<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                           Washington, D.C. 20549

                                  FORM 10-K
                                           
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the Fiscal Year Ended October 31, 1998

                       Commission File Number 000-27130

                                WESTAFF, INC.

            (Exact name of registrant as specified in its charter)


            DELAWARE                                    94-1266151
  (State or other jurisdiction of          (I.R.S. Employer Identification No.)
  incorporation and organization)

                    301 LENNON LANE, WALNUT CREEK, CA  94598-2453
             (Address of principal executive offices, including zip code)

                                    (925) 930-5300
                           (Registrant's telephone number)

             Securities registered pursuant to Section 12(b) of the Act:
                                         NONE
             Securities registered pursuant to Section 12(g) of the Act:
                        COMMON STOCK, $.01 PAR VALUE PER SHARE
                                   (Title of class)

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

     Indicate 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. [ X ]  

     The aggregate market value of the voting stock held by non-affiliates of 
the Registrant was approximately $42,913,256 as of December 31, 1998, based on 
the closing price of the Registrant's Common Stock on the Nasdaq National 
Market reported for that trading day.  Shares of Common Stock held by each 
officer and director and by each person who owns 5% or more of the 
outstanding Common Stock have been excluded from this computation in that 
such persons may be deemed to be affiliates. This determination of affiliate 
status is not necessarily a conclusive determination for other purposes.

     As of December 31, 1998 the Registrant had outstanding 15,844,406 shares 
of Common Stock.

                         DOCUMENTS INCORPORATED BY REFERENCE

     The following documents (or portions thereof) are incorporated herein by 
reference:

Portions of the Registrant's Proxy Statement for the Annual Meeting of 
Stockholders to be held on March 30, 1999 are incorporated by reference into 
this Form 10-K Report.


<PAGE>

                                        INDEX

                                    WESTAFF, INC.

<TABLE>
<CAPTION>

                                                                      Page No.
<C>     <S>                                                          <C>
PART I

ITEM 1.   BUSINESS....................................................    3

ITEM 2.   PROPERTIES..................................................   18

ITEM 3.   LEGAL PROCEEDINGS...........................................   18

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   18


PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 
          STOCKHOLDER MATTERS.........................................   19

ITEM 6.   SELECTED FINANCIAL DATA.....................................   20

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITIONAL AND RESULTS OF OPERATIONS.......................   20

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   29

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
          ON ACCOUNTING AND FINANCIAL DISCLOSURE......................   29


PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   30

ITEM 11.  EXECUTIVE COMPENSATION......................................   32

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN
          BENEFICIAL OWNERS AND MANAGEMENT............................   32

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED
          TRANSACTIONS................................................   32


PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT
          SCHEDULES, AND REPORTS ON FORM 8-K..........................   33

          SIGNATURES..................................................   38

</TABLE>

<PAGE>
                                  PART I

ITEM 1. BUSINESS.

     The following Business Section contains forward-looking statements that 
involve risks and uncertainties.  The Company's actual results could differ 
materially from those anticipated in these forward-looking statements as a 
result of certain factors including those set forth under "Factors Affecting 
Future Operating Results" beginning on page 13 below and elsewhere in, or 
incorporated by reference into, this Form 10-K.  This Annual Report on Form 
10-K for the year ended October 31, 1998 contains service marks of the 
Company.

GENERAL

     The Company provides temporary staffing services primarily in suburban 
and rural markets ("secondary markets"), as well as in the downtown areas of 
major urban centers ("primary markets"), in the United States and selected 
international markets. Through its network of Company-owned, franchise agent 
and licensed offices, the Company offers a wide range of temporary staffing 
solutions, including replacement, supplemental and on-site programs to 
businesses and government agencies. The Company has over 50 years of 
experience in the staffing industry and, as of October 31, 1998, operated 
through over 370 business services offices in 45 states, the District of 
Columbia, Guam and five foreign countries. As of October 31, 1998, 
approximately 71% of these offices were owned by the Company, 22% were 
operated by franchise agents and 7% were operated by licensees. The Company 
differentiates itself from other large temporary staffing companies by 
focusing on recruiting and placing essential support personnel in secondary 
markets. Essential support personnel often fill clerical, light industrial 
and light technical positions such as word processing, data entry, reception, 
customer service and telemarketing, warehouse labor, manufacturing, assembly 
and lab assistance. These assignments can support either core or non-core 
functions of the customer's business, but are always "essential" to daily 
operations. The Company believes that businesses are increasingly willing to 
outsource or supplement large portions of these essential support functions 
with temporary staffing personnel. 

