from
    $28,741 for

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | fiscal 2002 due to an overall 13.6% net decrease
    in licensed franchise gross profits, as well as reduced
    permanent placement business for which licensed franchisees
    typically earn a larger percentage of the related gross margin.
    Licensees share of gross profit as a percentage of
    licensed gross profit was 66.6% for fiscal 2003 as compared to
    67.7% for fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Selling and administrative expenses increased
    14.1% or $7,965 to $64,622 for fiscal 2003 from $56,657 for
    fiscal 2002. Selling and administrative expenses as a percentage
    of total revenues was 13.4% for fiscal 2003 and 12.2% for fiscal
    2002. Several factors contributed to this increase, including
    the Companys continued investment in its
    revenue-generating projects, specifically $2,100 related to the
    RemX® specialty staffing division and the Companys
    national expansion efforts in targeted geographic locations. The
    Company increased its sales force by 10.9% during the fourth
    quarter of fiscal 2003. Additionally, as discussed in Note 7 to
    the consolidated financial statements, the Company closed or
    consolidated several under-performing offices during the third
    and fourth quarters of fiscal 2003 resulting in a $992 charge
    for the related remaining lease obligations, severance benefits
    and other associated costs. The Company also experienced an
    increase of $636 in group health insurance premiums, $508 in
    general insurance costs, $223 in legal fees, $1,046 in
    consulting costs, $1,218 in colleague salaries and $513 in
    amortization of unearned compensation. There can be no assurance
    that selling and administrative expenses will not increase in
    the future, both in absolute terms and as a percentage of total
    revenues. Increases in these expenses could adversely affect the
    Companys profitability.
|
| |  | Depreciation and amortization increased 25.6% or
    $1,377 to $6,748 for fiscal 2003 from $5,371 for fiscal 2002.
    This increase primarily resulted from the change in accounting
    estimate related to the useful life of certain capitalized
    software costs, as discussed in Note 1 to the consolidated
    financial statements. The change in estimate resulted in an
    additional $985 amortization charge during the fourth quarter of
    fiscal 2003. The primary factor contributing to the change in
    the estimated useful life was that the softwares function
    was no longer consistent with the Companys strategic plan
    and its offices were not fully utilizing the system.
    Additionally, included in depreciation expense during the fourth
    quarter of fiscal 2003, the Company recorded a $477 impairment
    charge related to capitalized software costs, as discussed in
    Note 1 to the notes to consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Income from operations decreased $20,720 to an
operating loss of $19,837 for fiscal 2003 from operating income
of $883 for fiscal 2002 due to the factors described above,
which included significant increases in workers
compensation expense, continued increases in state unemployment
insurance, decrease in licensees gross profit margins,
increase in selling and administrative expenses, and increased
depreciation expense.

The Company incurred a loss (before cumulative
effect of adoption of a new accounting standard) of $26,822 for
fiscal 2003, as compared to income of $2,137 for fiscal 2002. In
addition to the reasons for the loss described above, the
Company provided a $16,880 valuation allowance against the net
deferred tax assets based upon the Companys recent
cumulative losses over the past three years (see Note 5 to the
notes to consolidated financial statements).

The cumulative effect of adoption of a new
accounting standard of $2,421 (net of tax of $1,634) for fiscal
2003 represents the goodwill impairment charge resulting from
the Companys adoption of Statement of Financial Accounting
Standard (SFAS) No. 142 effective the beginning
of fiscal 2003, as discussed in Note 1 to the notes to
consolidated financial statements.

Liquidity and Capital Resources (amounts in
thousands)

The Companys balance sheet includes $48,500
in cash and investments as of October 3, 2004 (including
restricted cash and investments discussed below), and it
continues to be debt free, although significant letters of
credit are outstanding. Historically, the Company has financed
its operations through cash generated by operating activities
and its credit facility, as necessary. Generally, the
Companys principal uses of cash are working capital needs
and capital expenditures (including management information
systems initiatives and direct office openings) and franchise
acquisitions. Beginning in the third quarter of fiscal 2003, the
Company collateralized $21,615 of its workers compensation
liability with pledged cash and securities, as opposed to

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issuing additional letters of credit. During the
second quarter of fiscal 2004, the Company used $16,000 in cash
to collateralize its $40,000 line of credit as required by its
new credit facility, as discussed below and in Note 4 to
the consolidated financial statements. The nature of the
Companys business requires payment of wages to its
temporary associates on a weekly basis, while payments from
clients are generally received 30-45 days after the related
billing.


Cash flows from operating, investing and
financing activities, as reflected in the accompanying
consolidated statements of cash flows, are summarized below:

|                                                 |                                 |                           |        |               |   |   |         |         |  
|------------------------------------------------ | ------------------------------- | ------------------------- | ------ | ------------- | - | - | ------- | ------- | -
|                                                 |                                 |                          
|                                                 |                                 | For the Fiscal Year Ended
|                                                 |                                 |                          
|                                                 |                                 | October 3,                |        | September 28,
|                                                 |                                 | 2004                      |        | 2003         
|                                                 |                                 |                           |        |              
|Cash provided by (used in):                      |                                 |                           |        |               |   |   |         |        
|                                                 | Operating activities            |                           | $      | (413          | ) |   | $       | 9,417   |  
|                                                 | Investing activities            |                           |        | (5,680        | ) |   |         | (22,415 | )
|                                                 | Financing activities            |                           |        | 193           |   |   |         | 112     |  
|                                                 | Effect of exchange rate on cash |                           |        | 12            |   |   |         | 21      |  
|                                                 |                                 |                           |        |               |   |   |         |        
|Net decrease in cash and cash equivalents        |                                 |                           | (5,888 | )             |   |   | (12,865 | )      
|Cash and cash equivalents at beginning of period |                                 |                           | 13,236 |               |   |   | 26,101  |        
|                                                 |                                 |                           |        |               |   |   |         |        
|Cash and cash equivalents at end of period       |                                 | $                         | 7,348  |               |   | $ | 13,236  |        
|                                                 |                                 |                           |        |               |   |   |         |        



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cash flows from operating activities, compared to
    the preceding year, were primarily impacted by the timing of
    receivables collections, the timing of payroll disbursements
    (including incentive compensation payments), as well as the
    timing of vendor payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Cash used in investing activities is primarily
    related to the Companys investment portfolio, which
    includes highly rated debt securities with various maturity
    dates through fiscal 2007. Net cash inflows related to
    available-for-sale investments were $15,438 during fiscal 2004
    as compared to $9,030 of net cash outflows in the corresponding
    prior year period. Cash used for purchases of fixed assets,
    including information systems development costs, was $3,365 for
    fiscal 2004 and $2,622 for fiscal 2003. The Company continues to
    invest in computer-based technologies and direct office openings
    and anticipates approximately $4,000 in related capital
    expenditures for fiscal 2005.
|
| |  | Cash provided by financing activities is
    primarily a result of shares of the Companys Class A
    Common Stock issued through the Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Cash and cash equivalents decreased $5,888 from
the prior year as a result of the Companys
collateralization of its $40,000 line of credit via restricted
cash and investments commencing in the second quarter of fiscal
2004. See additional discussion below regarding the
Companys credit facility.

As discussed in Note 3 to the consolidated
financial statements, Remedy provides workers compensation
insurance to its temporary associates and colleagues. The
Company establishes a reserve for the deductible portion of its
workers compensation claims using actuarial estimates of
the ultimate cost of claims and related expenses that have been
reported but not settled, and that have been incurred but not
reported. The estimated remaining deductible liability under the
aforementioned contracts as of October 3, 2004 is
approximately $36,449 of which $12,359 is recorded as current
and $24,090 is recorded as non-current in the consolidated
balance sheets. The Company also has an aggregate $2,677 current
liability recorded at October 3, 2004 for amounts due to
various state funds related to workers compensation.

The Company is contractually required to
collateralize its obligation under each of these workers
compensation insurance contracts through the use of irrevocable
letters of credit, pledged cash and securities or a combination
thereof. The level and type of collateral required for each
policy year is determined by the insurance carrier at the
inception of the policy year and may be modified periodically.
The Company had outstanding letters of credit totaling $34,661
and $21,911 as of October 3, 2004 and September 28,
2003,

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respectively. Quarterly, the Company is required
to pay 0.75% in interest on the first $16,000 of the outstanding
letters of credit and 1.50% on the remaining $18,661.


The Company executed a credit facility dated
February 4, 2004 with Bank of America, which replaced its
existing credit agreement with Bank of America and Union Bank of
California. The credit facility provides for aggregate
borrowings not to exceed $40,000, including any letters of
credit existing under the prior credit agreement. The
Companys obligation under the line of credit is
collateralized by certain assets of the Company. In addition,
the Company is required to maintain a $16,000 Bank of America
Certificate of Deposit to satisfy the collateral requirement,
which is classified as restricted cash and investments in the
accompanying consolidated balance sheets. The credit agreement
expires on June 1, 2005. The interest rate on the
outstanding borrowings, including any outstanding letters of
credit, is at the Companys discretion, either the Bank of
Americas prime rate plus 0.0% or 0.5% (depending on the
amount of outstanding borrowings) or LIBOR plus 0.75% or 1.5%
(depending on the amount of outstanding borrowings) and is paid
monthly. The Company is required to pay quarterly fees of 0.25%
per annum on the unused portion of the line of credit. Under the
new agreement, the Company is also required to comply with
certain restrictive covenants, the most restrictive of which
limits the Companys net loss for each fiscal quarter and
on a fiscal year-to-date basis. As of October 3, 2004 the
Company was in compliance with all restrictive covenants with
exception of the net loss limitation covenant. Subsequent to
year end the Company amended and restated its credit facility
with Bank of America dated February 4, 2004. The Amended
and Restated Credit Agreement (Credit Agreement)
with Bank of America is effective December 1, 2004. Under
the new Credit Agreement, the Company is in compliance with all
restrictive covenants as prescribed in the Credit Agreement.

The new Credit Agreement provides for borrowings
up to $50,000 with a provision permitting the Company to
increase the aggregate amount of borrowings to $60,000. The
Company has granted a security interest to Bank of America in
all its existing and future assets. The Credit Agreement will
expire two years from the closing date on December 1, 2006.
The Credit Agreement bears interest equal to LIBOR plus 1.75% to
2.75% based upon the Companys earnings before interest,
taxes, depreciation and amortization (EBITDA) or
Bank of Americas prime rate plus 0.00% to 0.50% based on
EBITDA. The Company will also be required to pay monthly fees of
0.25% per annum on the unused portion of the line of credit and
monthly fees of 0.75% to 1.50% on outstanding letters of credit
based on a pricing matrix. The Credit Agreement requires the
Company to comply with a minimum EBITDA covenant which will not
go into effect unless the Companys total liquidity drops
below $15,000. Liquidity is defined by Bank of America as
unrestricted domestic cash plus excess borrowing availability.
Additionally, under the Credit Agreement, the Company is not
required to maintain a $16,000 Bank of America Certificate of
Deposit as collateral as required by its current credit facility.

The Company has no borrowings outstanding as of
each of the three fiscal years ended October 3, 2004. The
Company had outstanding letters of credit totaling $34,661,
$21,911 and $31,028 at October 3, 2004, September 28,
2003 and September 29, 2002, respectively, to collaterize
its remaining workers compensation deductible liability
discussed in Note 3.

The Company will most likely be required to
increase the amount of letters of credit outstanding for its new
workers compensation program commencing April 4,
2005. At October 3, 2004, the Company had $5,339 available
under the line of credit existing at such time. The Company
believes that this amount plus the letter of credit reductions
for previous year programs and the new Credit Agreement
described above will be sufficient for the new insurance policy.

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The following table summarizes the letters of
credit and pledged cash and securities at October 3, 2004
and September 28, 2003:

|                                                                        |                                                       |            |        |               |  |   |        |        | 
|----------------------------------------------------------------------- | ----------------------------------------------------- | ---------- | ------ | ------------- |  | - | ------ | ------ | 
|                                                                        |                                                       | October 3, |        | September 28,
|                                                                        |                                                       | 2004       |        | 2003         
|                                                                        |                                                       |            |        |              
|Collateralized certificate of deposit related to
    bank agreement     |                                                       | $          | 16,000 |               |  | $ |       |       
|Deferred compensation investments                                       |                                                       |            | 3,161  |               |  |   | 2,654  |       
|                                                                        |                                                       |            |        |               |  |   |        |       
|                                                                        | Total restricted investments  current                |            | $      | 19,161        |  |   | $      | 2,654  | 
|                                                                        |                                                       |            |        |               |  |   |        |       
|Pledged cash and securities related to workers
    compensation polices |                                                       | $          | 21,925 |               |  | $ | 21,615 |       
|                                                                        |                                                       |            |        |               |  |   |        |       
|                                                                        | Total restricted cash and investments 
    long-term |            | $      | 21,925        |  |   | $      | 21,615 | 
|                                                                        |                                                       |            |        |               |  |   |        |       
|Letters of credit                                                       |                                                       | $          | 34,661 |               |  | $ | 21,911 |       
|                                                                        |                                                       |            |        |               |  |   |        |       

From July 22, 1997 through March 31,
2001, the Company had a fully insured workers compensation
program with Reliance National Insurance Company
(Reliance). Subsequent to March 31, 2001 (the
end of Companys final policy year with Reliance), Reliance
became insolvent and is currently in liquidation. The Company is
in litigation with the California Insurance Guaranty Association
regarding financial responsibility for all remaining open
California claims under the Reliance workers compensation
program. During the fourth quarter of fiscal 2004, the Company
recorded a $5,877 charge for the costs of indemnifying certain
clients for losses they may suffer as a result of the Court of
Appeals October 2004 decision. This charge is based upon
various estimates and is subject to change as more information
becomes available to the Company. The Company may also choose to
reimburse clients that did not enter into contracts with the
Company or whose contracts may not have included indemnification
language. These costs will be treated as period costs and will
be charged to the consolidated statements of operations in the
period management decides to make any goodwill
payments to clients. Managements current estimate of
future goodwill payments is a range of $2,000 to $3,000 (see
Part I, Item 3, Legal Proceedings and Note 8 to the
notes to consolidated financial statements). This estimate is
subject to change.

On August 26, 2004, the Company filed a
universal shelf registration statement on Form S-3 with the
Securities and Exchange Commission (SEC). The
registration statement covers an aggregate of up to $30,000 of
securities registered by the Company, which may consist of
common stock, preferred stock, debt securities, depositary
shares and or warrants. The registered securities may be sold in
one or more offerings in the future. Specific terms and prices
will be determined at the time of any offering and included in a
related prospectus supplement to be filed with the SEC.

On November 18, 2003, the Company was
notified by the State of California Employment Development
Department (the EDD) that the Company allegedly
underpaid its state unemployment insurance by approximately
$2,000 for the period January 1, 2003 through
September 30, 2003. Based on preliminary evaluations and on
advice of its outside counsel, the Company believes that its
methodology in calculating its state unemployment insurance is
in compliance with all applicable laws and regulations. The
Company is currently working with outside counsel to resolve
this issue, and has not accrued for this amount as of
October 3, 2004.

From time to time, the Company may selectively
purchase licensed and traditional franchise offices in certain
territories with the intent of expanding the Companys
market presence in such regions. The Company may continue
evaluating certain strategic acquisitions which may have an
impact on liquidity depending on the size of the acquisition.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements
as defined in Regulation S-K 303(a)(4)(ii).

Contractual Obligations (amounts in
thousands)

The Company has no significant contractual
obligations not fully recorded in the consolidated balance
sheets or fully disclosed in the Notes to the consolidated
financial statements.

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As of October 3, 2004, the Companys
contractual obligations included:

|                       |  |                                               |        |        |  |           |        |           |  |            |        |  |  |   |       |  |  |   |        | 
|---------------------- |  | --------------------------------------------- | ------ | ------ |  | --------- | ------ | --------- |  | ---------- | ------ |  |  | - | ----- |  |  | - | ------ | 
|                       |  |                                              
|                       |  | Contractual Obligations Payment Due by Period
|                       |  |                                              
|                       |  |                                               |        | Fiscal |  | Fiscal    |        | Fiscal    |  |           
|                       |  | Total                                         |        | 2005   |  | 2006-2007 |        | 2008-2009 |  | Thereafter
|                       |  |                                               |        |        |  |           |        |           |  |           
|Operating Leases       |  | $                                             | 14,836 |        |  | $         | 4,328  |           |  | $          | 5,778  |  |  | $ | 3,463 |  |  | $ | 1,267  | 
|Workers Compensation* |  |                                               | 36,449 |        |  |           | 12,359 |           |  |            | 10,127 |  |  |   | 4,603 |  |  |   | 9,360  | 
|                       |  |                                               |        |        |  |           |        |           |  |            |        |  |  |   |       |  |  |   |        | 
|Total                  |  | $                                             | 51,285 |        |  | $         | 16,687 |           |  | $          | 15,905 |  |  | $ | 8,066 |  |  | $ | 10,627 | 
|                       |  |                                               |        |        |  |           |        |           |  |            |        |  |  |   |       |  |  |   |        | 



---



|  |                                                                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Estimated obligation is based upon actuarial
    analysis and represents the remaining deductible liability under
    the Companys current workers compensation contracts.
    This amount excludes $2,677 of additional amounts due to various
    state funds related to workers compensation.

The Asset Purchase Agreement related to the
January 2004 acquisition of one of the Companys
traditional franchise operations includes provisions for
contingent payments for the three years subsequent to the
closing date and is based upon performance targets related to
increases in earnings before interest, taxes, depreciation and
amortization (EBITDA) over the prior year. If a
contingent payment is required, the Company will account for it
as an increase to the purchase price and record it as goodwill.
Additionally, contingent payments based on an increase in EBITDA
over the prior year for the two years subsequent to
December 29, 2002 are provided for in the Stock Purchase
Agreement related to the March 2003 acquisition of a large
licensed franchise operation. The Company was not required to
make a payment for the twelve months ended December 31,
2003. If a contingent payment is required at December 31,
2004, it will be accounted for as an increase to the purchase
price and recorded as goodwill. (See Note 6 to the notes to
consolidated financial statements).

The Company believes that its current and
expected levels of working capital of $54,957 and line of credit
are adequate to support present operations and to fund future
growth and business opportunities for the foreseeable future.
The Company would pursue other sources of capital, should it be
necessary.

Critical Accounting Policies

The discussions and analyses of the
Companys consolidated financial condition and results of
operations were based on the Companys consolidated
financial statements, which have been prepared in conformity
with generally accepted accounting principles in the United
States of America. The preparation of these financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of any contingent assets and liabilities at the
financial statement date, and reported amounts of revenue and
expenses during the reporting period. On an ongoing basis, the
Companys management reviews and evaluates these estimates
and assumptions, including those that relate to revenue
recognition, accounts receivable, workers compensation
costs, goodwill, intangible and other long-lived assets, income
taxes including the valuation allowance for deferred tax assets,
contingencies and litigation. These estimates are based on
historical experience and a variety of other assumptions
believed reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or
conditions.

Management believes the following critical
accounting policies are those most significantly affected by the
judgment, estimates and/or assumptions used in the preparation
of Remedys consolidated financial statements.

Revenue
Recognition The
Company generates revenue from the sale of temporary staffing
and permanent placement services by its Company-owned and
licensed franchise operations and from royalties on sales of
such services by its traditional franchise operations. Temporary
staffing revenues and the related labor costs and payroll taxes
are recorded in the period in which the services are performed.
Permanent placement revenues are recognized when the permanent
placement candidate begins full-time employment. Sales
allowances are established to estimate losses due to placed
candidates not remaining employed for the

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Companys permanent placement guarantee
period, typically 30-100 days and have historically been
insignificant to the Companys overall results of
operations.


The Company accounts for the revenues and the
related direct costs in accordance with Emerging Issues Task
Force (EITF) 99-19 Reporting Revenue Gross as
a Principal versus Net as an Agent. The Company is
required to assess whether it acts as a principal in its
transactions or as an agent acting on the behalf of others.
Where the Company is the principal in a transaction and has the
risks and rewards of ownership, the transaction is recorded
gross in the income statement, and where the Company acts merely
as an agent, only the net fees earned are recorded in the income
statement. Under the Companys traditional
franchised agreement, the franchisee has the direct contractual
relationship with clients, holds title to the related customer
receivables and is the legal employer of the temporary
employees. Accordingly, the Company does not include the
revenues and direct expenses from these transactions in its
income statement and only records the royalty fee earned.
Alternatively, under the Companys licensed
franchise agreements the Company has the direct contractual
relationship with clients, holds title to the related customer
receivables and is the legal employer of the temporary
employees. As the Company retains the risks and rewards of
ownership (such as the liability for the cost of temporary
personnel and the risk of loss for collection), the revenues and
direct expenses of its licensed franchise operations are
included in the Companys results of operations. The
Company remits to each licensed franchisee a portion of the
gross margin generated by its office(s).

Accounts
Receivable Remedy
provides an allowance for doubtful accounts on its accounts
receivable for estimated losses resulting from the inability of
its clients to make required payments. This allowance is based
upon managements analysis of historical write-off levels,
current economic trends, routine assessment of its clients
financial strength and any other known factors impacting
collectibility. If the financial condition of its clients were
to deteriorate, which may result in the impairment of their
ability to make payments, additional allowances may be required.
Remedys estimates are influenced by the following
considerations: the large number of clients and their dispersion
across wide geographic areas, the fact that no single customer
accounts for 10% or more of its total revenues and its
continuing credit evaluation of its clients financial
conditions.

Workers Compensation
Costs The Company
maintains reserves for its workers compensation
obligations using actuarial methods to estimate the remaining
undiscounted liability for the deductible portion of all claims,
including those incurred but not reported. This process includes
establishing loss development factors, based on the historical
claims experience of the Company and the industry, and applying
those factors to current claims information to derive an
estimate of the Companys ultimate claims liability. The
calculated ultimate liability is then reduced by cumulative
claims payments to determine the required reserve. Management
evaluates the reserve, and the underlying assumptions, regularly
throughout the year and makes adjustments as needed. While
management believes that the recorded amounts are adequate,
there can be no assurance that changes to managements
estimates will not occur due to limitations inherent in the
estimation process.

Goodwill and Other Intangible
Assets Effective
the first quarter of fiscal 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 applies to
goodwill and intangible assets that are not amortized.
SFAS No. 142 requires goodwill to no longer be
amortized but instead be subject to an impairment test at least
annually or if events or circumstances change that may reduce
the fair value of the reporting unit below its book value.
Reporting units are determined based on geographic groupings of
Company-owned offices. Intangible assets with finite lives
continue to be amortized over their estimated useful lives. In
connection with the initial impairment test upon adoption, the
Company obtained valuations of its individual reporting units
from an independent third-party valuation firm. The valuation
methodologies considered included analyses of discounted cash
flows at the reporting unit level, guidelines for publicly
traded company multiples and comparable transactions. As a
result of these impairment tests, the Company recorded a
non-cash charge of $2.4 million, net of income taxes of
$1.6 million, to reduce the carrying value of the goodwill
to its implied fair value. This charge is reflected as a
cumulative effect of adoption of a new accounting standard in the

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Companys consolidated statements of
operations for the fiscal year ended September 28, 2003.
The Company performs its annual impairment test at the end of
each fiscal year.


Other Long-Lived
Assets Effective
the first quarter of fiscal 2003, the Company adopted
SFAS No. 144, Accounting for the Impairment or
disposal of Long-Lived Assets. In accordance with
SFAS No. 144, the Company assesses the fair value and
recoverability of its long-lived assets including intangibles
subject to amortization, whenever events and circumstances
indicate the carrying value of an asset may not be recoverable
from estimated future cash flows expected to result from its use
and eventual disposition. In doing so, the Company makes
assumptions and estimates regarding future cash flows and other
factors. The fair value of the long-lived assets is dependent
upon the forecasted performance of the Companys business
and the overall economic environment. When it determines that
the carrying value of the long-lived assets may not be
recoverable, it measures impairment based upon a forecasted
discounted cash flow method. If these forecasts are not met, the
Company may have to record additional impairment charges not
previously recognized. The Company recorded $0.8 million,
of asset impairment charges related to capitalized software for
fiscal 2003, of which $0.5 million is included in
depreciation expense and $0.3 million is included in
selling and administrative expense (see Note 1 to notes to
consolidated financial statements). There were no asset
impairment charges in fiscal years 2004 and 2002.

Income
Taxes In
preparing the Companys consolidated financial statements,
management estimates the Companys income taxes in each of
the taxing jurisdictions in which it operates. This includes
estimating the Companys actual current tax expense
together with any temporary differences resulting from the
different treatment of certain items, such as the timing for
recognizing revenues and expenses, for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included in the Companys
consolidated balance sheets.

Deferred tax assets and liabilities are
determined based on temporary differences between income and
expenses reported for financial reporting and tax reporting. The
Company is required to record a valuation allowance to reduce
its deferred tax assets to the amount that it believes is more
likely than not to be realized. In assessing the need for a
valuation allowance, the Company considers all positive and
negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning
strategies and recent financial performance. The Company had
been profitable through the first fiscal quarter of 2003,
however, continued market softness and significant increases in
workers compensation costs resulted in significant losses
in fiscal 2003. The Company experienced losses throughout fiscal
2004.

As a result of the Companys recent
cumulative losses, management concluded that a full valuation
allowance of $22.6 million and $16.9 million against
the deferred tax assets was appropriate as of the end of fiscal
2004 and 2003, respectively. While the Company expects to be
profitable in fiscal 2005 and beyond, in view of the recent
losses, there is no assurance that there will be sufficient
future taxable income to realize the benefit of the deferred tax
asset. If, after future assessments of the realizability of the
deferred tax assets, the Company determines that a lesser
allowance is required, it would record a reduction to income tax
expense and the valuation allowance in the period of such
determination.

Contingencies and Litigation There are various claims, lawsuits
and pending actions against the Company incident to its
operations. If a loss arising from these actions is probable and
can be reasonably estimated, the Company must record the amount
of the estimated liability. Based on current available
information, management believes that the ultimate resolution of
these actions will not have a material adverse effect on the
Companys consolidated financial statements. As additional
information becomes available, management will continue
assessing any potential liability related to these actions and
may need to revise its estimates.

New Accounting Standards

In March 2004, the Financial Accounting Standards
Board (FASB) issued its exposure draft,
Share-Based Payment, which is a proposed amendment
to SFAS No. 123, Accounting for Stock-Based
Compensation. The exposure draft is effective for public
companies with fiscal years beginning after December 15,
2004 and would require all share-based payments to employees,
including grants of employee

33



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##### Table of Contents



stock options and purchases under employee stock
purchase plans, to be recognized as expenses in the statement of
operations based on their fair values and vesting periods. In
October 2004, the FASB deferred the effective date to interim
and annual periods beginning after June 15, 2005. The FASB
expects to issue a final standard by December 31, 2004. The
Company has not yet assessed the impact of adopting this new
standard.


In March 2004, the FASB approved the consensus
reached on EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). The objective of
this Issue is to provide guidance on determining when an
investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss.
The guidance also includes accounting considerations subsequent
to the recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. In
September 2004, the FASB issued FASB Staff Position
(FSP) EITF Issue 03-1-1 that delays the
effective date for the measurement and recognition guidance
included in EITF 03-1. The disclosures required by
EITF 03-1 have not been deferred and are effective for
annual periods ending after June 15, 2004.

Inflation

The effects of inflation on the Companys
operations were not significant during the periods presented in
the consolidated financial statements.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Qualitative and Quantitative Disclosures
    About Market Risk

The Company is exposed to market risk resulting
from changes in interest rates and equity prices and, to a
lesser extent, foreign currency rates. Under its current policy,
the Company does not engage in speculative or leveraged
transactions to manage exposure to market risk.

Interest rate risk.The interest rate payable on the
Companys line of credit is at the Companys
discretion, either the Bank of Americas prime rate plus
0.0% or 0.5% (depending on the amount of outstanding borrowings)
or LIBOR plus 0.75% or 1.5% (depending on the amount of
outstanding borrowings) and is paid monthly. The Company is
required to pay quarterly fees of 0.25% per annum on the unused
portion of the line of credit. If interest rates paid on the
credit facility had changed by 10% compared to actual rates, the
increase or decrease in interest expense would have been
immaterial in fiscal 2004.

In addition, the Company has approximately
$15.4 million in fixed rate investments consisting of U.S.
government securities as of October 3, 2004. The fixed rate
securities mature throughout fiscal 2007 and have an average
weighted interest rate of 2.5%.

Equity price risk.The Company holds investments in
various marketable available-for-sale and trading securities
which are subject to price risk. The fair market value of such
investments as of October 3, 2004 and September 28,
2003 was $3.2 million and $18.4 million, respectively.
The potential change in fair market value of these investments,
assuming a 10% change in prices would have been an increase or
decrease of $0.3 million and $1.8 million,
respectively.

Foreign currency
risks.To date, the Company has had
minimal sales outside the United States. Therefore, it has only
minimal exposure to foreign currency exchange risk. The Company
does not hedge against foreign currency risks and believes that
foreign exchange risk is immaterial to its current business.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The information required by Item 8 of this
report is set forth in Item 15(a) under the caption
Financial Statements as a part of this report.

34



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

As of October 3, 2004, the Company carried
out an evaluation, under the supervision and with the
participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e). In designing
and evaluating the Companys disclosure controls and
procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
The design of any disclosure controls and procedures also is
based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions.

Based upon their evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, subject to
the limitations noted above, the Companys disclosure
controls and procedures are effective to allow timely decisions
regarding disclosures to be included in the Companys
periodic filings with the Securities and Exchange Commission.

Changes in Internal Control over Financial
Reporting

There was no significant change in the
Companys internal control over financial reporting during
the Companys fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.




Item 9B.Other
Information

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information as to the officers of the Company
required by this item is set forth at the end of Part I of
this report under the caption Executive Officers of the
Registrant. Information as to the Board of Directors of
the Company required by this item is incorporated by reference
from the portion of the Companys definitive Proxy
Statement under the caption Proposal 1 
Election of Directors. Information as to the
Companys reporting persons compliance with
Section 16(a) of the Exchange Act, required by this item,
is incorporated by reference from the portion of the
Companys definitive Proxy Statement under the caption
Section 16(A) Beneficial Ownership Reporting
Compliance. Information as to the Audit Committee of the
Company required by this item is incorporated by reference from
the portion of the Companys definitive Proxy Statement
under the caption Board Committees and Meetings to
be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and mailed to the Companys
shareholders prior to the Companys Annual Meeting of
Shareholders, which is scheduled to be held on March 1,
2005.

The Company has adopted a Code of Ethics that
applies to all directors and employees, including the
Companys principal executive, financial and accounting
officers. The Code of Ethics is posted on the Company website at
www.remedytemp.com and is filed as an exhibit to this Annual
Report on Form 10-K. The Company intends to satisfy the
requirements under Item 5.05 of Form 8-K regarding
disclosure of amendments to, or waivers from, provisions of the
Companys Code of Ethics that apply, by posting such
information on the Companys website. Copies of the Code of
Ethics will be provided, free of charge, upon

35



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##### Table of Contents



written request directed to Investment Relations,
RemedyTemp, Inc. 101 Enterprise, Aliso Viejo, California 92656.





Item 11.Executive
Compensation

Information as to Executive Compensation required
by this item is incorporated by reference from the
Companys definitive Proxy Statement, under the caption
Executive Compensation and Other Information, to be
filed with the Commission pursuant to Regulation 14A under
the Exchange Act and mailed to the Companys shareholders
prior to the Companys Annual Meeting of Shareholders,
which is scheduled to be held on March 1, 2005.






|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholders
    Matters

Information as to Security Ownership of Certain
Beneficial Owners and Management and Related Shareholder matters
required by this item is incorporated by reference from the
Companys definitive Proxy Statement, under the captions
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information to be filed with the Commission pursuant to
Regulation 14A under the Exchange Act and mailed to the
Companys shareholders prior to the Companys Annual
Meeting of Shareholders, which is scheduled to be held on
March 1, 2005.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information as to Certain Relationships and
Related Transactions required by this item is incorporated by
reference from the Companys definitive Proxy Statement,
under the caption Certain Transactions, to be filed
with the Commission pursuant to Regulation 14A under the
Exchange Act and mailed to the Companys shareholders prior
to the Companys Annual Meeting of Shareholders, which is
scheduled to be held on March 1, 2005.




Item 14.     Principal
Accountant Fees and Services

Information as to Principal Accountant Fees and
Services required by this item is incorporated by reference from
the Companys definitive Proxy Statement, under the caption
Independent Auditor Fees for Fiscal 2004 and 2003,
to be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and mailed to the Companys
shareholders prior to the Companys Annual Meeting of
Shareholders, which is scheduled to be held on March 1,
2005.




PART IV




Item 15.     Exhibits
and Financial Statement Schedules

(a) Financial Statements.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Consolidated Financial Statements filed
    as part of this Report are set forth in the Index to
    Consolidated Financial Statements on page F-1 of this
    Report.
|
| | (2) Financial Statement Schedule filed as
    part of this report is set forth in the Index to
    Consolidated Financial Statements on page F-1 of this
    report.      

(b) Exhibits

The following Exhibits
are filed as part of this Report:

|        |     |             |  |                                                                     
|------- | --- | ----------- |  | --------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | 3.1 |             |  | Amended and Restated Articles of Incorporation of
    the Company(a)
|        | 3.2 |             |  | Amended and Restated Bylaws of the Company(e)                       

36



---



##### Table of Contents



|        |        |             |  |                                                                                                                                     
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 4.1    |             |  | Specimen Stock Certificate(a)                                                                                                       
|        | 4.2    |             |  | Shareholder Rights Agreement(a)                                                                                                     
|        | 10.1*  |             |  | Robert E. McDonough, Sr. Amended and Restated
    Employment Agreement(f)                                                           
|        | 10.2*  |             |  | Paul W. Mikos Employment Agreement, as
    amended(g)                                                                               
|        | 10.3*  |             |  | Robert E. McDonough, Sr. Amendment No. 1 to
    Amended and Restated Employment Agreement(i)                                        
|        | 10.7*  |             |  | Deferred Compensation Agreement for Alan M.
    Purdy(a)                                                                            
|        | 10.9   |             |  | Form of Indemnification Agreement(a)                                                                                                
|        | 10.11* |             |  | Amended and Restated RemedyTemp, Inc. 1996 Stock
    Incentive Plan(h)                                                              
|        | 10.12* |             |  | Amended and Restated RemedyTemp, Inc. 1996
    Employee Stock Purchase Plan(h)                                                      
|        | 10.13  |             |  | Form of Franchising Agreement for Licensed
    Offices(k)                                                                           
|        | 10.14  |             |  | Form of Franchising Agreement for Franchised
    Offices(a)                                                                         
|        | 10.15  |             |  | Form of Licensing Agreement for
    IntelliSearch®(a)                                                                               
|        | 10.18* |             |  | Additional Deferred Compensation Agreement for
    Alan M. Purdy(b)                                                                 
|        | 10.19  |             |  | Lease Agreement between RemedyTemp, Inc. and
    Parker-Summit, LLC(c)                                                              
|        | 10.22* |             |  | RemedyTemp, Inc. Deferred Compensation Plan(d)                                                                                      
|        | 10.23* |             |  | Amended and Restated Employment Agreement for
    Greg Palmer(m)                                                                    
|        | 10.24* |             |  | 1998 RemedyTemp, Inc. Amended and Restated
    Deferred Compensation and Stock Ownership Plan for Outside
    Directors(r)          
|        | 10.25  |             |  | Form of Licensing Agreement for i/Search
    2000®(e)                                                                               
|        | 10.27* |             |  | Paul W. Mikos Severance Agreement and General
    Release(j)                                                                        
|        | 10.28* |             |  | Gunnar B. Gooding Employment and Severance
    Letter(l)                                                                            
|        | 10.29* |             |  | Cosmas N. Lykos Employment and Severance Letter(l)                                                                                  
|        | 10.30* |             |  | Alan M. Purdy Retirement Agreement and General
    Release(n)                                                                       
|        | 10.31* |             |  | Monty Houdeshell Employment Letter(o)                                                                                               
|        | 10.32* |             |  | Monty Houdeshell Change in Control Severance
    Agreement(p)                                                                       
|        | 10.33* |             |  | Shawn Mohr Severance Agreement(p)                                                                                                   
|        | 10.34  |             |  | Amendment No. 2 to the Lease Agreement between
    RemedyTemp, Inc. and Parker 
    Summit, LLC(q)                                 
|        | 10.36  |             |  | Business Loan Agreement between Bank of America
    N.A. and RemedyTemp, Inc.(s)                                                    
|        | 10.37  |             |  | Amended and Restated Credit Agreement between
    Bank of America, N.A. and
    Remedy Temp, Inc.(t)                                
|        | 14.1   |             |  | Code of Business Conduct and Ethics(q)                                                                                              
|        | 21.1   |             |  | List of Subsidiaries                                                                                                                
|        | 23.1   |             |  | Consent of independent registered public
    accounting firm                                                                        
|        | 31.1   |             |  | Chief Executive Officer Certification Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                 
|        | 31.2   |             |  | Chief Financial Officer Certification Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                 
|        | 32     |             |  | Chief Executive Officer and Chief Financial
    Officer Certifications Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002



---



|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Indicates a management contract or a compensatory
    plan, contract or arrangement.                                                                  
|   
|(a) | Incorporated by reference to the exhibit of same
    number to the Registrants Registration Statement on
    Form S-1(Reg. No. 333-4276), as amended.