     In November 1998, the Company announced its plan to sell its medical 
business, primarily operating through Western Medical Services, Inc., a 
wholly-owned subsidiary of the Company ("Western Medical").  The Company is 
currently involved in discussions with a number of parties who have expressed 
an interest in Western Medical.  As a result of this decision, the Company 
has classified its medical operations as discontinued operations in the 
Company's Consolidated Financial Statements and provided a separate 
discussion of the medical operations in this Business Section.  See 
"--Medical Services" and "Management's Discussion and Analysis of Financial 
Condition and Results of Operations--Discontinued Operations."  

     The Company was founded in 1948 and incorporated in California in 1954.  
In October 1995, the Company reincorporated in Delaware. The Company's 
corporate name was changed to Westaff, Inc. in September 1998.  The Company's 
executive offices are located at 301 Lennon Lane, Walnut Creek, California 
94598-2453, and its telephone number is (925) 930-5300. The Company transacts 
business through its subsidiaries, the largest of which is Westaff (USA), 
Inc., a California corporation, that is the primary operating entity.

     References in this Form 10-K to (i) the "Company" or "Westaff" refer to 
Westaff, Inc., its predecessor and their respective subsidiaries, unless the 
context otherwise requires, and (ii) "franchise agents" refer to the 
Company's franchisees in their roles as limited agents of the Company in 
recruiting job applicants, soliciting job orders, filling those orders and 
handling collection matters upon request, but otherwise refer to the 
Company's franchisees in their roles as independent contractors of the 
Company.

BUSINESS STRATEGY

     The Company's objective is to become a leading provider of essential 
support services in secondary markets throughout the United States and in 
selected international markets. The key elements of the Company's business 
strategy include: 

     FOCUS ON SALES WITHIN THE ESSENTIAL SUPPORT SERVICES SECTOR.   The 
Company focuses on placing essential support personnel in the growing markets 
for clerical, light industrial and light technical temporary staffing. The 
Company believes 

<PAGE>

that essential support services are the foundation of the temporary staffing 
industry and will remain so for the foreseeable future. The Company also 
believes that employees performing essential support functions are, and will 
remain, an integral part of the labor market in local, regional and national 
economies around the world. The Company believes that it is well-positioned 
to capitalize on the anticipated growth in these business segments because of 
its ability to attract and retain essential support personnel and its 
specialized knowledge of the staffing needs of customers. 

     ENHANCE RECRUITING OF QUALIFIED PERSONNEL.  The Company believes that a 
key component of the Company's success is its ability to recruit and maintain 
a pool of qualified essential support personnel and regularly place them into 
desirable positions. The Company uses comprehensive methods to assess, select 
and, when appropriate, train its temporary employees in order to maintain a 
pool of qualified personnel to satisfy ongoing customer demand. The Company 
believes one of its key competitive advantages in attracting and retaining 
essential support personnel is its "quick pay" system, which provides it with 
the ability to print payroll checks at most of its branch offices within 24 
hours after receipt of a time card. The Company also offers its temporary 
employees comprehensive benefit, retention and recognition packages, 
including bonuses, vacation pay, holiday pay and opportunities to participate 
in the Company's contributory 401(k) plan and discounted employee stock 
purchase plan. 