37



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##### Table of Contents





|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 29,
    1996.
|   
|(c) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended March 30,
    1997.   
|   
|(d) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 28, 1997.         
|   
|(e) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 27, 1998.         



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Reports on
    Form 10-Q for the quarterly period ended December 27,
    1998.



|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Reports on
    Form 10-Q for the quarterly period ended June 27, 1999
    (original agreement) and for the quarterly period ended
    December 31, 2000 (amendment).
|   
|(h) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended October 3, 1999.                                                                                                   
|   
|(i) | Incorporated by reference to exhibit number 10.1
    to the Registrants Quarterly Report on Form 10-Q for
    the quarterly period ended December 31, 2000.                                                                                                  
|   
|(j) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended April 1, 2001.                                                                                               
|   
|(k) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended July 1, 2001.                                                                                                
|   
|(l) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 30, 2001.                                                                                                
|   
|(m) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 30,
    2001.                                                                                       



|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(n) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2002.
|   
|(o) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 29, 2002. 
|   
|(p) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended June 29, 2003.
|   
|(q) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 28, 2003. 



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(r) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 28,
    2003.
|   
|(s) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended March 28,
    2004.   



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(t) | Incorporated by reference to the exhibit of same
    number to Registrants Current Report on Form 8-K on
    December 3, 2004.

38



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.

REMEDYTEMP, INC.

/s/ GREG D. PALMER




Greg D. Palmer


President and Chief Executive
Officer


December 6, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                |  |                                                                                         |  |                  |  | 
|----------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ---------------- |  | 
|                                                |  |                                                                                         |  |                 
|Signature                                       |  | Title                                                                                   |  | Date            
|                                                |  |                                                                                         |  |                 
|                                               
|/s/ GREG D. PALMERGreg D. Palmer                |  | President and Chief Executive Officer                                                   |  | December 6, 2004
|                                               
|/s/ PAUL W. MIKOSPaul W. Mikos                  |  | Chairman of the Board of Directors                                                      |  | December 6, 2004
|                                               
|/s/ ROBERT E. MCDONOUGHRobert E. McDonough, Sr. |  | Vice-Chairman of the Board of Directors                                                 |  | December 6, 2004
|                                               
|/s/ MONTY A. HOUDESHELLMonty A. Houdeshell      |  | Senior Vice President and Chief Financial
    Officer
    (Principal Financial Officer) |  | December 6, 2004
|                                               
|/s/ JOHN D. SWANCOATJohn D. Swancoat            |  | Vice President and Controller
    (Principal Accounting Officer)                        |  | December 6, 2004
|                                               
|/s/ WILLIAM D. CVENGROSWilliam D. Cvengros      |  | Director                                                                                |  | December 6, 2004
|                                               
|/s/ JAMES L. DOTIJames L. Doti, Ph.D.           |  | Director                                                                                |  | December 6, 2004
|                                               
|/s/ ROBERT A. ELLIOTTRobert A. Elliott          |  | Director                                                                                |  | December 6, 2004
|                                               
|/s/ MARY GEORGEMary George                      |  | Director                                                                                |  | December 6, 2004
|                                               
|/s/ J. MICHAEL HAGANJ. Michael Hagan            |  | Director                                                                                |  | December 6, 2004
|                                               
|/s/ JOHN B. ZAEPFELJohn B. Zaepfel              |  | Director                                                                                |  | December 6, 2004

39



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##### Table of Contents



REMEDYTEMP, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                               |                                                                                                                                                         |      |  |      | 
|------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | 
|                               |                                                                                                                                                         | Page
|                               |                                                                                                                                                         |     
|Financial Statements:          |                                                                                                                                                         |      |  |     
|                               | Report of Independent Registered Public
    Accounting Firm                                                                                             |      |  | F-2  | 
|                               | Consolidated Balance Sheets as of October 3,
    2004 and September 28, 2003                                                                            |      |  | F-3  | 
|                               | Consolidated Statements of Operations for the
    three fiscal years ended October 3, 2004,
    September 28, 2003 and September 29, 2002               |      |  | F-4  | 
|                               | Consolidated Statements of Shareholders
    Equity for the three fiscal years ended
    October 3, 2004, September 28, 2003 and
    September 29, 2002 |      |  | F-5  | 
|                               | Consolidated Statements of Cash Flows for the
    three fiscal years ended October 3, 2004,
    September 28, 2003 and September 29, 2002               |      |  | F-6  | 
|                               | Notes to Consolidated Financial Statements                                                                                                              |      |  | F-7  | 
|Financial Statement Schedules: |                                                                                                                                                         |      |  |     
|                               | For the three fiscal years ended October 3,
    2004, September 28, 2003 and September 29, 2002
    II  Valuation and Qualifying Accounts              |      |  | F-27 | 

All other schedules are omitted because they are
not applicable or the required information is shown in the
consolidated financial statements or notes thereto.

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Shareholders of
RemedyTemp, Inc.

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the
financial position of RemedyTemp, Inc. and its subsidiaries at
October 3, 2004 and September 28, 2003, and the
results of their operations and their cash flows for each of the
three fiscal years in the period ended October 3, 2004 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated
financial statements, the Company adopted the provisions of the
Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.

PRICEWATERHOUSECOOPERS LLP

Orange County, California

December 1, 2004


F-2



---



##### Table of Contents



REMEDYTEMP, INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except par
value)


|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |        |        | 
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------------- | ------ | - | ------- | ------ | ------ | 
|                                                                                      |                                                                                                                                                                                   | October 3,                 |         | September 28,
|                                                                                      |                                                                                                                                                                                   | 2004                       |         | 2003         
|                                                                                      |                                                                                                                                                                                   |                            |         |              
|ASSETS                                                                               
|Current assets:                                                                       |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                      | Cash and cash equivalents                                                                                                                                                         |                            | $       | 7,348         |        |   | $       | 13,236 |       
|                                                                                      | Investments                                                                                                                                                                       |                            |         | 66            |        |   |         | 15,730 |       
|                                                                                      | Restricted investments (Note 1)                                                                                                                                                   |                            |         | 19,161        |        |   |         | 2,654  |       
|                                                                                      | Accounts receivable, net of allowance for
    doubtful accounts of $2,984 and $2,627, respectively                                                                                |                            |         | 63,152        |        |   |         | 60,594 |       
|                                                                                      | Prepaid expenses and other current assets                                                                                                                                         |                            |         | 8,913         |        |   |         | 6,679  |       
|                                                                                      | Deferred and current income taxes (Note 5)                                                                                                                                        |                            |         | 160           |        |   |         | 330    |       
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                      |                                                                                                                                                                                   | Total current assets       |         |               | 98,800 |   |         |        | 99,223 | 
|Fixed assets, net (Note 2)                                                            |                                                                                                                                                                                   |                            | 10,589  |               |        |   | 12,337  |       
|Restricted cash and investments (Note 1)                                              |                                                                                                                                                                                   |                            | 21,925  |               |        |   | 21,615  |       
|Other assets                                                                          |                                                                                                                                                                                   |                            | 330     |               |        |   | 1,334   |       
|Intangible assets, net of accumulated
    amortization of $700 and $219, respectively |                                                                                                                                                                                   |                            | 2,274   |               |        |   | 1,655   |       
|Goodwill (Note 1)                                                                     |                                                                                                                                                                                   |                            | 3,703   |               |        |   | 3,030   |       
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|Total Assets                                                                          |                                                                                                                                                                                   | $                          | 137,621 |               |        | $ | 139,194 |       
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                     
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                             
|Current liabilities:                                                                  |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                      | Accounts payable                                                                                                                                                                  |                            | $       | 4,225         |        |   | $       | 4,790  |       
|                                                                                      | Accrued workers compensation, current
    portion (Note 3)                                                                                                                       |                            |         | 15,036        |        |   |         | 15,263 |       
|                                                                                      | Accrued payroll, benefits and related costs                                                                                                                                       |                            |         | 17,938        |        |   |         | 17,530 |       
|                                                                                      | Accrued licensees share of gross profit                                                                                                                                          |                            |         | 2,745         |        |   |         | 2,231  |       
|                                                                                      | Other accrued expenses                                                                                                                                                            |                            |         | 3,899         |        |   |         | 3,335  |       
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                      |                                                                                                                                                                                   | Total current liabilities  |         |               | 43,843 |   |         |        | 43,149 | 
|Other liabilities (Note 3)                                                            |                                                                                                                                                                                   |                            | 30,267  |               |        |   | 20,681  |       
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                      |                                                                                                                                                                                   | Total liabilities          |         |               | 74,110 |   |         |        | 63,830 | 
|Commitments and contingent liabilities
    (Note 8)                                   |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|Shareholders equity (Note 11):                                                       |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                      | Preferred Stock, $0.01 par value; authorized
    5,000 shares; none outstanding                                                                                                   |                            |         |              |        |   |         |       |       
|                                                                                      | Class A Common Stock, $0.01 par value;
    authorized 50,000 shares; 8,778 and 8,769 issued and outstanding
    at October 3, 2004 and September 28, 2003, respectively           |                            |         | 88            |        |   |         | 88     |       
|                                                                                      | Class B Non-Voting Common Stock, $0.01 par
    value; authorized 4,530 shares; 800 and 894 issued and
    outstanding at October 3, 2004 and September 28, 2003,
    respectively |                            |         | 8             |        |   |         | 9      |       
|                                                                                      | Additional paid-in capital                                                                                                                                                        |                            |         | 41,522        |        |   |         | 42,674 |       
|                                                                                      | Unearned compensation                                                                                                                                                             |                            |         | (3,737        | )      |   |         | (6,031 | )     
|                                                                                      | Accumulated other comprehensive (loss) income                                                                                                                                     |                            |         | (68           | )      |   |         | 134    |       
|                                                                                      | Retained earnings                                                                                                                                                                 |                            |         | 25,698        |        |   |         | 38,490 |       
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|                                                                                      |                                                                                                                                                                                   | Total shareholders equity |         |               | 63,511 |   |         |        | 75,364 | 
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       
|Total Liabilities and Shareholders Equity                                            |                                                                                                                                                                                   | $                          | 137,621 |               |        | $ | 139,194 |       
|                                                                                      |                                                                                                                                                                                   |                            |         |               |        |   |         |       

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



REMEDYTEMP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(amounts in thousands, except per share
amounts)


|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |       |         | 
|---------------------------------------------------------------------------------------------------- | ---------------- | -------------- | ------- | ------------- | ------- | ------------- | ------- | ---- | ------- | - | ------- | ----- | ------- | 
|                                                                                                     |                  | October 3,     |         | September 28, |         | September 29,
|                                                                                                     |                  | 2004           |         | 2003          |         | 2002         
|                                                                                                     |                  |                |         |               |         |              
|Company-owned office revenues                                                                        |                  | $              | 341,691 |               |         | $             | 300,070 |      |         | $ | 267,207 |      
|Licensed franchise revenues                                                                          |                  |                | 176,699 |               |         |               | 180,262 |      |         |   | 195,588 |      
|Franchise royalties and initial franchise fees                                                       |                  |                | 1,538   |               |         |               | 1,633   |      |         |   | 1,743   |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|                                                                                                     |                  | Total revenues |         |               | 519,928 |               |         |      | 481,965 |   |         |       | 464,538 | 
|Cost of Company-owned office revenues                                                                |                  |                | 286,158 |               |         |               | 261,628 |      |         |   | 219,418 |      
|Cost of licensed franchise revenues                                                                  |                  |                | 141,224 |               |         |               | 143,577 |      |         |   | 153,113 |      
|Licensees share of gross profit                                                                     |                  |                | 23,818  |               |         |               | 24,431  |      |         |   | 28,741  |      
|Selling and administrative expenses                                                                  |                  |                | 71,251  |               |         |               | 64,622  |      |         |   | 56,657  |      
|CIGA litigation costs (Note 8)                                                                       |                  |                | 6,080   |               |         |               | 796     |      |         |   | 355     |      
|Depreciation and amortization                                                                        |                  |                | 5,844   |               |         |               | 6,748   |      |         |   | 5,371   |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|(Loss) income from operations                                                                        |                  |                | (14,447 | )             |         |               | (19,837 | )    |         |   | 883     |      
|Other income and expense:                                                                            |                  |                |         |               |         |               |         |      |         |   |         |      
|                                                                                                     | Interest expense |                |         | (413          | )       |               |         | (434 | )       |   |         | (187  | )      
|                                                                                                     | Interest income  |                |         | 1,010         |         |               |         | 998  |         |   |         | 1,006 |        
|                                                                                                     | Other, net       |                |         | 735           |         |               |         | 731  |         |   |         | 812   |        
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|(Loss) income before income taxes and cumulative
    effect of adoption of a new accounting standard |                  |                | (13,115 | )             |         |               | (18,542 | )    |         |   | 2,514   |      
|(Benefit from) provision for income taxes
    (Note 5)                                               |                  |                | (323    | )             |         |               | 8,280   |      |         |   | 377     |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|(Loss) income before cumulative effect of
    adoption of a new accounting standard                  |                  |                | (12,792 | )             |         |               | (26,822 | )    |         |   | 2,137   |      
|Cumulative effect of adoption of a new accounting
    standard, net of income taxes of $1,634.       |                  |                |        |               |         |               | 2,421   |      |         |   |        |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|Net (loss) income                                                                                    |                  | $              | (12,792 | )             |         | $             | (29,243 | )    |         | $ | 2,137   |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|(Loss) income per share  basic and
    diluted:                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|(Loss) income per share before cumulative effect
    of adoption of a new accounting standard        |                  | $              | (1.42   | )             |         | $             | (2.98   | )    |         | $ | 0.24    |      
|Cumulative effect per share of adoption of a new
    accounting standard, net of income taxes        |                  |                |        |               |         |               | (0.27   | )    |         |   |        |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|Net (loss) income per share                                                                          |                  | $              | (1.42   | )             |         | $             | (3.25   | )    |         | $ | 0.24    |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|Weighted average shares:                                                                             |                  |                |         |               |         |               |         |      |         |   |         |      
|Basic                                                                                                |                  |                | 9,022   |               |         |               | 9,010   |      |         |   | 8,973   |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      
|Diluted                                                                                              |                  |                | 9,022   |               |         |               | 9,010   |      |         |   | 9,076   |      
|                                                                                                     |                  |                |         |               |         |               |         |      |         |   |         |      

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



REMEDYTEMP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(amounts in thousands)


|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |         |         |      |  
|----------------------------- | ------------------------------------------ | ---------------------------------- | ---------------------------------------------------------------- | ------------ | - | ---------- | -- | -------- | - | -------- | ----- | ------------- | - | -------- | -- | ------ | - | ----- | ------ | ------ | - | - | ------ | ------ | - | - | ------ |  | ------- | - | --- | - |  | ---- | ------- | ------- | ------- | ---- | -
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       | Accumulated   |   |         
|                              |                                            | Class A                            |                                                                  | Class B      |   |            |    |          |   |          |       | Other         |   |         
|                              |                                            | Common Stock                       |                                                                  | Common Stock |   | Additional |    |          |   |          |       | Comprehensive |   |         
|                              |                                            |                                    |                                                                  |              |   | Paid -In   |    | Unearned |   | Retained |       | (Loss)        |   |         
|                              |                                            | Shares                             |                                                                  | Amount       |   | Shares     |    | Amount   |   | Capital  |       | Compensation  |   | Earnings |    | Income |   | Total
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |      
|Balance at September 30, 2001 |                                            |                                    | 7,391                                                            |              |   | $          | 74 |          |   |          | 1,565 |               |   | $        | 16 |        |   | $     | 33,889 |        |   |   |        |        |   | $ | 65,596 |  |         |   |     |   |  | $    | 99,575  |        
|                              | Activity of Employee Stock Purchase Plan   |                                    |                                                                  | 6            |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        | 58     |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | 58      |        
|                              | Stock option activity                      |                                    |                                                                  | 33           |   |            |    | 1        |   |          |       |               |   |          |    |        |   |       |        | 422    |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | 423     |        
|                              | Conversion upon transfer to non-affiliates |                                    |                                                                  | 312          |   |            |    | 3        |   |          |       | (312          | ) |          |    | (3     | ) |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Restricted stock grants                    |                                    |                                                                  | 425          |   |            |    | 4        |   |          |       |               |   |          |    |        |   |       |        | 5,900  |   |   | $      | (5,904 | ) |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Forfeiture of restricted stock             |                                    |                                                                  | (25          | ) |            |    |          |   |          |       |               |   |          |    |        |   |       |        | (347   | ) |   |        | 327    |   |   |        |  |         |   |     |   |  |      |         | (20     | )      
|                              | Amortization of unearned compensation      |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        | 850    |   |   |        |  |         |   |     |   |  |      |         | 850     |        
|                              | Comprehensive income:                      |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |         |        
|                              |                                            | Other comprehensive loss:          |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |         |         |     
|                              |                                            |                                    | Unrealized loss on marketable securities (net of
    tax of $27) |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  | (39  | )       |         |         | (39  | )
|                              |                                            | Net income                         |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  | 2,137   |   |     |   |  |      |         |         | 2,137   |     
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        
|                              | Comprehensive income, net of tax           |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | 2,098   |        
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        
|Balance at September 29, 2002 |                                            |                                    | 8,142                                                            |              |   | $          | 82 |          |   |          | 1,253 |               |   | $        | 13 |        |   | $     | 39,923 |        |   | $ | (4,728 | )      |   | $ | 67,733 |  |         | $ | (39 | ) |  | $    | 102,984 |        
|                              | Activity of Employee Stock Purchase Plan   |                                    |                                                                  | 11           |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        | 112    |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | 112     |        
|                              | Stock option activity                      |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Conversion upon transfer to non-affiliates |                                    |                                                                  | 359          |   |            |    | 4        |   |          |       | (359          | ) |          |    | (4     | ) |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Restricted stock grants                    |                                    |                                                                  | 320          |   |            |    | 3        |   |          |       |               |   |          |    |        |   |       |        | 3,474  |   |   |        | (3,477 | ) |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Forfeiture of restricted stock             |                                    |                                                                  | (63          | ) |            |    | (1       | ) |          |       |               |   |          |    |        |   |       |        | (835   | ) |   |        | 836    |   |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Amortization of unearned compensation      |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        | 1,338  |   |   |        |  |         |   |     |   |  |      |         | 1,338   |        
|                              | Comprehensive loss:                        |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |         |        
|                              |                                            | Other comprehensive income:        |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |         |         |     
|                              |                                            |                                    | Unrealized gain on marketable securities                         |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  | 152  |         |         |         | 152  |  
|                              |                                            |                                    | Translation adjustment                                           |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  | 21   |         |         |         | 21   |  
|                              |                                            | Net loss                           |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  | (29,243 | ) |     |   |  |      |         |         | (29,243 | )   
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        
|                              | Comprehensive loss                         |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | (29,070 | )      
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        
|Balance at September 28, 2003 |                                            |                                    | 8,769                                                            |              |   | $          | 88 |          |   |          | 894   |               |   | $        | 9  |        |   | $     | 42,674 |        |   | $ | (6,031 | )      |   | $ | 38,490 |  |         | $ | 134 |   |  | $    | 75,364  |        
|                              | Activity of Employee Stock Purchase Plan   |                                    |                                                                  | 19           |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        | 185    |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | 185     |        
|                              | Stock option activity                      |                                    |                                                                  | 1            |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        | 8      |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | 8       |        
|                              | Conversion upon transfer to non-affiliates |                                    |                                                                  | 94           |   |            |    | 1        |   |          |       | (94           | ) |          |    | (1     | ) |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Forfeiture of restricted stock             |                                    |                                                                  | (105         | ) |            |    | (1       | ) |          |       |               |   |          |    |        |   |       |        | (1,345 | ) |   |        | 1,346  |   |   |        |  |         |   |     |   |  |      |         |        |        
|                              | Amortization of unearned compensation      |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        | 948    |   |   |        |  |         |   |     |   |  |      |         | 948     |        
|                              | Comprehensive loss:                        |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |         |        
|                              |                                            | Other comprehensive (loss) income: |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |         |         |     
|                              |                                            |                                    | Unrealized loss on marketable securities                         |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  | (228 | )       |         |         | (228 | )
|                              |                                            |                                    | Translation adjustment                                           |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  | 26   |         |         |         | 26   |  
|                              |                                            | Net loss                           |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  | (12,792 | ) |     |   |  |      |         |         | (12,792 | )   
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        
|                              | Comprehensive loss                         |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         | (12,994 | )      
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        
|Balance at October 3, 2004    |                                            |                                    | 8,778                                                            |              |   | $          | 88 |          |   |          | 800   |               |   | $        | 8  |        |   | $     | 41,522 |        |   | $ | (3,737 | )      |   | $ | 25,698 |  |         | $ | (68 | ) |  | $    | 63,511  |        
|                              |                                            |                                    |                                                                  |              |   |            |    |          |   |          |       |               |   |          |    |        |   |       |        |        |   |   |        |        |   |   |        |  |         |   |     |   |  |      |         |        

See accompanying notes to consolidated financial
statements.

F-5



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##### Table of Contents



REMEDYTEMP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(amounts in thousands)


|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |         |   |       |        |  
|------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------- | - | ------------- | ------- | ------- | - | ----- | ------- | ------- | - | ----- | ------ | -
|                                                        |                                                              | October 3,                                                                            |                                                                                     | September 28,                               |   | September 29,
|                                                        |                                                              | 2004                                                                                  |                                                                                     | 2003                                        |   | 2002         
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |              
|Cash flows from operating activities:                   |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|                                                        | Net (loss) income                                            |                                                                                       | $                                                                                   | (12,792                                     | ) |               | $       | (29,243 | ) |       | $       | 2,137   |  
|                                                        |                                                              | Adjustments to reconcile net (loss) income
    to net cash from operating activities: |                                                                                     |                                             |   |               |         |         |   |       |         |         |   |      
|                                                        |                                                              |                                                                                       | Cumulative effect of adoption of a new accounting
    standard, net of income taxes |                                             |   |              |         |         |   | 2,421 |         |         |   |      |       
|                                                        |                                                              |                                                                                       | Loss on disposal of fixed assets                                                    |                                             |   |              |         |         |   | 30    |         |         |   |      |       
|                                                        |                                                              |                                                                                       | Depreciation and amortization                                                       |                                             |   | 5,844         |         |         |   | 6,748 |         |         |   | 5,371 |       
|                                                        |                                                              |                                                                                       | Provision for losses on accounts receivable                                         |                                             |   | 1,213         |         |         |   | 1,357 |         |         |   | 1,333 |       
|                                                        |                                                              |                                                                                       | Restricted stock compensation expense                                               |                                             |   | 948           |         |         |   | 1,338 |         |         |   | 830   |       
|                                                        |                                                              |                                                                                       | Deferred taxes                                                                      |                                             |   |              |         |         |   | 7,080 |         |         |   | (253  | )     
|                                                        |                                                              |                                                                                       | Other                                                                               |                                             |   |              |         |         |   | 725   |         |         |   |      |       
|                                                        |                                                              |                                                                                       | Changes in assets and liabilities, net of
    purchase of franchises:               |                                             |   |               |         |         |   |       |         |         |   |       |       
|                                                        |                                                              |                                                                                       |                                                                                     | Trading investments                         |   |               | (507    | )       |   |       | (862    | )       |   |       | (84    | )
|                                                        |                                                              |                                                                                       |                                                                                     | Accounts receivable                         |   |               | (3,537  | )       |   |       | (227    | )       |   |       | (85    | )
|                                                        |                                                              |                                                                                       |                                                                                     | Prepaid expenses and other current assets   |   |               | (2,681  | )       |   |       | (934    | )       |   |       | (2,611 | )
|                                                        |                                                              |                                                                                       |                                                                                     | Other assets                                |   |               | 1,004   |         |   |       | 701     |         |   |       | 607    |  
|                                                        |                                                              |                                                                                       |                                                                                     | Accounts payable                            |   |               | (594    | )       |   |       | 1,639   |         |   |       | 756    |  
|                                                        |                                                              |                                                                                       |                                                                                     | Other liabilities                           |   |               | 3,180   |         |   |       | 15,809  |         |   |       | 8,202  |  
|                                                        |                                                              |                                                                                       |                                                                                     | Accrued CIGA litigation costs               |   |               | 5,877   |         |   |       |        |         |   |       |       |  
|                                                        |                                                              |                                                                                       |                                                                                     | Accrued payroll, benefits and related costs |   |               | 398     |         |   |       | 3,743   |         |   |       | 1,235  |  
|                                                        |                                                              |                                                                                       |                                                                                     | Accrued licensees share of gross profit    |   |               | 506     |         |   |       | (635    | )       |   |       | (336   | )
|                                                        |                                                              |                                                                                       |                                                                                     | Other accrued expenses                      |   |               | 558     |         |   |       | (286    | )       |   |       | (784   | )
|                                                        |                                                              |                                                                                       |                                                                                     | Income taxes payable                        |   |               | 170     |         |   |       | 13      |         |   |       | (1,748 | )
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Net cash (used in) provided by operating
    activities |                                                              |                                                                                       | (413                                                                                | )                                           |   |               | 9,417   |         |   |       | 14,570  |        
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Cash flows from investing activities:                   |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|                                                        | Purchase of fixed assets                                     |                                                                                       |                                                                                     | (3,365                                      | ) |               |         | (2,622  | ) |       |         | (3,548  | )
|                                                        | Purchase of available-for-sale investments                   |                                                                                       |                                                                                     | (323                                        | ) |               |         | (26,258 | ) |       |         | (28,513 | )
|                                                        | Proceeds from maturity of available-for-sale
    investments |                                                                                       |                                                                                     | 15,761                                      |   |               |         | 17,228  |   |       |         | 7,311   |  
|                                                        | Restricted cash and investments                              |                                                                                       |                                                                                     | (16,310                                     | ) |               |         | (7,000  | ) |       |         |        |  
|                                                        | Purchase of franchises                                       |                                                                                       |                                                                                     | (1,443                                      | ) |               |         | (3,763  | ) |       |         | (1,562  | )
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Net cash used in investing activities                   |                                                              |                                                                                       | (5,680                                                                              | )                                           |   |               | (22,415 | )       |   |       | (26,312 | )      
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Cash flows from financing activities:                   |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|                                                        | Proceeds from stock option activity                          |                                                                                       |                                                                                     | 8                                           |   |               |         |        |   |       |         | 423     |  
|                                                        | Proceeds from Employee Stock Purchase Plan
    activity      |                                                                                       |                                                                                     | 185                                         |   |               |         | 112     |   |       |         | 58      |  
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Net cash provided by financing activities               |                                                              |                                                                                       | 193                                                                                 |                                             |   |               | 112     |         |   |       | 481     |        
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Effect of exchange rate changes in cash                 |                                                              |                                                                                       | 12                                                                                  |                                             |   |               | 21      |         |   |       |        |        
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Net decrease in cash and cash equivalents               |                                                              |                                                                                       | (5,888                                                                              | )                                           |   |               | (12,865 | )       |   |       | (11,261 | )      
|Cash and cash equivalents at beginning of period        |                                                              |                                                                                       | 13,236                                                                              |                                             |   |               | 26,101  |         |   |       | 37,362  |        
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Cash and cash equivalents at end of period              |                                                              | $                                                                                     | 7,348                                                                               |                                             |   | $             | 13,236  |         |   | $     | 26,101  |        
|                                                        |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|Other cash flow information:                            |                                                              |                                                                                       |                                                                                     |                                             |   |               |         |         |   |       |         |        
|                                                        | Cash paid for interest                                       |                                                                                       | $                                                                                   | 487                                         |   |               | $       | 348     |   |       | $       | 217     |  
|                                                        | Cash (refund) paid for income taxes, net                     |                                                                                       | $                                                                                   | (512                                        | ) |               | $       | 445     |   |       | $       | 2,173   |  

See accompanying notes to consolidated financial
statements.

F-6



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##### Table of Contents



REMEDYTEMP, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Amounts in thousands, except per share
amounts)




|   |                                                                           
|-- | --------------------------------------------------------------------------
|1. | Description of business and summary of
    significant accounting policies



| |                      
| | ---------------------
| | Basis of presentation

The consolidated financial statements include the
accounts of RemedyTemp, Inc. and its wholly-owned subsidiaries,
(collectively referred to herein as the Company or
Remedy). All significant intercompany transactions
and balances have been eliminated.



| |                        
| | -----------------------
| | Description of business

The Companys principal business is
providing temporary personnel to industrial, service and
technology companies, professional organizations and
governmental agencies nationwide.

The Company has two classes of Common Stock
outstanding: Class A Common Stock, which has all voting and
other rights normally associated with Common Stock; and
Class B Common Stock, which is identical to the
Class A Common Stock in all respects except that the
Class B Common Stock has no voting rights except with
respect to certain amendments of the Companys Amended and
Restated Articles of Incorporation, certain mergers and as
otherwise required by law. The Class B Common Stock
automatically converts into Class A Common Stock on a
share-for-share basis upon the earlier of (i) a transfer to
a non-affiliate of the holder thereof in a public offering
pursuant to an effective registration statement or Rule 144
promulgated under the Securities Act of 1933, as amended,
(ii) the death or legal incapacity of Robert E.
McDonough, Sr., or (iii) the tenth anniversary of the
completion of the Companys initial public offering on
July 16, 1996.



| |                                               
| | ----------------------------------------------
| | Summary of significant accounting
    policies



| |            
| | -----------
| | Fiscal year

The Companys fiscal year includes 52 or
53 weeks, ending on the Sunday closest to September 30.
Fiscal year 2004 consisted of 53 weeks. Fiscal years 2003
and 2002 consisted of 52 weeks. Fiscal 2005 will consist of
52 weeks.



| |                    
| | -------------------
| | Revenue recognition

The Company generates revenue from the sale of
temporary staffing and permanent placement services by its
Company-owned and licensed franchise operations and from
royalties on sales of such services by its traditional franchise
operations. Temporary staffing revenues and the related labor
costs and payroll taxes are recorded in the period in which the
services are performed. Permanent placement revenues are
recognized when the permanent placement candidate begins
full-time employment. Sales allowances are established to
estimate losses due to placed candidates not remaining employed
for the Companys permanent placement guarantee period,
typically 30-100 days and have historically been
insignificant to the Companys overall results of
operations.

The Company follows the guidance of Emerging
Issues Task Force (EITF) 99-19, Recording
Revenue Gross as a Principal Agent versus Net as an Agent
in the presentation of revenues and direct costs of revenues.
This guidance requires the Company to assess whether it acts as
a principal in the transaction or as an agent acting on behalf
of others. Where the Company is the principal in the transaction
and has the risks and rewards of ownership, the transactions are
recorded gross in the consolidated statements of operations.

The Company utilizes two types of franchise
agreements referred to as traditional and
licensed. Under the Companys traditional
franchised agreement, the franchisee has the direct contractual
relationship with the clients, holds title to the related
customer receivables and is the legal employer of the temporary
employees. Accordingly, revenues and cost of revenues generated
by the traditional franchise operations are not included in the
Companys consolidated financial statements. The Company
earns and records continuing franchise fees, based upon the
contractual percentage of franchise gross revenues, in the
period in which the traditional franchisee provides the
services. Such fees are recorded by the Company as
Franchise royalties.

F-7



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the Companys licensed franchise
agreement, revenues generated by the franchised operation and
the related costs of revenues are included in the Companys
consolidated financial statements and are reported as
Licensed franchise revenues and Cost of
licensed franchise revenues, respectively. The Company has
the direct contractual relationship with the customer, holds
title to the related customer receivables and is the legal
employer of the temporary employees. Thus, certain risks
associated with the licensed franchise operations remain with
the Company. The net distribution paid to the licensed
franchisee for the services rendered is based on a percentage of
the gross profit generated by the licensed operation and is
reflected as Licensees share of gross profit
in the consolidated statements of operations. The Companys
share of the licensees gross profit represents the
continuing franchise fee as outlined in the licensed franchise
agreement and is recorded when earned in connection with the
related licensed franchise revenues.

Both traditional and licensed franchisees remit
an initial franchise fee (currently $10-$18) for their
affiliation with the Company. Generally, this fee is recognized
as revenue when substantially all of the initial services
required of the Company have been performed, and is reported by
the Company as Initial franchise fees. However, for
franchise agreements entered into after December 31, 2001,
a portion of the initial franchise fee is deferred and payable
over two years. The Company defers revenue recognition on this
portion of the fee until payment is received. Initial services
provided to traditional and licensed franchisees consist
primarily of training and assistance with opening publicity,
both of which are completed prior to the commencement of the
franchised operations. Ongoing services provided to traditional
franchisees consist primarily of payroll processing, customer
billing and operation guidance, as considered necessary. Ongoing
services provided to licensed franchisees include employment of
temporary employees, payroll processing, customer billing,
accounts receivable collection and operation guidance.



| |                                                                      
| | ---------------------------------------------------------------------
| | Concentrations of credit risk and allowance
    for doubtful accounts

The Companys financial instruments that
potentially subject the Company to concentrations of credit risk
consist principally of trade receivables. The Company performs
on-going credit evaluations of its clients and generally does
not require collateral. Concentrations of credit risk are
limited due to the large number of clients comprising the
Companys customer base and their dispersion across
different business and geographic areas. Accounts receivable are
carried at the amount estimated to be collectible. The Company
maintains an allowance for potential losses based upon
managements analysis of historical write-off levels,
current economic trends, routine assessment of its clients
financial strength and any other known factors impacting
collectibility. Recoveries are recognized in the period they are
received. The ultimate amount of accounts receivable that become
uncollectible could differ from those estimated; however, such
losses have generally been within managements
expectations. The provision provided for losses on accounts
receivable was $1,213, $1,357 and $1,333 for the fiscal years
ended October 3, 2004, September 28, 2003 and
September 29, 2002, respectively, and is included in
selling and administrative expenses in the accompanying
consolidated statements of operations.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Use of estimates in the preparation of
    consolidated financial statements

The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.



| |                                        
| | ---------------------------------------
| | Fair value of financial
    instruments

The carrying amounts of cash, investments,
accounts receivable, accounts payable and all other accrued
expenses approximate fair value because of the short maturity of
these items. The Companys investments in equity securities
are carried at fair value based upon available market
information.

F-8



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Foreign currency

The reporting currency of the Company is the
United States dollar. The functional currency of the
Companys subsidiary in Canada is the Canadian dollar.
Balance sheet accounts denominated in the Canadian dollar
(balances in Canadian dollars are not material) are translated
at exchange rates as of the date of the balance sheet and
statement of operations accounts are translated at average
exchange rates for the period. Translation gains and losses are
accumulated as a separate component of accumulated other
comprehensive income (loss) within shareholders
equity.



| |                          
| | -------------------------
| | Cash and cash equivalents

For purposes of financial reporting, cash
equivalents represent highly liquid short-term investments with
original maturities of less than 90 days.



| |                                            
| | -------------------------------------------
| | Accounting for stock-based
    compensation

The Company follows the disclosure-only
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, and,
accordingly, accounts for its stock-based compensation plans
using the intrinsic value method under APB No. 25,
Accounting for Stock Issued to Employees and related
interpretations.

The following table illustrates the effect on net
(loss) income and net (loss) income per share, had
compensation expense for the employee stock-based plans been
recorded based on the fair value method under
SFAS No. 123, as amended:

|                                                                                                                                     |  |                           |         |               |  |               |         |   |  |   |       | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ------- | ------------- |  | ------------- | ------- | - |  | - | ----- | 
|                                                                                                                                     |  |                          
|                                                                                                                                     |  | For the Fiscal Year Ended
|                                                                                                                                     |  |                          
|                                                                                                                                     |  | October 3,                |         | September 28, |  | September 29,
|                                                                                                                                     |  | 2004                      |         | 2003          |  | 2002         
|                                                                                                                                     |  |                           |         |               |  |              
|Net (loss) income, as reported                                                                                                       |  | $                         | (12,792 | )             |  | $             | (29,243 | ) |  | $ | 2,137 | 
|Deduct: total stock-based employee compensation
    expense determined under fair value based method, net of related
    tax effects |  |                           | 494     |               |  |               | 425     |   |  |   | 686   | 
|                                                                                                                                     |  |                           |         |               |  |               |         |   |  |   |       | 
|Net (loss) income, as adjusted                                                                                                       |  | $                         | (13,286 | )             |  | $             | (29,668 | ) |  | $ | 1,451 | 
|                                                                                                                                     |  |                           |         |               |  |               |         |   |  |   |       | 
|Basic and diluted net (loss) income per
    share:                                                                                   |  |                           |         |               |  |               |         |   |  |   |       | 
|As reported                                                                                                                          |  | $                         | (1.42   | )             |  | $             | (3.25   | ) |  | $ | 0.24  | 
|As adjusted                                                                                                                          |  | $                         | (1.47   | )             |  | $             | (3.29   | ) |  | $ | 0.16  | 



| |            
| | -----------
| | Investments

The Company accounts for its investments in
accordance with Statement of Financial Accounting Standard
(SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The
Companys portfolio consists of commercial paper, fixed
income securities and mutual funds classified as
available-for-sale. At the time of sale, the cost of mutual fund
investments are determined using the average cost method and
fixed income securities cost is based upon specific
identification. The Companys portfolio of fixed income
securities have various maturity dates; $5,937 mature in fiscal
2006 and $9,420 mature in fiscal 2007. Unrealized gains and
losses from available-for-sale securities are included in
accumulated other comprehensive income (loss) within
shareholders equity. The net unrealized gains
(losses) for available-for-sale securities were ($228) and
$152 for fiscal 2004 and 2003, respectively. The gross and net
realized gains (losses) related to the Companys
available-for-sale securities were $82 and ($8) and $0 for
fiscal years 2004, 2003 and 2002, respectively.