     EMPHASIZE SECONDARY MARKETS.  The Company's strategy is to capitalize on 
its presence in secondary markets and to build market share by targeting 
small to mid-sized customers, including divisions of Fortune 500 companies. 
The Company believes that in many cases, such markets are less competitive 
and less costly in which to operate than the more central areas of 
metropolitan markets, where a large number of staffing services companies 
frequently compete for business and occupancy costs are relatively high. In 
addition, the Company believes that secondary markets are more likely to 
provide the opportunity to sell retail and recurring business that is 
characterized by relatively higher gross margins. The Company focuses on this 
type of business while also selectively servicing strategic national and 
regional contracts. 

     MAINTAIN ENTREPRENEURIAL AND DECENTRALIZED OFFICES WITH STRONG CORPORATE 
SUPPORT.  The Company seeks to foster an entrepreneurial environment by 
operating each office as a separate profit center, by giving managers and 
staff considerable operational autonomy and financial incentives and by 
establishing franchise agent and licensed offices in appropriate markets. The 
Company has designed programs to encourage a "team" approach in all aspects 
of sales and recruiting, to improve productivity and to maximize profits. The 
Company believes that this structure allows it to recruit and retain highly 
motivated managers who have demonstrated the ability to succeed in a 
competitive environment. This structure also allows managers and staff to 
focus on branch operations while relying on corporate headquarters for 
support in back-office operations, such as risk management programs and 
unemployment insurance, credit, collections, advice on legal and regulatory 
matters, quality standards and marketing. 

     ENHANCE INFORMATION SYSTEMS.  The Company believes its management 
information systems are instrumental to the success of its operations. The 
Company's business depends on its ability to store, retrieve, process and 
manage significant amounts of data and periodically expand or upgrade its 
information processing capabilities. The Company has finalized a long-term 
strategic plan for its next generation management information and support 
systems and is introducing these systems in a number of phases through 
replacements of, and enhancements to, various aspects of its current systems. 
The Company believes that these replacements and enhancements will increase 
management's ability to store, retrieve, process and manage information. As a 
result, the Company will be able to improve service to its customers and 
employees by reducing errors and speeding the resolution of inquiries, while 
more efficiently allocating resources devoted to developing and maintaining 
the Company's information technology infrastructure. See "Factors Affecting 
Future Operating Results--Reliance on Management Information Systems." 

     CONTROL COSTS THROUGH EMPHASIS ON RISK MANAGEMENT.  Workers' 
compensation and unemployment insurance premiums are significant expenses in 
the temporary staffing industry. Workers' compensation costs are particularly 
high in the light industrial sector. The Company has developed risk 
management programs that it believes improve management's ability to control 
these employee-related costs through pre-employment safety training, safety 
assessment and precautions in the work place, post-accident procedures and 
return to work programs. The Company also has created strong financial 
incentives for branch offices to implement its risk management procedures. 
The Company believes that its emphasis on controlling employee-related costs 
enables branch office managers to price services more competitively and 
improve profitability.

<PAGE>

GROWTH STRATEGY 

     The Company's growth strategy comprises two elements: continued 
immediate focus on internal growth and future pursuit of strategic and 
complementary acquisitions. 

     INTERNAL GROWTH.  A principal element of the Company's growth strategy 
has been its focus on internal growth. Same store sales from continuing 
operations increased 14.4%, 12.9% and 8.0% in fiscal 1996, fiscal 1997 and 
fiscal 1998, respectively, as compared to the prior annual periods. The 
Company's internal growth strategy consists of the following: 

     -    INCREASE SALES AND PROFITABILITY AT EXISTING OFFICES. The Company
          believes that a substantial opportunity exists to increase sales of
          services and profitability in existing offices. The Company has
          implemented incentive compensation plans to encourage branch office
          managers and staff to increase productivity and profits at the branch
          level, such as the Company's incentive program based on gross profit
          per full-time equivalent (FTE) staff for most of its business services
          field personnel as well as a return on sales bonus program for
          managers. In addition, the Company has restructured its
          corporate-level branch management function to establish and monitor
          branch office performance targets and develop programs to support
          branch operations. 