Investments related to the Companys
deferred compensation program (see Note 9) are classified
as trading and total $3,161 and $2,654 for fiscal 2004 and 2003,
respectively. The deferred compensation investments are

F-9



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

included in current restricted investments in the
Companys consolidated balance sheets at October 3,
2004 and September 28, 2003. The realized and unrealized
gains and losses relating to trading securities are recorded in
other income and expense. Net realized and unrealized gains
(losses) for trading securities were $243, $381 and ($309)
for fiscal 2004, 2003 and 2002, respectively and are offset by
the change in the deferred compensation liability which is
included in selling and administrative expenses. All investments
are carried at fair value.

The following table presents the classification
of the Companys investments:

|                     |                                                                |                                       |   |               |        |  |   |        |        | 
|-------------------- | -------------------------------------------------------------- | ------------------------------------- | - | ------------- | ------ |  | - | ------ | ------ | 
|                     |                                                                | October 3,                            |   | September 28,
|                     |                                                                | 2004                                  |   | 2003         
|                     |                                                                |                                       |   |              
|Current              |                                                                |                                       |   |               |        |  |   |       
|                     | Available-for-sale securities (mutual funds)                   |                                       | $ | 66            |        |  | $ | 15,730 |       
|                     | Certificate of deposit                                         |                                       |   | 16,000        |        |  |   |       |       
|                     | Trading securities                                             |                                       |   | 3,161         |        |  |   | 2,654  |       
|                     |                                                                |                                       |   |               |        |  |   |       
|                     |                                                                | Total investments                     |   | $             | 19,227 |  |   | $      | 18,384 | 
|                     |                                                                |                                       |   |               |        |  |   |       
|Long-term Restricted |                                                                |                                       |   |               |        |  |   |       
|                     | Cash                                                           |                                       | $ | 6,568         |        |  | $ | 7,000  |       
|                     | Available-for-sale securities (U.S. government
    securities) |                                       |   | 15,357        |        |  |   | 14,615 |       
|                     |                                                                |                                       |   |               |        |  |   |       
|                     |                                                                | Total restricted cash and investments |   | $             | 21,925 |  |   | $      | 21,615 | 
|                     |                                                                |                                       |   |               |        |  |   |       

Gross unrealized gains and losses on our
available-for-sale securities were as follows:

|                            |                         |                               |   |               |      |   |   |     |     | 
|--------------------------- | ----------------------- | ----------------------------- | - | ------------- | ---- | - | - | --- | --- | 
|                            |                         |                              
|                            |                         | For the Fiscal Year Ended    
|                            |                         |                              
|                            |                         | October 3,                    |   | September 28,
|                            |                         | 2004                          |   | 2003         
|                            |                         |                               |   |              
|Mutual funds:               |                         |                               |   |               |      |   |   |    
|                            | Gross unrealized gains  |                               | $ | 34            |      |   | $ | 154 |    
|                            | Gross unrealized losses |                               |   | (38           | )    |   |   |    |    
|U.S. government securities: |                         |                               |   |               |      |   |   |    
|                            | Gross unrealized gains  |                               |   | 156           |      |   |   | 4   |    
|                            | Gross unrealized losses |                               |   | (380          | )    |   |   | (6  | )  
|                            |                         |                               |   |               |      |   |   |    
|                            |                         | Net unrealized (losses) gains |   | $             | (228 | ) |   | $   | 152 | 
|                            |                         |                               |   |               |      |   |   |    

The following table summarizes the fair value and
gross unrealized losses related to the Companys
available-for-sale securities that have been in a continuous
unrealized loss position, at October 3, 2004:

|                           |  |                                  |        |                         |  |   |      |  
|-------------------------- |  | -------------------------------- | ------ | ----------------------- |  | - | ---- | -
|                           |  |                                 
|                           |  | In a Loss Position for Less Than
|                           |  | 12 Months                       
|                           |  |                                 
|                           |  | Fair Value                       |        | Gross Unrealized Losses
|                           |  |                                  |        |                        
|U.S. government securities |  | $                                | 15,357 |                         |  | $ | (115 | )

There have been no available-for-sale securities
that have been in a continuous unrealized loss position for more
than 12 months.

The Company periodically reviews its investment
portfolio to determine if any investment is
other-than-temporarily impaired due to changes in credit risk or
other potential valuation concerns. At October 3, 2004, the
Company believes that its investments are not
other-than-temporarily impaired. While certain
available-for-sale debt securities have fair values that are
below cost, the Company believes that it is probable that
principal and interest will be collected in accordance with
contractual terms, and that the decline in market value is due
to changes in interest rates and not due to increased credit
risk.

F-10



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |             
| | ------------
| | Fixed assets

Fixed assets are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets,
which are three to five years for furniture and fixtures and
computer equipment. Major improvements to leased office space
are capitalized and amortized over the shorter of their useful
lives or the term of the lease.

The Company accounts for long-lived assets,
including other purchased intangible assets, in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which requires impairment
losses to be recorded on long-lived assets, including
intangibles subject to amortization, used in operations when
indicators of impairment, such as significant economic slowdowns
in the industry, are present. Reviews are performed to determine
whether the carrying value of an asset is impaired, based on
comparisons to undiscounted expected future cash flows. If this
comparison indicates that there is impairment, the impaired
asset is written down to fair value, which is typically
calculated using quoted market prices and/ or discounted
expected future cash flows. Impairment is based on the excess of
the carrying amount over the fair value of those assets.

During fiscal 2004, the Company wrote off
approximately $234 of fixed assets that could no longer be
utilized. This charge is included in depreciation and
amortization expense in the accompanying consolidated statements
of operations.

The Company capitalizes the costs of purchased
software or internal and external development costs for its
internal-use information system in accordance with Statement of
Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use
(SOP 98-1). In accordance with SOP 98-1,
the Company commences amortization at the time the software is
ready for its intended use. Amortization is determined using the
straight-line method over the expected useful life of the
software, usually between three and five years. These
capitalized costs are included in fixed assets in the
accompanying consolidated balance sheets. During fiscal 2003,
the Company wrote off approximately $304 of capitalized software
that could no longer be utilized. This charge is included in
selling and administrative expenses in the accompanying
consolidated statements of operations. During the fourth quarter
of fiscal 2003, the Company changed the estimated useful life of
the capitalized software used to manage sales and track client
activities. The primary factor contributing to the change in the
estimated useful life was that the softwares function was
no longer consistent with the Companys strategic plan and
its offices were not fully utilizing the system. The Company
discontinued use of the software in November 2003. The change in
accounting estimate resulted in an additional amortization
charge of approximately $985 and is included in depreciation and
amortization expense in the accompanying consolidated statements
of operations for the year ended September 28, 2003.

Additionally, during the fourth quarter of fiscal
2003, certain impairment indicators were present and the Company
performed a review for impairment and determined that the
estimated future cash flows from certain capitalized software
development costs were less than their carrying amount and wrote
off approximately $477. The primary impairment indicator was the
change in the Companys strategic focus to higher margin
business. The impairment charge is included in depreciation and
amortization expense in the accompanying consolidated statements
of operations.



| |                                         
| | ----------------------------------------
| | Goodwill and other intangible
    assets

Goodwill represents the excess of purchase price
over the estimated fair value of net assets acquired. Effective
September 30, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 applies to goodwill and
intangible assets that are not amortized. SFAS No. 142
addresses the recognition and measurement of goodwill and other
intangible assets acquired in a business combination. In
accordance with SFAS No. 142, the Company no longer
amortizes goodwill but instead tests goodwill for impairment at
the reporting unit level at each fiscal year end or more
frequently if the Company believes indicators of impairment
exist. Reporting units are determined based on geographic
groupings of Company-owned offices.

F-11



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Intangible assets with finite lives continue to
be amortized over their estimated useful lives. The impairment
test for goodwill is comprised of two parts. The first step
compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount exceeds the
fair value of the reporting unit, the second step of the
goodwill impairment test is performed. The second step compares
the implied fair value of the reporting units goodwill
with the respective carrying amount in order to determine the
amount of impairment loss, if any.

In fiscal 2003, upon adoption of
SFAS No. 142 the Company performed the two-step
goodwill impairment test process and obtained assistance from a
third-party in performing the valuations of its individual
reporting units. The valuation methodologies considered included
analyses of discounted cash flows at the reporting unit level,
guidelines for publicly traded company multiples and comparable
transactions. As a result of these impairment tests, the Company
recorded a non-cash charge of $2,421, net of income taxes of
$1,634, to reduce the carrying value of the goodwill to its
implied fair value. This charge is reflected as a cumulative
effect of adoption of a new accounting standard in the
Companys consolidated statements of operations for the
year ended September 28, 2003.

In accordance with SFAS No. 142, no
amortization of goodwill was recorded for fiscal 2004 and 2003.
During fiscal 2002, the Company recorded goodwill amortization
of $256. Excluding this amortization expense and the related tax
impact, net income for fiscal 2002 would have been $2,289, or
$0.25 per diluted share. The changes in the carrying amounts of
goodwill for the fiscal years ended October 3, 2004 and
September 28, 2003 are as follows:

|                  |  |            |       |               |  |   |        |  
|----------------- |  | ---------- | ----- | ------------- |  | - | ------ | -
|                  |  | October 3, |       | September 28,
|                  |  | 2004       |       | 2003         
|                  |  |            |       |              
|Beginning of year |  | $          | 3,030 |               |  | $ | 4,283  |  
|Additions         |  |            | 702   |               |  |   | 2,833  |  
|Impairments       |  |            |      |               |  |   | (4,086 | )
|Other adjustments |  |            | (29   | )             |  |   |       |  
|                  |  |            |       |               |  |   |        |  
|End of year       |  | $          | 3,703 |               |  | $ | 3,030  |  
|                  |  |            |       |               |  |   |        |  

Other intangible assets with finite lives include
franchise rights, client relationships, and non-competition
agreements and are amortized on a straight-line basis. The
Company assesses the fair value and recoverability of its
intangible assets subject to amortization in accordance with
SFAS No. 144. The weighted average amortization period
is 6.3 years for franchise rights; 3.5 years for
client relationships; and 5.0 years for non-competition
agreements. Amortization expense related to other intangible
assets was $481, $195 and $15 for fiscal years 2004, 2003 and
2002, respectively. The following table presents the details of
the Companys other intangible assets that are subject to
amortization:

|                              |  |            |       |               |  |   |       |  
|----------------------------- |  | ---------- | ----- | ------------- |  | - | ----- | -
|                              |  | October 3, |       | September 28,
|                              |  | 2004       |       | 2003         
|                              |  |            |       |              
|Franchise rights              |  | $          | 2,090 |               |  | $ | 1,480 |  
|Client relationships          |  |            | 470   |               |  |   | 100   |  
|Non-competition agreements    |  |            | 414   |               |  |   | 294   |  
|                              |  |            |       |               |  |   |       |  
|                              |  |            | 2,974 |               |  |   | 1,874 |  
|Less accumulated amortization |  |            | (700  | )             |  |   | (219  | )
|                              |  |            |       |               |  |   |       |  
|Total                         |  | $          | 2,274 |               |  | $ | 1,655 |  
|                              |  |            |       |               |  |   |       |  

Estimated amortization expense is $544, $542,
$493, $379, $242 and $74 for fiscal years 2005 through fiscal
2009 and thereafter, respectively.

F-12



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |             
| | ------------
| | Other income

Other income consists primarily of late fees
collected from clients on past due accounts receivable balances
in the amounts of $678, $685 and $853, for fiscal years 2004,
2003 and 2002, respectively.



| |                  
| | -----------------
| | Advertising costs

The Company expenses advertising costs as
incurred. Advertising expenses were $1,071, $931 and $1,228 for
fiscal 2004, 2003 and 2002, respectively.



| |             
| | ------------
| | Income taxes

The Company records income taxes in accordance
with the provisions of SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 is an asset and
liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been recognized in the Companys
consolidated financial statements or tax returns. In estimating
future tax consequences, SFAS No. 109 generally
considers all expected future events including enactments of
changes in the tax law or rates.



| |                  
| | -----------------
| | Reclassifications

Certain amounts in the prior years consolidated
financial statements have been reclassified to conform to the
current year presentation.



| |                         
| | ------------------------
| | New Accounting Standards

In March 2004, the Financial Accounting Standards
Board (FASB) issued its exposure draft,
Share-Based Payment, which is a proposed amendment
to SFAS No. 123, Accounting for Stock-Based
Compensation. The exposure draft is effective for public
companies with fiscal years beginning after December 15,
2004 and would require all share-based payments to employees,
including grants of employee stock options and purchases under
employee stock purchase plans, to be recognized as expenses in
the statement of operations based on their fair values and
vesting periods. On October 13, 2004, the FASB deferred the
effective date to interim and annual periods beginning after
June 15, 2005. The FASB expects to issue a final standard
by December 31, 2004. This standard will be effective for
the Company at the beginning of the fourth quarter of fiscal
2005. The Company has not yet assessed the impact of adopting
this new standard.

In March 2004, the FASB approved the consensus
reached on EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). The objective of this
Issue is to provide guidance on determining when an investment
is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss.
The guidance also includes accounting considerations subsequent
to the recognition of an other-than-temporary impairment and
requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. In
September 2004, the FASB issued FASB Staff Position
(FSP) EITF Issue 03-1-1 that delays the effective
date for the measurement and recognition guidance included in
EITF 03-1. The disclosures required by EITF 03-1 have
not been deferred and are effective for annual periods ending
after June 15, 2004.

F-13



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|2. | Fixed assets

|                                |  |            |        |               |  |   |        | 
|------------------------------- |  | ---------- | ------ | ------------- |  | - | ------ | 
|                                |  | October 3, |        | September 28,
|                                |  | 2004       |        | 2003         
|                                |  |            |        |              
|Computer equipment and software |  | $          | 24,807 |               |  | $ | 26,565 | 
|Furniture and fixtures          |  |            | 5,751  |               |  |   | 5,558  | 
|Leasehold improvements          |  |            | 2,480  |               |  |   | 2,327  | 
|Construction in progress        |  |            | 974    |               |  |   | 151    | 
|                                |  |            |        |               |  |   |        | 
|                                |  |            | 34,012 |               |  |   | 34,601 | 
|Less accumulated depreciation   |  |            | 23,423 |               |  |   | 22,264 | 
|                                |  |            |        |               |  |   |        | 
|Fixed assets, net               |  | $          | 10,589 |               |  | $ | 12,337 | 
|                                |  |            |        |               |  |   |        | 

Construction in process primarily relates to
software development and implementation costs for various
internal-use information systems.



|   |                      
|-- | ---------------------
|3. | Workers compensation

Remedy provides workers compensation
insurance to its temporary associates and colleagues. Effective
April 1, 2001 and for workers compensation claims
originating in the majority of states (referred to as
non-monopolistic states), the Company has contracted with
independent, third-party carriers for workers compensation
insurance and claims administration. Each annual contract covers
all workers compensation claim costs greater than a
specified deductible amount, on a per occurrence
basis. The Company is self-insured for its deductible liability
($250 per individual claim incurred from April 1, 2001 to
March 31, 2002 and $500 for all subsequent claims). The
insurance carrier is responsible for incremental losses in
excess of the applicable deductible amount.

Remedy establishes a reserve for the estimated
remaining deductible portion of its workers compensation
claims, representing the estimated ultimate cost of claims and
related expenses that have been reported but not settled, and
that have been incurred but not reported. The estimated ultimate
cost of a claim is determined by applying actuarially determined
loss development factors to current claims information. These
development factors are determined based upon a detailed
actuarial analysis of historical claims experience of both the
Company and the staffing industry. The Company periodically
updates the actuarial analysis supporting the development
factors utilized and revises those development factors, as
necessary. Adjustments to the claims reserve are charged or
credited to expense in the periods in which they occur. The
estimated remaining deductible liability under the
aforementioned contracts as of October 3, 2004 is
approximately $36,449, of which $12,359 is recorded as current
and $24,090 is recorded as non-current in the accompanying
consolidated balance sheets.

The Company also has an aggregate $2,677 current
liability recorded at October 3, 2004 for amounts due to
various state funds related to workers compensation. At
September 28, 2003, the Company had an aggregate $5,302
current liability recorded for additional premiums due under
previous guaranteed cost policies in addition to amounts due to
various state funds.

F-14



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents the classification
of the Companys workers compensation liability and
accrued CIGA litigation costs:

|          |                                                                             |                               |   |               |        |  |   |        |        | 
|--------- | --------------------------------------------------------------------------- | ----------------------------- | - | ------------- | ------ |  | - | ------ | ------ | 
|          |                                                                             | October 3,                    |   | September 28,
|          |                                                                             | 2004                          |   | 2003         
|          |                                                                             |                               |   |              
|Current   |                                                                             |                               |   |               |        |  |   |       
|          | Liability for various state funds and previous
    guaranteed cost policies |                               | $ | 2,677         |        |  | $ | 5,302  |       
|          | Accrued workers compensation                                               |                               |   | 12,359        |        |  |   | 9,961  |       
|          |                                                                             |                               |   |               |        |  |   |       
|          |                                                                             | Accrued workers compensation |   | $             | 15,036 |  |   | $      | 15,263 | 
|          |                                                                             |                               |   |               |        |  |   |       
|Long-term |                                                                             |                               |   |               |        |  |   |       
|          | Other liabilities                                                           |                               | $ | 300           |        |  | $ |       |       
|          | Accrued CIGA litigation costs                                               |                               |   | 5,877         |        |  |   |       |       
|          | Accrued workers compensation                                               |                               |   | 24,090        |        |  |   | 20,681 |       
|          |                                                                             |                               |   |               |        |  |   |       
|          |                                                                             | Other liabilities             |   | $             | 30,267 |  |   | $      | 20,681 | 
|          |                                                                             |                               |   |               |        |  |   |       

The Company is contractually required to
collateralize its remaining obligation under each of these
workers compensation insurance contracts through the use
of irrevocable letters of credit, pledged cash and securities or
a combination thereof. The level and type of collateral required
for each policy year is determined by the insurance carrier at
the inception of the policy year and may be modified
periodically. As of October 3, 2004, the Company has
outstanding letters of credit of $34,661 and pledged cash and
securities totaling $21,925. The pledged cash and securities are
restricted and cannot be used for general corporate purposes
while the Companys remaining obligations under the
workers compensation program are outstanding. Accordingly,
the Company has classified these pledged cash and securities as
restricted in the accompanying consolidated balance sheets.

From July 22, 1997 through March 31,
2001, the Company had a fully insured workers compensation
program with Reliance National Insurance Company
(Reliance). The annual premium for this program was
based upon actual payroll costs multiplied by a fixed rate. Each
year, the Company prepaid the premium based upon estimated
payroll levels and an adjustment was subsequently made for
differences between the estimated and actual amounts. Subsequent
to March 31, 2001 (the end of Companys final policy
year with Reliance), Reliance became insolvent and was
subsequently liquidated. The Company is currently in litigation
with the California Insurance Guaranty Association regarding
financial responsibility for all remaining open claims under the
Reliance workers compensation program. The Company
recorded a $5,877 charge to operating income during the fourth
quarter of fiscal 2004 as a result of the October 2004 Court of
Appeals decision (see Note 8 for further discussion).
Additionally, the Company reclassified $203, $796 and $355 of
legal expenses incurred in fiscal 2004, 2003, and 2002,
respectively, related to the CIGA matter from selling and
administrative expenses to CIGA litigation costs.



|   |               
|-- | --------------
|4. | Line of credit

The Company executed a credit facility dated
February 4, 2004 with Bank of America, which replaced its
existing credit agreement with Bank of America and Union Bank of
California. The credit facility provides for aggregate
borrowings not to exceed $40,000, including any letters of
credit existing under the prior credit agreement. The
Companys obligation under the line of credit is
collateralized by certain assets of the Company. In addition,
the Company is required to maintain a $16,000 Bank of America
Certificate of Deposit to satisfy the collateral requirement,
which is classified as restricted cash and investments in the
accompanying consolidated balance sheets. The credit agreement
expires on June 1, 2005. The interest rate on the
outstanding borrowings, including any outstanding letters of
credit, is at the Companys discretion, either the Bank of
Americas prime rate plus 0.0% or 0.5% (depending on the
amount of outstanding borrowings) or LIBOR plus 0.75% or 1.5%
(depending on the amount of outstanding borrowings) and is paid
monthly. The Company is required to pay quarterly fees of 0.25%
per annum on the unused portion of the line of credit. Under the
new agreement, the Company is also required to

F-15



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

comply with certain restrictive covenants, the
most restrictive of which limits the Companys net loss for
each fiscal quarter and on a fiscal year-to-date basis. As of
October 3, 2004 the Company was in compliance with all
restrictive covenants with exception of the net loss limitation
covenant. Subsequent to year end the Company amended and
restated its credit facility with Bank of America dated
February 4, 2004. The Amended and Restated Credit Agreement
(Credit Agreement) with Bank of America is effective
December 1, 2004. Under the new Credit Agreement, the
Company is in compliance with all restrictive covenants as
prescribed in the Credit Agreement.

The new Credit Agreement provides for borrowings
up to $50,000 with a provision permitting the Company to
increase the aggregate amount of borrowings to $60,000. The
Company has granted a security interest to Bank of America in
all its existing and future assets. The Credit Agreement will
expire two years from the closing date on December 1, 2006.
The Credit Agreement bears interest equal to LIBOR plus 1.75% to
2.75% based upon the Companys earnings before interest,
taxes, depreciation and amortization (EBITDA) or
Bank of Americas prime rate plus 0.00% to 0.50% based on
EBITDA. The Company will also be required to pay monthly fees of
0.25% per annum on the unused portion of the line of credit and
monthly fees of 0.75% to 1.50% on outstanding letters of credit
based on a pricing matrix. The Credit Agreement requires the
Company to comply with a minimum EBITDA covenant which will not
go into effect unless the Companys total liquidity drops
below $15,000. Liquidity is defined by Bank of America as
unrestricted domestic cash plus excess borrowing availability.
Additionally, under the Credit Agreement, the Company is not
required to maintain a $16,000 Bank of America Certificate of
Deposit as collateral as required by its current credit facility.

The Company has no borrowings outstanding as of
each of the three fiscal years ended October 3, 2004. The
Company had outstanding letters of credit totaling $34,661,
$21,911 and $31,028 at October 3, 2004, September 28,
2003 and September 29, 2002, respectively, to collaterize
its remaining workers compensation deductible liability
discussed in Note 3.



|   |             
|-- | ------------
|5. | Income taxes

The Companys (benefit from) provision for
income taxes consists of the following:

|                                                |         |                           |      |               |   |               |       |       |   |   |     |     |  
|----------------------------------------------- | ------- | ------------------------- | ---- | ------------- | - | ------------- | ----- | ----- | - | - | --- | --- | -
|                                                |         |                          
|                                                |         | For the Fiscal Year Ended
|                                                |         |                          
|                                                |         | October 3,                |      | September 28, |   | September 29,
|                                                |         | 2004                      |      | 2003          |   | 2002         
|                                                |         |                           |      |               |   |              
|Current tax (benefit) expense:                  |         |                           |      |               |   |               |       |       |   |   |     |    
|                                                | Federal |                           | $    | (260          | ) |               | $     | (241  | ) |   | $   | (42 | )
|                                                | State   |                           |      | (261          | ) |               |       | 518   |   |   |     | 303 |  
|                                                | Foreign |                           |      | 198           |   |               |       | 40    |   |   |     |    |  
|                                                |         |                           |      |               |   |               |       |       |   |   |     |    
|Total current                                   |         |                           | (323 | )             |   |               | 317   |       |   |   | 261 |    
|Deferred tax (benefit) expense:                 |         |                           |      |               |   |               |       |       |   |   |     |    
|                                                | Federal |                           |      |              |   |               |       | 5,537 |   |   |     | 155 |  
|                                                | State   |                           |      |              |   |               |       | 792   |   |   |     | (39 | )
|                                                |         |                           |      |               |   |               |       |       |   |   |     |    
|Total deferred                                  |         |                           |     |               |   |               | 6,329 |       |   |   | 116 |    
|                                                |         |                           |      |               |   |               |       |       |   |   |     |    
|Total (benefit from) provision for income taxes |         | $                         | (323 | )             |   | $             | 6,646 |       |   | $ | 377 |    
|                                                |         |                           |      |               |   |               |       |       |   |   |     |    

Deferred tax assets and liabilities are
determined based on temporary differences between income and
expenses reported for financial reporting and tax reporting. The
Company is required to record a valuation allowance to reduce
its deferred tax assets to the amount that it believes is more
likely than not to be realized. In assessing the need for a
valuation allowance, the Company considers all positive and
negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning
strategies and recent financial performance. The Company had
been profitable through the first fiscal quarter of 2003,
however, continued market

F-16



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

softness and significant increases in
workers compensation costs resulted in significant losses
in fiscal 2003. The Company experienced losses throughout fiscal
2004.

As a result of the Companys recent
cumulative losses, management concluded that a full valuation
allowance of $22,581 and $16,879 against the deferred tax assets
was appropriate for fiscal 2004 and 2003, respectively. While
the Company hopes to be profitable in fiscal 2005 and beyond, in
view of the recent losses, there is no assurance that there will
be sufficient future taxable income to realize the benefit of
the deferred tax asset. If, after future assessments of the
realizability of the deferred tax assets, the Company determines
a lesser allowance is required, it would record a reduction to
income tax expense and the valuation allowance in the period of
such determination.

The composition of the deferred tax assets
(liabilities) is as follows:

|                                                             |                                       |            |         |               |  |   |         |        | 
|------------------------------------------------------------ | ------------------------------------- | ---------- | ------- | ------------- |  | - | ------- | ------ | 
|                                                             |                                       | October 3, |         | September 28,
|                                                             |                                       | 2004       |         | 2003         
|                                                             |                                       |            |         |              
|Deferred income tax assets:                                  |                                       |            |         |               |  |   |         |       
|                                                             | Deferred compensation                 |            | $       | 2,476         |  |   | $       | 2,015  | 
|                                                             | Accrued workers compensation         |            |         | 14,433        |  |   |         | 13,332 | 
|                                                             | Accrued CIGA litigation costs         |            |         | 2,414         |  |   |         |       | 
|                                                             | Bad debt expense                      |            |         | 1,178         |  |   |         | 1,031  | 
|                                                             | Job tax credits                       |            |         | 2,684         |  |   |         | 1,437  | 
|                                                             | State net operating loss carryforward |            |         | 187           |  |   |         |       | 
|                                                             | Other, net                            |            |         | 1,535         |  |   |         | 1,297  | 
|                                                             |                                       |            |         |               |  |   |         |       
|Total deferred income tax asset                              |                                       | $          | 24,907  |               |  | $ | 19,112  |       
|                                                             |                                       |            |         |               |  |   |         |       
|Prepaid expenses                                             |                                       | $          | (813    | )             |  | $ | (697    | )     
|Depreciation and amortization                                |                                       |            | (1,513  | )             |  |   | (1,536  | )     
|                                                             |                                       |            |         |               |  |   |         |       
|Total deferred income tax liability                          |                                       | $          | (2,326  | )             |  | $ | (2,233  | )     
|                                                             |                                       |            |         |               |  |   |         |       
|Net deferred income tax asset before valuation
    allowance |                                       | $          | 22,581  |               |  | $ | 16,879  |       
|Valuation allowance                                          |                                       |            | (22,581 | )             |  |   | (16,879 | )     
|                                                             |                                       |            |         |               |  |   |         |       
|Net deferred income tax asset                                |                                       | $          |        |               |  | $ |        |       
|                                                             |                                       |            |         |               |  |   |         |       

The provision for income taxes differs from the
amount of income tax determined by applying the applicable U.S.
statutory income tax rates to income before taxes as a result of
the following differences:

|                                       |  |                           |       |               |  |               |       |    |  |  |       |   
|-------------------------------------- |  | ------------------------- | ----- | ------------- |  | ------------- | ----- | -- |  |  | ----- | --
|                                       |  |                          
|                                       |  | For the Fiscal Year Ended
|                                       |  |                          
|                                       |  | October 3,                |       | September 28, |  | September 29,
|                                       |  | 2004                      |       | 2003          |  | 2002         
|                                       |  |                           |       |               |  |              
|Federal tax computed at statutory rate |  |                           | (35.0 | )%            |  |               | (35.0 | )% |  |  | 35.0  | % 
|State taxes, net of federal benefit    |  |                           | (4.6  | )%            |  |               | (4.4  | )% |  |  | 5.9   | % 
|Federal tax credits                    |  |                           | (6.7  | )%            |  |               | (6.7  | )% |  |  | (29.1 | )%
|Meals and entertainment                |  |                           | 0.6   | %             |  |               | 0.6   | %  |  |  | 2.9   | % 
|Change in valuation allowance          |  |                           | 43.5  | %             |  |               | 75.2  | %  |  |  | 0.0   | % 
|Other                                  |  |                           | (0.3  | )%            |  |               | (0.3  | )% |  |  | 0.3   | % 
|                                       |  |                           |       |               |  |               |       |    |  |  |       |   
|Total provision for income taxes       |  |                           | (2.5  | )%            |  |               | 29.4  | %  |  |  | 15.0  | % 
|                                       |  |                           |       |               |  |               |       |    |  |  |       |   

F-17



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                  
|-- | ---------------------------------
|6. | Purchase of franchised operations

From time to time, the Company may selectively
purchase traditional and licensed franchise operations for
strategic reasons, including facilitating its expansion plans of
increased market presence in identified geographic regions. The
consolidated financial statements include the results of
operations of these offices commencing as of their respective
acquisition dates. Results of operations for the acquired
licensed operations are recorded in accordance with the
Companys related revenue recognition policy until the
acquisition date. Prior to the acquisitions, the revenues and
related costs of revenues for licensed franchises are recognized
as licensed franchise revenues and cost of licensed franchise
revenues in the consolidated statements of operations. For
traditional franchise operations prior to acquisition, the
revenues are recorded as franchise royalties. Subsequent to the
acquisitions, the revenues and related costs of revenues are
recognized as direct revenues and cost of direct revenues in the
consolidated statements of operations. These acquisitions were
accounted for under the purchase method of accounting.

On January 12, 2004 (the closing
date), the Company completed the acquisition of one of its
traditional franchise operations consisting of two offices in
Texas for $1,800. At the closing date, the Company paid $1,443
in cash ($57 in net amounts owed to the Company by the
franchisee were deducted from the cash payment). The remaining
$300 will be paid in cash two years from the closing date. Of
the total purchase price, $702 was allocated to goodwill.
Additionally, $1,100 was allocated to amortizable intangible
assets consisting of franchise rights ($610), client
relationships ($370) and non-competition agreements ($120) and
is being amortized over the estimated useful lives of
6.5 years, 3.5 years and 5.0 years, respectively.
The Asset Purchase Agreement includes provisions for contingent
payments for the three years subsequent to the closing date and
is based upon performance targets related to increases in
earnings before interest, taxes, depreciation and amortization
(EBITDA) over the prior year. Contingent payments
will be accounted for as an increase to the purchase price and
recorded as goodwill.

During March and April of fiscal 2003, the
Company acquired a large licensed franchise operation in
Tennessee consisting of several offices and purchased assets of
a smaller licensed franchise in Texas consisting of one office,
respectively. The combined purchase price was $3,763 ($3,720 for
the Tennessee franchise and $43 for the Texas franchise). The
Company recorded goodwill of $2,833 ($2,799 for the Tennessee
franchise and $34 for the Texas franchise). In connection with
the Tennessee acquisition, $1,840 of the purchase price was
allocated to amortizable intangible assets consisting of
franchise rights ($1,480), client relationships ($100) and
non-competition agreement ($260) and is being amortized over the
estimated useful lives of 6.2 years, 3.5 years, and
5.0 years, respectively. The Stock Purchase Agreement for
the Tennessee acquisition includes a provision for contingent
payments for the two years subsequent to December 29, 2002.
The contingent payments are based upon performance targets
related to increases in the Tennessee offices EBITDA over
the prior year. The Company was not required to make a payment
for the twelve months ended December 28, 2003. If a
contingent payment is required at December 31, 2004, it
will be accounted for as an increase to the purchase price and
recorded as goodwill. Additionally, the Company is required to
pay monthly royalties to the prior franchisee based upon
revenues of a certain client of the Tennessee office for as long
as Remedy services that client. The Company paid $836 and $466
in royalty payments which are included in selling and
administrative expenses in the accompanying consolidated
statements of operations for fiscal 2004 and 2003, respectively.



|   |                
|-- | ---------------
|7. | Office closures

The Companys strategic plan focuses on
increasing the percentage of business from higher margin service
lines, increasing sales through targeted sales force and
distribution channel expansion and enhancing operating margins
through continuous productivity improvements. As a result, and
given overall industry and market conditions, the Company is
continually reassessing its current operating structure.
Consequently, during the third quarter of fiscal 2003, the
Company implemented plans to close or consolidate certain
Company-owned offices, specifically those that were
under-performing or primarily dedicated to recruiting
activities. During the third and fourth quarters of fiscal 2003,
the Company recorded a $992 charge for costs in connection with
these plans,

F-18



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

including $689 related to contractual lease
obligations and $303 for severance benefits, fixed asset
disposals and other costs associated with these office closures.
The $992 charge is included in selling and administrative
expenses in the Companys consolidated statements of
operations for the fiscal year ended September 28, 2003.
During fiscal 2004 the Company closed several direct offices and
recorded $45 related to contracted lease obligations which is
included in selling and administrative expenses in the
Companys consolidated statements of operations for the
fiscal year ended October 3, 2004. At October 3, 2004
and September 28, 2003, the remaining liability resulting
from the closed office charges was $130 and $464, respectively,
and relates to estimated losses on subleases and the remaining
net lease payments on closed locations that will be paid out
through fiscal 2007.



|   |                                           
|-- | ------------------------------------------
|8. | Commitments and contingent
    liabilities

The Company leases its corporate facility,
Company-owned offices and certain equipment under operating
leases. The leases typically require the Company to pay taxes,
insurance and certain other operating expenses applicable to the
leased property. Total rent expense was approximately $5,199,
$6,362 and $5,512 for the years ended October 3, 2004,
September 28, 2003 and September 29, 2002,
respectively. Total sublease income was $175, $182 and $80 for
fiscal years 2004, 2003 and 2002, respectively.

Future minimum lease commitments under all
noncancellable operating leases as of October 3, 2004 are
as follows:

|                     |       |   |        |        | 
|-------------------- | ----- | - | ------ | ------ | 
|Fiscal Year          |       |  
|                     |       |  
|2005                 |       | $ | 4,328  |       
|2006                 |       |   | 3,223  |       
|2007                 |       |   | 2,555  |       
|2008                 |       |   | 1,874  |       
|2009                 |       |   | 1,589  |       
|Thereafter           |       |   | 1,267  |       
|                     |       |   |        |       
|                     |       |   | 14,836 |       
|Less sublease income |       |   | 49     |       
|                     |       |   |        |       
|                     | Total |   | $      | 14,787 | 
|                     |       |   |        |       



| |           
| | ----------
| | Litigation



| |             
| | ------------
| | Class Action

On October 16, 2001, GLF Holding Company,
Inc. and Fredrick S. Pallas filed a Complaint in the Superior
Court of the State of California, County of Los Angeles, against
RemedyTemp, Inc., Remedy Intelligent Staffing, Inc., Remedy
Temporary Services, Inc., Karin Somogyi, Paul W. Mikos, and
Greg Palmer. The Complaint purported to be a class action
brought by the individual plaintiffs on behalf of all of the
Companys franchisees. The Complaint alleged claims for
fraud and deceit, negligent misrepresentation, negligence,
breach of contract, breach of warranty, conversion, an
accounting, unfair and deceptive practices, restitution and
equitable relief. On or about December 3, 2002, plaintiffs
filed an Amended Complaint alleging these same causes of action,
but adding additional facts to the Complaint particularly with
respect to the Companys workers compensation program
and adding claims regarding unfair competition on behalf of the
general public in addition to their existing class action claim.
The plaintiffs claimed that Remedy wrongfully induced its
franchisees into signing franchise agreements and took other
action that caused the franchisees damage.

The Company believed that plaintiffs claims
fell within the arbitration clause contained in the franchise
agreements signed by plaintiffs. As a result, immediately after
plaintiffs filed suit, the Company filed arbitration

F-19



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

demands against plaintiffs with the American
Arbitration Association. On or about April 1, 2003, the
Company amended its arbitration demands to add claims against
plaintiffs relating to workers compensation.

The Company denied and continues to deny the
allegations in the Complaint. There has been no finding of
wrongdoing by the Company. Nevertheless, to avoid costly,
disruptive, and time-consuming litigation, and without admitting
any wrongdoing or liability, the Company negotiated and agreed
to a settlement with plaintiffs and stipulated to the
certification of a settlement class comprised of all individuals
or entities that entered into a Franchise Agreement (including
renewals or amendments thereof) with RemedyTemp, Inc. and/ or
Remedy Intelligent Staffing, Inc. anytime prior to
March 29, 2004.