     -    SELECTIVELY EXPAND ON-SITE PROGRAMS.  The Company has taken advantage
          of industry trends by expanding its on-site (also referred to as
          "vendor-on-premises") programs. Since its initial public offering, the
          Company has substantially increased the number of its on-site programs
          and, as of October 31, 1998, had 45 such programs. Under these
          programs, the Company can assume administrative responsibility for
          coordinating all essential staffing services throughout a customer's
          location, including skills testing and training. On-site relationships
          provide customers with dedicated account management which can more
          effectively meet the customer's changing staffing needs with high
          quality, consistent service. These programs tend to have lower gross
          margins than those for retail customers, higher volumes, comparatively
          lower operating expenses and relatively longer customer relationships.
          These programs also may provide an office with sufficient gross profit
          dollars to cover fixed expenses as well as conduct activities to
          generate name recognition for recruiting and marketing purposes. 

     -    PURSUE EXPANSION BY ESTABLISHMENT OF NEW OFFICES.  The Company seeks
          to open new Company-owned offices primarily in existing markets to
          benefit from common area management, cross-marketing opportunities and
          leveraging of administrative expenses. The Company's corporate and
          operating management jointly develop expansion plans for new offices
          based upon various criteria, including market demand, availability of
          qualified personnel, the regulatory environment in the relevant market
          and whether a new office would complement or broaden the Company's
          current geographic network. The Company expects to limit expansion of
          its franchise agent and licensed programs to proven industry
          professionals interested in pursuing markets that are not strategic to
          the Company. 

     -    EXPAND INTERNATIONAL PRESENCE.  The Company intends to expand its
          international presence primarily through internal growth and, to a
          lesser extent, by pursuing selected acquisition opportunities. As of
          October 31, 1998, the Company operated 59 offices in Australia, the
          United Kingdom, Norway, New Zealand and Denmark, and has experienced
          growth in its international markets, with sales of services, excluding
          the effect of foreign currency rate fluctuations, increasing 24.6% in
          fiscal 1997 compared to fiscal 1996 and 18.5% in fiscal 1998 compared
          to fiscal 1997. The Company believes that its established
          international presence will enable it to take advantage of growing
          overseas markets where the high cost of maintaining permanent
          employees encourages the use of temporary personnel. 

     PURSUIT OF COMPLEMENTARY AND STRATEGIC ACQUISITIONS.  The Company 
currently intends to focus on internal growth at least through the second 
quarter of fiscal 1999.  In the future, the Company may also pursue 
opportunities for growth through acquisitions in existing as well as new 
markets.  However, the Company has scaled back its near-term acquisition 
plans and, accordingly, sales growth from additional acquisitions will likely 
be minimal at least through the first two quarters of fiscal 1999 and 
possibly throughout fiscal 1999.  In evaluating potential acquisition 
candidates, the Company focuses on independent staffing companies with a 
history of profitable operations, a strong management team, a recognized 
presence in 

<PAGE>

secondary markets and compatible corporate philosophies and 
culture.  In fiscal 1998, the Company completed 14 business services 
acquisitions.  See "Factors Affecting Future Operating Results--Uncertain 
Ability to Continue and Manage Growth; Risks Related to Acquisitions."

     The Company has established a team of corporate officers and department 
heads responsible for identifying prospective acquisitions, performing due 
diligence, negotiating contracts and subsequently integrating the acquired 
companies. The integration of newly acquired companies generally involves 
standardizing each company's accounting and financial procedures with those 
of the Company. Acquired companies are brought under the Company's uniform 
risk management program and key personnel of acquired companies often become 
part of field management. Marketing, sales, field operations and personnel 
programs are reviewed and, where appropriate, conformed to the best practices 
of the Company's existing operations. 

     In addition to external acquisitions, the Company also may engage in 
"internal" acquisitions, i.e., the purchase of existing franchise agent and 
licensed operations. The Company has a right of first refusal on any sale of 
franchise agent or licensed operations. Since the beginning of fiscal 1998, 
the Company has acquired a total of seven business services franchise agent 
offices.

SERVICES

     The Company's business services division places essential support 
personnel in clerical, light industrial and light technical positions through 
an international network of offices. Essential support personnel often fill 
clerical, light industrial and light technical positions such as word 
processing, data entry, reception, customer service and telemarketing, 
warehouse labor, manufacturing, assembly and lab assistance. As of October 
31, 1998, the Company's domestic and international business services 
operations comprised over 370 offices.