On April 6, 2004, the Court preliminarily
approved the parties settlement agreement and
conditionally certified the Settlement Class. All discovery and
other proceedings in this action were stayed, except as may be
necessary to implement the Settlement Agreement. On
September 9, 2004, the Court issued a final approval of the
Settlement Agreement. The exposure is deemed immaterial to the
Companys consolidated financial statements and is included
in the consolidated statements of operations for the fiscal year
ended October 3, 2004.



| |     
| | ----
| | CIGA

In early 2002, as a result of the liquidation of
Remedys former workers compensation insurance
carrier, Reliance National Insurance Company
(Reliance), the California Insurance Guarantee
Association (CIGA) began making efforts to join some
of the Companys clients and their workers
compensation insurance carriers (collectively,
Clients), in pending workers compensation
claims filed by Remedy employees. At the time of these injuries,
from July 22, 1997 through March 31, 2001, Remedy was
covered by workers compensation policies issued by
Reliance. The Company believes that, under California law, CIGA
is responsible for Reliances outstanding liabilities. On
April 5, 2002, the California Workers Compensation
Appeals Board (WCAB), at Remedys request,
consolidated the various workers compensation claims in
which CIGA sought to join Remedys Clients, and agreed to
stay proceedings on those claims pending resolution of the issue
of CIGAs obligations to satisfy Reliances
obligations to Remedys employees. The WCAB selected a
single test case from the consolidated pending cases in which to
decide whether CIGA is responsible for the claims of
Remedys employees, or can shift such responsibility to the
Clients. The trial occurred on September 20, 2002. The WCAB
Administrative Law Judge ruled in favor of CIGA, thus allowing
the pending workers compensation matters to proceed
against the Clients. Remedy then filed a motion for
reconsideration of the Administrative Law Judges decision
by the entire WCAB. On March 28, 2003, the WCAB, en banc,
affirmed the ruling of the Administrative Law Judge. Thereafter,
in May 2003, the Company filed a petition for writ of review of
the WCABs decision in the California Court of Appeal. The
WCAB continued the stay in effect since
April 5, 2002, thus preventing CIGA from proceeding until
the writ proceeding was concluded. In January 2004, the Court of
Appeal granted the Companys petition and undertook to
review the WCABs decision. The Court heard oral argument
in the matter on July 9, 2004.

On October 20, 2004, the Court of Appeal
affirmed the WCABs decision. The Company intends to seek
further review of that decision by way of rehearing by the Court
of Appeal and/ or review by the California Supreme Court. On
November 18, 2004, the Court of Appeal granted the
Companys petition for rehearing and requested additional
briefing on this matter. Both avenues of further review are
discretionary with the court such that the Company does not have
an absolute right to such review.

Despite the Companys determination to
further pursue the appellate review process, there can be no
assurance that such efforts will be successful in overturning
the Court of Appeals decision. In the event of a final
unfavorable outcome, Remedy may be obligated to reimburse
certain clients and believes that it would consider
reimbursement of other clients for actual losses incurred as a
result of an unfavorable ruling in this matter. If CIGA is
permitted to join Remedys clients, thus triggering the
clients insurance carriers obligation to respond to
the claims of Remedys employees, the Company believes that
the direct financial exposure to Remedy becomes a function of
the ultimate losses on the claims and the impact of such claims,
if any, on the clients insurance coverage, potentially
including but not limited to the clients responsibility
for any deductibles or retentions under their own workers
compensation

F-20



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

insurance. The Company has received data from the
Third Party Administrator (TPA) handling the claims for
CIGA, for the claims in question, which totals
$31.4 million at October 3, 2004 revised from
$40.0 million at June 27, 2004 due to additional
information provided to the Company by the TPA. The losses
incurred to date represent amounts paid to date by the trustee
and the remaining claim reserves on open files.

Based on the Court of Appeals decision, the
Company has recorded a $5.9 million charge to operating
income. This amount represents the Companys current
estimate based on review of known information and was
established for costs associated with the indemnification of
certain clients for losses they may suffer as a result of the
ruling. The $5.9 million charge was based on the
Companys review of customer contracts, review of the Loss
Run received from the TPA handling the claims, actuarial
development of the reported claim losses, estimates of customer
insurance coverage, and other applicable information. The amount
of the charge is therefore subject to change as more information
becomes available to the Company. Additionally, the Company
reclassified $0.2 million, $0.8 million and
$0.4 million of legal expenses incurred in fiscal 2004,
2003, and 2002, respectively, related to the CIGA matter from
selling and administrative expense to CIGA litigation costs. The
Company may also choose to reimburse clients that did not enter
into contracts with the Company or whose contracts may not have
included indemnification language. These costs will be treated
as period costs and will be charged to the consolidated
statements of operations in the period management decides to
make any goodwill payments to clients.
Managements current estimate of future goodwill payments
is a range of $2.0 million to $3.0 million. This
estimate is subject to change.



| |                 
| | ----------------
| | Other Litigation

From time to time, the Company becomes a party to
other litigation incidental to its business and operations. The
Company maintains insurance coverage that management believes is
reasonable and prudent for the business risks that the Company
faces. Based on current available information, management does
not believe the Company is party to any other legal proceedings
that are likely to have a material adverse effect on its
business, financial condition, cash flows or results of
operations.



| |                  
| | -----------------
| | Other Contingency

On November 18, 2003, the Company was
notified by the State of California Employment Development
Department (the EDD) that the Company allegedly
underpaid its state unemployment insurance by approximately
$2,000 for the period January 1, 2003 through
September 30, 2003. Based on preliminary evaluations and on
advice of its outside counsel, the Company believes that its
methodology in calculating its state unemployment insurance is
in compliance with all applicable laws and regulations. The
Company is currently working with outside counsel to resolve
this issue, and has not accrued for this amount as of
October 3, 2004.



|   |                       
|-- | ----------------------
|9. | Employee benefit plans



| |            
| | -----------
| | 401(k) Plan

The Company has an employee savings plan which
permits participants to make contributions by salary reduction
pursuant to section 401(k) of the Internal Revenue Code.
The plan is open to qualified full-time and temporary employees
who earn less than $90 per year. The annual amount of employer
contributions to the plan is determined at the discretion of the
Board of Directors, subject to certain limitations. Eligible
participants may make voluntary contributions to the plan and
become fully vested in the Companys contributions over a
five-year period. The Company made $40 and $38 in contributions
during fiscal 2004 and 2003, respectively. The Company made no
contributions for fiscal year 2002.

F-21



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | Deferred Compensation Plan

The Company maintains a nonqualified deferred
compensation plan (the Deferred Compensation Plan)
for certain executives of the Company. Under the Deferred
Compensation Plan, eligible participants may defer receipt of up
to 100% of their base compensation and bonuses on a pretax basis
until specified future dates, upon retirement or death. The
deferred amounts are placed in a trust and invested by the
Company. Participants recommend investment vehicles for the
funds, subject to approval by the trustees. The balance due each
participant increases or decreases as a result of the related
investment gains and losses. The trust and the investments
therein are assets of the Company and the participants of the
Deferred Compensation Plan are general creditors of the Company
with respect to benefits due and are recorded in the
accompanying consolidated balance sheets. For each of the three
fiscal years 2004, 2003 and 2002, the amounts charged to
compensation expense within selling and administrative expenses
offset by gains or losses on trading securities within other
income or expense relating to the Deferred Compensation Plan
were $739, $880 and $481, respectively. Included in accrued
payroll, benefits and related costs in the accompanying
consolidated balance sheets at October 3, 2004 and
September 28, 2003 was $3,277 and $2,730, respectively,
relating to amounts owed by the Company to the plan participants.



|    |                                                  
|--- | -------------------------------------------------
|10. | Accumulated other comprehensive
    (loss) income



| |                   
| | ------------------
| | Comprehensive Loss

The components of comprehensive loss, net of
taxes are as follows:

|                                   |                                                     |                           |         |               |   |   |         |     | 
|---------------------------------- | --------------------------------------------------- | ------------------------- | ------- | ------------- | - | - | ------- | --- | 
|                                   |                                                     |                          
|                                   |                                                     | For the Fiscal Year Ended
|                                   |                                                     |                          
|                                   |                                                     | October 3,                |         | September 28,
|                                   |                                                     | 2004                      |         | 2003         
|                                   |                                                     |                           |         |              
|Net loss                           |                                                     | $                         | (12,792 | )             |   | $ | (29,243 | )  
|Other comprehensive (loss) income: |                                                     |                           |         |               |   |   |         |    
|                                   | Change in unrealized (loss) gain on
    investments |                           |         | (228          | ) |   |         | 152 | 
|                                   | Translation adjustments                             |                           |         | 26            |   |   |         | 21  | 
|                                   |                                                     |                           |         |               |   |   |         |    
|Total comprehensive loss           |                                                     | $                         | (12,994 | )             |   | $ | (29,070 | )  
|                                   |                                                     |                           |         |               |   |   |         |    

During fiscal 2004 and 2003 the Company did not
record an income tax benefit or expense to the components of
other comprehensive income (loss) due to the Companys
full valuation allowance on the deferred tax assets (see
Note 5).

Accumulated
Other Comprehensive (Loss) Income

The components of accumulated other comprehensive
(loss) income are as follows:

|                                                        |  |            |      |               |  |   |     | 
|------------------------------------------------------- |  | ---------- | ---- | ------------- |  | - | --- | 
|                                                        |  | October 3, |      | September 28,
|                                                        |  | 2004       |      | 2003         
|                                                        |  |            |      |              
|Accumulated unrealized (loss) gain on
    investments   |  | $          | (115 | )             |  | $ | 113 | 
|Accumulated translation adjustments                     |  |            | 47   |               |  |   | 21  | 
|                                                        |  |            |      |               |  |   |     | 
|Total accumulated other comprehensive
    (loss) income |  | $          | (68  | )             |  | $ | 134 | 
|                                                        |  |            |      |               |  |   |     | 



|    |                     
|--- | --------------------
|11. | Shareholders equity



| |                                   
| | ----------------------------------
| | Earnings per share
    calculation

The Company is required to disclose basic and
diluted earnings per share (EPS) in accordance with
SFAS No. 128 Earnings Per Share. Basic EPS
is calculated using income divided by the weighted average
number of common shares outstanding during the period. Diluted
EPS is calculated similar to basic EPS except

F-22



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

that the weighted average number of common shares
is increased to include the number of additional common shares
that would have been outstanding if the potential dilutive
common shares, such as options, had been issued and restricted
shares had vested.

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

|                                            |                                                                                     |                           |   |               |   |               |   |         |   |  |   |       | 
|------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------- | - | ------------- | - | ------------- | - | ------- | - |  | - | ----- | 
|                                            |                                                                                     |                          
|                                            |                                                                                     | For the Fiscal Year Ended
|                                            |                                                                                     |                          
|                                            |                                                                                     | October 3,                |   | September 28, |   | September 29,
|                                            |                                                                                     | 2004                      |   | 2003          |   | 2002         
|                                            |                                                                                     |                           |   |               |   |              
|Numerator:                                  |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|                                            | (Loss) income before cumulative effect of
    adoption of a new accounting standard |                           | $ | (12,792       | ) |               | $ | (26,822 | ) |  | $ | 2,137 | 
|                                            | Cumulative effect of adoption of a new accounting
    standard, net of income taxes |                           |   |              |   |               |   | 2,421   |   |  |   |      | 
|                                            |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|                                            | Net (loss) income                                                                   |                           | $ | (12,792       | ) |               | $ | (29,243 | ) |  | $ | 2,137 | 
|                                            |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|Denominator:                                |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|                                            | Weighted-average number of shares, basic                                            |                           |   | 9,022         |   |               |   | 9,010   |   |  |   | 8,973 | 
|                                            | Effect of dilutive securities: Stock options                                        |                           |   |              |   |               |   |        |   |  |   | 103   | 
|                                            |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|                                            | Weighted-average number of shares 
    assuming dilution                           |                           |   | 9,022         |   |               |   | 9,010   |   |  |   | 9,076 | 
|                                            |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|Earnings per share  Basic and
    Diluted: |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|                                            | (Loss) income before cumulative effect of
    adoption of a new accounting standard |                           | $ | (1.42         | ) |               | $ | (2.98   | ) |  | $ | 0.24  | 
|                                            | Cumulative effect of adoption of a new accounting
    standard, net of income taxes |                           |   |              |   |               |   | (0.27   | ) |  |   |      | 
|                                            |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      
|                                            | Net (loss) income                                                                   |                           | $ | (1.42         | ) |               | $ | (3.25   | ) |  | $ | 0.24  | 
|                                            |                                                                                     |                           |   |               |   |               |   |         |   |  |   |      

Potential common shares consisting of stock
options and restricted stock of 1,295, 565 and 381 for fiscal
years 2004, 2003 and 2002, respectively, have been excluded from
the calculation of diluted shares because the effect of their
inclusion would be antidilutive.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In connection with the Companys initial
public offering in July 1996 (the Offering), the
Company implemented its 1996 Employee Stock Purchase Plan (the
Purchase Plan). Under the terms of the Purchase
Plan, as amended, eligible employees may purchase shares of the
Companys Common Stock based on payroll deductions. A total
of 250 shares were reserved for issuance under the Purchase
Plan. On August 16, 1999, the Purchase Plan was amended to
enable employees of the Companys subsidiaries to
participate in the Purchase Plan. The purchase price for shares
granted is the lower of 85% of the market price of the stock on
the first or last day of each six month purchase period. The
Purchase Plan commenced on October 1, 1996. During fiscal
2004, 19 shares were purchased at prices between $11.22 and
$8.87 per share, during fiscal 2003, 11 shares were purchased at
prices between $10.23 and $10.65 per share, and during fiscal
2002, 6 shares were purchased at $9.55 per share. As of
October 3, 2004, 123 shares of Common Stock were
available for issuance under the Purchase Plan.



| |                                               
| | ----------------------------------------------
| | Stock Ownership Plan for Outside
    Directors

Directors who are also employees or officers of
the Company receive no extra compensation for their service on
the Board. Pursuant to the Non-Employee Director Plan, effective
March 16, 1998, and amended by the Board on October 1,
2003, independent directors receive an annual retainer in the
form of cash or shares of Common Stock

F-23



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##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

valued at $25 on the date of their election or
re-election to the Board. For those directors electing to
receive their retainer in stock, the Shares that are issued
under the Non-Employee Director Plan are held in trust, on a
deferred basis (subject to an exception for financial hardship)
until a director is no longer a director of the Company. Such
shares are earned ratably over the year and are issued in trust
no later than ten business days after the next annual meeting of
shareholders following election or re-election, provided that
the director has remained a director during such time. The
maximum aggregate number of shares that have been authorized for
issuance under the Non-Employee Director Plan is 75 shares,
subject to adjustment upon recapitalization, stock dividends,
stock splits and similar changes in the Companys
capitalization as provided in the plan. As of October 3,
2004, 29 shares of Common Stock were available for issuance
under the Non-Employee Director Plan. In February 2004, 2003 and
2002, a total of 13, 9 and 9 shares, respectively, were
issued to the trust for services rendered. As the trust belongs
to the Company, all shares issued to the trust are treated as
treasury stock for financial reporting purposes. All shares
issued and earned are included in the diluted shares outstanding
calculation.



| |                     
| | --------------------
| | Stock Incentive Plan

The Companys 1996 Stock Incentive Plan, as
amended, (the Incentive Plan) provides for the grant
of stock based awards, including incentive stock options,
non-qualified stock options, restricted stock and stock
appreciation rights, among others, to key employees and members
of the Companys Board of Directors. A total of 1,800
shares have been reserved for issuance under the Incentive Plan,
and as of October 3, 2004, approximately 355 shares were
available for future grants. Options granted to employees
typically may be exercised within ten years from the grant date
and are exercisable in installments determined by the
Leadership, Development and Compensation Committee of the Board
of Directors. Options granted to non-employee, non-officer
directors prior to the Offering were immediately exercisable.
Options granted to non-employee, non-officer directors
subsequent to the Offering are typically 50% exercisable
immediately and 50% exercisable upon the date of the next annual
shareholders meeting. Grants for 15 shares at prices between
$8.26 and $13.28 per share were made during fiscal 2004, grants
for 158 shares at prices between $10.23 and $12.25 per share
were made during fiscal 2003, and grants for 171 shares at
prices between $10.25 and $18.35 per share were made during
fiscal 2002.

During fiscal year 2003 and 2002, the
Compensation Committee of the Board of Directors authorized and
issued 320 and 425 shares of restricted Class A Common
Stock, respectively, to certain officers of the Company (the
Restricted Stock) under the Incentive Plan. During
fiscal year 2004, no shares of restricted Class A Common
Stock were granted. These shares have no purchase price and
cliff vest after five years. However, the Restricted Stock is
subject to accelerated vesting after three years if certain
performance goals are achieved. All unvested Restricted Stock
shall be forfeited upon voluntary termination or termination for
cause. Upon involuntary termination for other than cause, 20%
vests one year from the grant date with the remaining unvested
shares vesting at 1.66% each month thereafter. In connection
with the Restricted Stock granted in fiscal 2002, the executives
were required to forfeit all outstanding stock options at that
time. As a result, a total of 592 stock options were forfeited
and cancelled in connection with these grants. Based upon the
fair market value of its Class A Common Stock on the
respective grant dates, the Company recorded unearned
compensation totaling $3,477 and $5,904, as a component of
shareholders equity, in connection with the Restricted
Stock grants during fiscal 2003 and 2002. The unearned
compensation is being amortized and charged to operations over
the vesting period. During fiscal 2004, 2003 and 2002, 105, 63
and 25 shares of the Restricted Stock were forfeited,
respectively.

F-24



---



##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the activity
relating to all stock and option plans, exclusive of the
Restricted Stock grants previously discussed:

|                                       |  |                        |         |                |  |                 |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 
|-------------------------------------- |  | ---------------------- | ------- | -------------- |  | --------------- | ----- | --------- |  | ------ | ----- | --------- |  | - | ----- |  |  |  | ------ | - |  | - | ----- | 
|                                       |  |                        |         |                |  |                 |       |          
|                                       |  |                        |         | Stock Purchase |  | Options Outside
|                                       |  | Incentive Plan Options |         | Plan           |  | Incentive Plan 
|                                       |  |                        |         |                |  |                
|                                       |  |                        |         | Weighted-      |  |                 |       | Weighted- |  |        |       | Weighted-
|                                       |  |                        |         | Average        |  |                 |       | Average   |  |        |       | Average  
|                                       |  |                        |         | Exercise       |  |                 |       | Exercise  |  |        |       | Exercise 
|                                       |  | Shares                 |         | Price          |  | Shares          |       | Price     |  | Shares |       | Price    
|                                       |  |                        |         |                |  |                 |       |           |  |        |       |          
|Options outstanding September 30, 2001 |  |                        | 1,124.1 |                |  | $               | 15.42 |           |  |        |      |           |  | $ |      |  |  |  | 125.0  |   |  | $ | 20.72 | 
|Options granted                        |  |                        | 163.2   |                |  | $               | 14.54 |           |  |        | 11.0  |           |  | $ | 10.06 |  |  |  |       |   |  | $ |      | 
|Options cancelled                      |  |                        | (591.0  | )              |  | $               | 14.74 |           |  |        |      |           |  | $ |      |  |  |  | (125.0 | ) |  | $ | 20.72 | 
|Options exercised                      |  |                        | (32.7   | )              |  | $               | 12.90 |           |  |        | (6.0  | )         |  | $ | 9.56  |  |  |  |       |   |  | $ |      | 
|                                       |  |                        |         |                |  |                 |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 
|Options outstanding September 29, 2002 |  |                        | 663.6   |                |  | $               | 15.95 |           |  |        | 5.0   |           |  | $ | 10.65 |  |  |  |       |   |  | $ |      | 
|Options granted                        |  |                        | 158.3   |                |  | $               | 11.91 |           |  |        | 11.3  |           |  | $ | 10.20 |  |  |  |       |   |  | $ |      | 
|Options cancelled                      |  |                        | (120.2  | )              |  | $               | 15.75 |           |  |        |      |           |  | $ |      |  |  |  |       |   |  | $ |      | 
|Options exercised                      |  |                        |        |                |  | $               |      |           |  |        | (10.6 | )         |  | $ | 10.42 |  |  |  |       |   |  | $ |      | 
|                                       |  |                        |         |                |  |                 |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 
|Options outstanding September 28, 2003 |  |                        | 701.7   |                |  | $               | 15.07 |           |  |        | 5.7   |           |  | $ | 10.17 |  |  |  |       |   |  | $ |      | 
|Options granted                        |  |                        | 15.0    |                |  | $               | 10.46 |           |  |        | 21.2  |           |  | $ | 9.42  |  |  |  |       |   |  | $ |      | 
|Options cancelled                      |  |                        | (45.6   | )              |  | $               | 13.67 |           |  |        |      |           |  | $ |      |  |  |  |       |   |  | $ |      | 
|Options exercised                      |  |                        | (0.7    | )              |  | $               | 11.88 |           |  |        | (18.7 | )         |  | $ | 9.88  |  |  |  |       |   |  | $ |      | 
|                                       |  |                        |         |                |  |                 |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 
|Options outstanding October 3, 2004    |  |                        | 670.4   |                |  | $               | 15.07 |           |  |        | 8.2   |           |  | $ | 8.87  |  |  |  |       |   |  | $ |      | 
|                                       |  |                        |         |                |  |                 |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 

The number of exercisable options outstanding for
fiscal 2004, 2003 and 2002 under the plans were 531.5, 485.5 and
520.1 shares, respectively, at weighted-average prices of
$15.80, $16.21 and $16.53 per share, respectively.

The fair value of each option grant has been
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for the grants in fiscal 2004, 2003 and 2002,
respectively: dividend yield of 0.0%, 0.0% and 0.0%; risk free
interest rate of 2.43%, 3.12% and 3.98%; expected volatility of
48.9%, 49.3% and 48.5% and expected lives of 2.8, 5.6 and
4.7 years. The weighted-average per share estimated fair
value at the date of grant for options granted during fiscal
2004, 2003 and 2002 was $4.15, $5.83 and $6.51 per share,
respectively.

The following table summarizes information about
stock options outstanding at October 3, 2004:

|                    |  |                     |         |                 |  |         |     |             |  |         |       |  |  |  |       |  |  |   |       | 
|------------------- |  | ------------------- | ------- | --------------- |  | ------- | --- | ----------- |  | ------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                    |  |                    
|Options Outstanding |  | 0ptions Exercisable
|                    |  |                    
|                    |  | Weighted-           |         |                 |  |        
|                    |  | Average             |         | Weighted-       |  |         |     | Weighted-  
|                    |  | Shares              |         | Remaining       |  | Average |     | Shares      |  | Average
|Exercise Price      |  | Outstanding         |         | Life (in years) |  | Price   |     | Exercisable |  | Price  
|                    |  |                     |         |                 |  |         |     |             |  |        
|$ 8.00  $10.       |  |                     | 00 15.6 |                 |  |         | 5.0 |             |  | $       | 8.58  |  |  |  |      |  |  | $ |      | 
|$10.01  $13.00     |  |                     | 259.9   |                 |  |         | 6.1 |             |  | $       | 12.16 |  |  |  | 160.3 |  |  | $ | 12.39 | 
|$13.01  $16.00     |  |                     | 239.8   |                 |  |         | 5.9 |             |  | $       | 14.72 |  |  |  | 213.9 |  |  | $ | 14.82 | 
|$16.01  $20.00     |  |                     | 75.0    |                 |  |         | 4.0 |             |  | $       | 17.48 |  |  |  | 69.0  |  |  | $ | 17.41 | 
|$20.01  $25.00     |  |                     | 78.3    |                 |  |         | 3.7 |             |  | $       | 22.70 |  |  |  | 78.3  |  |  | $ | 22.70 | 
|$25.01  $30.00     |  |                     | 10.0    |                 |  |         | 3.4 |             |  | $       | 26.19 |  |  |  | 10.0  |  |  | $ | 26.19 | 

F-25



---



##### Table of Contents



REMEDYTEMP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                 
|--- | ------------------------------------------------
|13. | Unaudited consolidated quarterly
    information

|                                                                                |  |                            |         |           |  |          |         |            |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------- | --------- |  | -------- | ------- | ---------- |  | - | ------- | - |  | - | ------- | -
|                                                                                |  |                           
|                                                                                |  | For the Three Months Ended
|                                                                                |  |                           
|                                                                                |  | December 28,               |         | March 28, |  | June 27, |         | October 3,
|                                                                                |  | 2003                       |         | 2004      |  | 2004     |         | 2004      
|                                                                                |  |                            |         |           |  |          |         |           
|Total revenues                                                                  |  | $                          | 126,011 |           |  | $        | 115,385 |            |  | $ | 129,250 |   |  | $ | 149,282 |  
|Total cost of direct and licensed revenues                                      |  | $                          | 105,521 |           |  | $        | 96,113  |            |  | $ | 105,472 |   |  | $ | 120,276 |  
|Licensees share of gross profit                                                |  | $                          | 5,817   |           |  | $        | 5,327   |            |  | $ | 5,900   |   |  | $ | 6,774   |  
|Selling and administrative, CIGA litigation costs
    and depreciation expenses |  | $                          | 18,190  |           |  | $        | 18,148  |            |  | $ | 19,368  |   |  | $ | 27,469  |  
|Net (loss) income                                                               |  | $                          | (3,316  | )         |  | $        | (4,025  | )          |  | $ | (1,308  | ) |  | $ | (4,143  | )
|Net (loss) income per share 
    basic and diluted                             |  | $                          | (0.37   | )         |  | $        | (0.45   | )          |  | $ | (0.14   | ) |  | $ | (0.46   | )

|                                                                                                                          |  |                            |         |           |  |          |         |               |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | --------- |  | -------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                          |  |                           
|                                                                                                                          |  | For the Three Months Ended
|                                                                                                                          |  |                           
|                                                                                                                          |  | December 29,               |         | March 30, |  | June 29, |         | September 28,
|                                                                                                                          |  | 2002                       |         | 2003      |  | 2003     |         | 2003         
|                                                                                                                          |  |                            |         |           |  |          |         |              
|Total revenues                                                                                                            |  | $                          | 120,794 |           |  | $        | 115,835 |               |  | $ | 118,838 |   |  | $ | 126,498 |  
|Total cost of direct and licensed revenues                                                                                |  | $                          | 97,668  |           |  | $        | 98,382  |               |  | $ | 97,401  |   |  | $ | 111,754 |  
|Licensees share of gross profit                                                                                          |  | $                          | 6,721   |           |  | $        | 5,640   |               |  | $ | 6,002   |   |  | $ | 6,068   |  
|Selling and administrative, CIGA litigation costs
    and depreciation expenses                                           |  | $                          | 16,354  |           |  | $        | 17,668  |               |  | $ | 17,874  |   |  | $ | 20,270  |  
|Cumulative effect of adoption of a new accounting
    standard, net of income tax                                         |  | $                          | 2,421   |           |  | $        |        |               |  | $ |        |   |  | $ |        |  
|Net (loss)                                                                                                                |  | $                          | (1,971  | )         |  | $        | (2,812  | )             |  | $ | (435    | ) |  | $ | (24,025 | )
|Net income (loss) per share before
    cumulative effect of adoption of a new accounting
    standard  basic and diluted |  | $                          | 0.05    |           |  | $        | (0.31   | )             |  | $ | (0.05   | ) |  | $ | (2.67   | )
|Cumulative effect per share of adoption of a new
    accounting standard, net of income tax                               |  |                            | (0.27   | )         |  |          |        |               |  |   |        |   |  |   |        |  
|                                                                                                                          |  |                            |         |           |  |          |         |               |  |   |         |   |  |   |         |  
|Net loss per share after cumulative effect of
    adoption of a new accounting standard  basic and
    diluted           |  | $                          | (0.22   | )         |  | $        | (0.31   | )             |  | $ | (0.05   | ) |  | $ | (2.67   | )
|                                                                                                                          |  |                            |         |           |  |          |         |               |  |   |         |   |  |   |         |  

Net (loss) income per share is computed
independently for each of the quarters presented and the
summation of quarterly amounts may not equal the total net
(loss) income per share reported for the year.



|    |                           
|--- | --------------------------
|14. | Variable interest entities

During the second quarter of fiscal 2004 the
Company adopted FASB Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities
(FIN 46-R). FIN 46-R provides the principles to
consider in determining when variable interest entities
(VIE) must be consolidated in the financial
statements of the primary beneficiary. Variable interests are
contractual, ownership or other monetary interests in an entity
that change with changes in the fair value of the entitys
net assets exclusive of variable interests. An entity is
considered to be a VIE when its capital is insufficient to
permit it to finance its activities without additional
subordinated financial support or its equity investors, as a
group, lack the characteristics of having a controlling
financial interest. FIN 46-R requires the consolidation of
entities which are determined to be VIEs when the reporting
company determines that it will absorb a majority of the
VIEs expected losses, receive a majority of the VIEs
residual returns, or both. The company that is required to
consolidate the VIE is called the primary beneficiary.

The Company has two forms of franchise
arrangements, traditional and licensed and has determined that
the franchise arrangements alone do not create a variable
interest. However, the Company has provided limited financing to
certain franchisees or licensees, which does create a potential
variable interest relationship. Based on further analysis
performed by the Company, management has determined that these
franchisees or licensees are not VIEs. Accordingly,
consolidation of these franchisees and licensees is not required.

F-26



---



##### Table of Contents



REMEDYTEMP, INC.

FINANCIAL STATEMENT SCHEDULE

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

|                                           |  |                        |       |           |  |               |       |            |  |   |       |  |  |   |       | 
|------------------------------------------ |  | ---------------------- | ----- | --------- |  | ------------- | ----- | ---------- |  | - | ----- |  |  | - | ----- | 
|                                           |  |                        |       |           |  |               |       | Balance at
|                                           |  | Balance at             |       |           |  |               |       | end of    
|Allowance for Doubtful Accounts Receivable |  | beginning of period    |       | Additions |  | Deductions(1) |       | period    
|                                           |  |                        |       |           |  |               |       |           
|                                           |  |                       
|                                           |  | (Amounts in thousands)
|Year ended October 3, 2004                 |  | $                      | 2,627 |           |  | $             | 1,213 |            |  | $ | 856   |  |  | $ | 2,984 | 
|Year ended September 28, 2003              |  | $                      | 1,913 |           |  | $             | 1,357 |            |  | $ | 643   |  |  | $ | 2,627 | 
|Year ended September 29, 2002              |  | $                      | 1,789 |           |  | $             | 1,333 |            |  | $ | 1,209 |  |  | $ | 1,913 | 



---



|    |                                       
|--- | --------------------------------------
|(1) | Represents net write-offs of bad debts

|                                       |  |                        |        |           |  |            |        |            |  |   |   |  |  |   |        | 
|-------------------------------------- |  | ---------------------- | ------ | --------- |  | ---------- | ------ | ---------- |  | - | - |  |  | - | ------ | 
|                                       |  |                        |        |           |  |            |        | Balance at
|                                       |  | Balance at             |        |           |  |            |        | end of    
|Deferred Tax Asset Valuation Allowance |  | beginning of period    |        | Additions |  | Deductions |        | period    
|                                       |  |                        |        |           |  |            |        |           
|                                       |  |                       
|                                       |  | (Amounts in thousands)
|Year ended October 3, 2004             |  | $                      | 16,879 |           |  | $          | 5,702  |            |  | $ |  |  |  | $ | 22,581 | 
|Year ended September 28, 2003          |  | $                      |       |           |  | $          | 16,879 |            |  | $ |  |  |  | $ | 16,879 | 
|Year ended September 29, 2002          |  | $                      |       |           |  | $          |       |            |  | $ |  |  |  | $ |       | 

F-27



---



##### Table of Contents



EXHIBIT INDEX

|        |        |             |  |                                                                                                                                      
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|No.     |        | Description
|        |        |            
|        | 3.1    |             |  | Amended and Restated Articles of Incorporation of
    the Company(a)                                                                 
|        | 3.2    |             |  | Amended and Restated Bylaws of the Company(e)                                                                                        
|        | 4.1    |             |  | Specimen Stock Certificate(a)                                                                                                        
|        | 4.2    |             |  | Shareholder Rights Agreement(a)                                                                                                      
|        | 10.1*  |             |  | Robert E. McDonough, Sr. Amended and Restated
    Employment Agreement(f)                                                            
|        | 10.2*  |             |  | Paul W. Mikos Employment Agreement, as amended(g)                                                                                    
|        | 10.3*  |             |  | Robert E. McDonough, Sr. Amendment No. 1 to
    Amended and Restated Employment Agreement(i)                                         
|        | 10.7*  |             |  | Deferred Compensation Agreement for Alan M.
    Purdy(a)                                                                             
|        | 10.9   |             |  | Form of Indemnification Agreement(a)                                                                                                 
|        | 10.11* |             |  | Amended and Restated RemedyTemp, Inc. 1996 Stock
    Incentive Plan(h)                                                               
|        | 10.12* |             |  | Amended and Restated RemedyTemp, Inc. 1996
    Employee Stock Purchase Plan(h)                                                       
|        | 10.13  |             |  | Form of Franchising Agreement for Licensed
    Offices(k)                                                                            
|        | 10.14  |             |  | Form of Franchising Agreement for Franchised
    Offices(a)                                                                          
|        | 10.15  |             |  | Form of Licensing Agreement for
    IntelliSearch®(a)                                                                                
|        | 10.18* |             |  | Additional Deferred Compensation Agreement for
    Alan M. Purdy(b)                                                                  
|        | 10.19  |             |  | Lease Agreement between RemedyTemp, Inc. and
    Parker-Summit, LLC(c)                                                               
|        | 10.22* |             |  | RemedyTemp, Inc. Deferred Compensation Plan(d)                                                                                       
|        | 10.23* |             |  | Amended and Restated Employment Agreement for
    Greg Palmer(m)                                                                     
|        | 10.24* |             |  | 1998 RemedyTemp, Inc. Amended and Restated
    Deferred Compensation and Stock Ownership Plan for Outside
    Directors(r)           
|        | 10.25  |             |  | Form of Licensing Agreement for i/ Search
    2000®(e)                                                                               
|        | 10.27* |             |  | Paul W. Mikos Severance Agreement and General
    Release(j)                                                                         
|        | 10.28* |             |  | Gunnar B. Gooding Employment and Severance
    Letter(l)                                                                             
|        | 10.29* |             |  | Cosmas N. Lykos Employment and Severance Letter(l)                                                                                   
|        | 10.30* |             |  | Alan M. Purdy Retirement Agreement and General
    Release(n)                                                                        
|        | 10.31* |             |  | Monty Houdeshell Employment Letter(o)                                                                                                
|        | 10.32* |             |  | Monty Houdeshell Change in Control Severance
    Agreement(p)                                                                        
|        | 10.33* |             |  | Shawn Mohr Severance Agreement(p)                                                                                                    
|        | 10.34  |             |  | Amendment No. 2 to the Lease Agreement
    between RemedyTemp, Inc. and Parker  Summit, LLC(q)                                      
|        | 10.36  |             |  | Business Loan Agreement between Bank of America
    N.A. and RemedyTemp, Inc.(s)                                                     
|        | 10.37  |             |  | Amended and Restated Credit Agreement between
    Bank of America, N.A. and Remedy Temp, Inc.(t)                                     
|        | 14.1   |             |  | Code of Business Conduct and Ethics(q)                                                                                               
|        | 21.1   |             |  | List of Subsidiaries                                                                                                                 
|        | 23.1   |             |  | Consent of independent registered public
    accounting firm                                                                         
|        | 31.1   |             |  | Chief Executive Officer Certification Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                  
|        | 31.2   |             |  | Chief Financial Officer Certification Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                  
|        | 32     |             |  | Chief Executive Officer and Chief Financial
    Officer Certifications Pursuant to Section 906 of the
    Sarbanes- Oxley Act of 2002



---



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Indicates a management contract or a compensatory
    plan, contract or arrangement.                                                                                   
|   
|(a) | Incorporated by reference to the exhibit of same
    number to the Registrants Registration Statement on
    Form S-1 (Reg. No. 333-4276), as amended.                
|   
|(b) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 29,
    1996.



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended March 30,
    1997.                                                                                          
|   
|(d) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 28, 1997.                                                                                                
|   
|(e) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 27, 1998.                                                                                                
|   
|(f) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Reports on
    Form 10-Q for the quarterly period ended December 27,
    1998.                                                                                      
|   
|(g) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Reports on
    Form 10-Q for the quarterly period ended June 27, 1999
    (original agreement) and for the quarterly period ended
    December 31, 2000 (amendment).
|   
|(h) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended October 3, 1999.                                                                                                   
|   
|(i) | Incorporated by reference to exhibit number 10.1
    to the Registrants Quarterly Report on Form 10-Q for
    the quarterly period ended December 31, 2000.                                                                                                  
|   
|(j) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended April 1, 2001.                                                                                               
|   
|(k) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended July 1, 2001.                                                                                                
|   
|(l) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 30, 2001.                                                                                                
|   
|(m) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 30,
    2001.                                                                                       
|   
|(n) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2002.                                                                                               
|   
|(o) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 29, 2002.                                                                                                
|   
|(p) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended June 29, 2003.                                                                                               
|   
|(q) | Incorporated by reference to the exhibit of same
    number to the Registrants Annual Report on Form 10-K
    for the yearly period ended September 28, 2003.                                                                                                
|   
|(r) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended December 28,
    2003.                                                                                       
|   
|(s) | Incorporated by reference to the exhibit of same
    number to the Registrants Quarterly Report on
    Form 10-Q for the quarterly period ended March 28,
    2004.                                                                                          
|   
|(t) | Incorporated by reference to the exhibit of same
    number to Registrants Current Report on Form 8-K on
    December 3, 2004.