     The Company markets its temporary personnel services to local and 
regional customers through a network of Company-owned, franchise agent and 
licensed offices, as well as through its on-site service locations. The 
Company coordinates sales and marketing efforts through its corporate 
headquarters in cooperation with branch and regional offices and targets 
small to mid-size companies in secondary markets. New customers are obtained 
through personal sales presentations, telemarketing, direct mail 
solicitation, referrals from other customers and advertising in a variety of 
regional and local media, including the yellow pages, newspapers, magazines 
and trade publications. In addition, local radio, billboard and other 
creative advertising are used in certain markets to enhance the Company's 
name recognition. 

     As of October 31, 1998, the Company's international operations comprised 
59 Company-owned offices: 20 in Australia; 23 in the United Kingdom; six in 
Norway; six in New Zealand; and four in Denmark. Through these offices, the 
Company provides regular and temporary personnel services in the clerical and 
light industrial support areas. The Company employs a managing director for 
each foreign country who oversees all operations in that country. For fiscal 
1997 and fiscal 1998, 13.3% and 12.4%, respectively, of total system revenues 
from continuing operations were derived from the Company's international 
operations. Same store sales for international operations increased 18.2% and 
6.5% for fiscal 1997 and fiscal 1998, respectively, as compared to the same 
prior year periods. A total of 23 offices in the United Kingdom and 22 
offices in Australia have certification under ISO 9002, a total quality 
management program. 

OPERATIONS

     As of October 31, 1998, the Company operated through a network of over 
370 business services offices in 45 states, the District of Columbia, Guam 
and five foreign countries. In addition, the Company from time to time 
establishes recruiting offices both for recruiting potential temporary 
employees and for testing demand for its services in new market areas. The 
Company's operations are decentralized, with branch, area, regional and zone 
managers and franchise agents and licensees enjoying considerable autonomy in 
hiring, determining business mix and advertising. 

     The following table sets forth information as to the number of business 
services offices in operation as of the dates indicated.

<PAGE>

<TABLE>
<CAPTION>

                                           OCT. 29,    OCT. 28,  NOV. 2,    NOV. 1,   OCT. 31,
                                           --------    --------  -------    -------   --------
                                               1994        1995     1996       1997       1998
                                               ----        ----     ----       ----       ----
<S>                                          <C>         <C>      <C>        <C>        <C>
 Number of Offices by Ownership:(1)                                                 
     Company-owned.......................       168         196      217        226        267
     Franchise agent.....................        89          90      103        103         82
     Licensed............................        16          21        7         11         25
                                               ----        ----     ----       ----       ----
         Total...........................       273         307      327        340        374
                                               ----        ----     ----       ----       ----
                                               ----        ----     ----       ----       ----

 Number of Offices by Location(1):
     Domestic............................       232         263      280        288        315
     International.......................        41          44       47         52         59
                                               ----        ----     ----       ----       ----
 Total...................................       273         307      327        340        374
                                               ----        ----     ----       ----       ----
                                               ----        ----     ----       ----       ----

--------------
</TABLE>
(1)  Excludes Company-owned recruiting offices and medical services offices. 

     COMPANY-OWNED OFFICES.  Employees of each Company-owned office report to 
a manager who is responsible for day-to-day operations and the profitability 
of that office. Office managers generally report to area and/or regional 
managers. As of December 31, 1998, there were two zone managers and 15 
regional managers in the Company's business services division. All domestic 
and some international employees in the Company's business services branch 
offices may earn commissions based on the gross profit dollars per FTE 
employee. This program is designed to motivate employees to maximize the 
growth and profitability of their offices. In addition, office, area, 
regional and zone managers are eligible to participate in a return on sales 
incentive plan that compensates them based on the net income achieved in 
their office, area, region or zone. The Company believes that its 
incentive-based compensation plans encourage employees in its Company-owned 
offices to increase sales and profits, resulting in an entrepreneurial, 
creative and committed team. 

     FRANCHISE AGENT OFFICES.  The Company's franchise agents have the 
exclusive right by contract to sell certain of the Company's services and to 
use the Company's service marks, business names and systems in a specified 
territory. The Company's franchise agent agreements generally allow franchise 
agents to open multiple offices within their exclusive territories. As of 
October 31, 1998, the Company's 43 business services franchise agents 
operated 82 franchise agent offices. The Company designs its franchise agent 
program to provide attractive terms to franchise agents. Sales generated by 
franchise agent operations and related costs are included in the Company's 
consolidated sales of services and cost of services, respectively, and during 
fiscal 1996, 1997 and 1998, franchise agents offices represented 30.0%, 26.0% 
and 21.6%, respectively, of the Company's sales of services. 

     Under the Company's franchise agent program, the franchise agent, as an 
independent contractor, is responsible for establishing and maintaining an 
office and paying related administrative and operating expenses, such as 
rent, utilities and salaries of its branch office staff. Each franchise agent 
functions as a limited agent of the Company in recruiting job applicants, 
soliciting job orders, filling those orders and handling collection matters 
upon request, but otherwise functions as an independent contractor. As 
franchisor, the Company is the employer of the temporary employees and the 
owner of the customer accounts receivable. The Company is responsible for 
providing start-up materials and supplies, training the franchise agent and 
occasionally assisting on-site, aiding in bids for national accounts and 
paying the wages of the temporary employees and all related payroll taxes and 
insurance. As a result, the Company provides a substantial portion of the 
working capital needed for the franchise agent operations. The Company also 
provides the use of the Company's payroll and information services to manage 
information regarding temporary employees and customers.  Franchise agent 
agreements have an initial term of five years and are renewable for multiple 
five-year terms. 

     Franchise agents are required to follow the Company's operating 
procedures and standards in recruiting, screening, classifying and retaining 
temporary personnel. Under the Company's name, the franchise agent solicits 
orders for temporary employees from customers and assigns the Company's 
temporary employees to customers in response to such orders. In an effort to 
control liability associated with workers' compensation claims, the Company's 
risk management department works closely with franchise agent offices in 
evaluating job assignments and seeking to promote sales while effectively 
managing risks. The Company handles all government withholding, quarterly 
reports and W-2s, and maintains comprehensive 


<PAGE>

insurance coverage for all temporary employees sent on assignment by 
franchise agent offices. In addition, through on-site safety and quality 
assurance inspections, franchise agent offices evaluate risks and check 
compliance with state and federal safety regulations. In some cases, the 
Company may, in conjunction with the Company's insurance carrier, employ the 
services of a professional loss control engineer. 

     The Company's franchise agent and license agreements contain two-year 
non-competition covenants which the Company vigorously seeks to enforce. 
Efforts to enforce the non-competition covenants have resulted in litigation 
brought by the Company following termination of certain franchise agent 
agreements. In the past five fiscal years, the Company has commenced four 
actions to enforce the non-competition covenants. Three of those actions were 
resolved in the Company's favor, and one is presently pending. See "Factors 
Affecting Future Operating Results--Risks Related to Franchise Agent and 
Licensed Operations." 

     LICENSED OFFICES.  Under the Company's license program, the licensee is 
the employer of the temporary employees and the owner of the customer 
accounts receivable. The Company typically grants licensees the exclusive 
right to establish an office to market and provide light industrial and 
clerical temporary personnel or light technical temporary personnel within a 
designated geographic area. Licensees receive the same basic training from 
the Company as franchise agents and attend seminars, participate in marketing 
programs and use the Company's sales literature. The Company also assists its 
licensees in obtaining business from its national accounts and provides them 
with national, regional and cooperative local advertising. 

     Licensees operate within the framework of the Company's policies and 
standards. They recruit and employ temporary employees according to the 
Company's guidelines, and pay these employees using the Company's payroll 
procedures. However, licensees must obtain their own workers' compensation, 
liability, fidelity bonding and state unemployment coverage, which determine 
their payroll costs. The Company bills all licensees' customers and collects 
their remittances. License agreements are for a term of five years and are 
renewable for multiple five-year terms. As of October 31, 1998, the Company's 
10 business services licensees operated 25 licensed offices.

     As a service to its licensees, the Company finances the licensees' 
temporary employee payroll, payroll taxes and insurance. This indebtedness is 
secured by a pledge of the licensees' accounts receivable, tangible and 
intangible assets, and the license agreements. Borrowings under the lines of 
credit bear interest at a rate equal to the reference rate of the Bank of 
America NT & SA plus two percentage points. Interest is charged on the 
borrowings only if the outstanding balance exceeds certain specified limits.

     The Company's sale of franchises and licenses is regulated by the 
Federal Trade Commission and by state business opportunity and franchise 
laws. The Company has either registered, or been exempted from registration, 
in 14 of the 15 states that require registration in order to offer franchises 
or licenses. In one of the 15 states, the Company has not yet sought 
registration and is therefore not currently authorized to offer franchise or 
license arrangements. 

MANAGEMENT INFORMATION SYSTEMS

     The Company believes that its management information systems are 
instrumental to the success of its operations. The Company's management 
information systems include a billing and payroll application which is 
designed to provide timely and accurate payment for temporary employees and 
billing to the Company's customers. Under this system, centralized computer 
server systems, interfaced with personal computers in branch offices, support 
branch office operations with daily, weekly, monthly and quarterly reports 
that provide information ranging from customer activity to office 
profitability. Office automation provides the branch offices with direct 
access to data for a variety of purposes, such as mailings, ad hoc customer 
queries and accounts receivable monitoring. These systems provide the Company 
with the ability to print checks at most of its offices within 24 hours after 
receipt of the time card. Most of the employees of the domestic 
Company-owned, franchise agent and licensed offices are served by the 
Company's systems of remote site personal computers. The few offices that are 
not currently linked by personal computer to the systems submit billing and 
payroll information by facsimile or overnight delivery services to the 
Company's headquarters for processing. The remote site systems are supported 
by the Company's in-house technical support department, which is responsible 
for computer installations, training and technical support.


<PAGE>

     In the third quarter of fiscal 1998, the Company finalized its long-term 
strategic plan for its next generation management information and support 
systems. In connection with this process, the Company has entered into 
agreements or is in discussion with various software and hardware providers 
to purchase the required hardware and software and to assist in the design 
and implementation of the new systems. The Company anticipates that these 
systems will be easier to maintain and allow the Company to realize 
efficiencies in managing information technology resources. These systems 
should provide management with enhanced abilities to acquire daily, weekly, 
monthly and quarterly reports on office and Company performance and improve 
the mechanisms for distribution of these reports to field personnel. These 
systems are designed to more tightly integrate the Company's payroll and 
customer billing activities, and should also offer enhanced candidate 
recruiting and customer data management and search capabilities that will 
integrate directly with the Company's payroll and billing functions and 
thereby reduce both the incidence of errors and the time necessary to 
research billing and payroll issues. When fully implemented, these systems 
should permit the Company's customers to review their own billing, accounts 
receivable and job activity records as well as conduct research and place 
orders on-line, and allow Company employees and temporary staff to review 
their own payroll, benefits and human resource information, all via the use 
of the Internet. These systems are also designed to enable the Company's 
temporary employees to receive their paychecks essentially on demand. 

     The long-term strategic plan calls for a systematic conversion from the 
Company's current systems to the new systems over the next 24 months in a 
multi-phased approach to deliver incremental productivity and efficiency 
gains. The first phase will be to replace the Company's back-office financial 
accounting and reporting system. The Company believes this conversion will 
resolve certain Year 2000 compliance issues in its existing systems, as well 
as provide its field offices with more real-time access to branch and 
regional operating information. Concurrent with this project, the Company 
intends to implement a frame relay network which will allow a Company-wide 
access to a centrally managed office and productivity software suite. The 
second phase will deliver a full featured branch office tool designed to 
assist in order management, candidate search and recruiting, customer service 
management and sales management, which should fully integrate with the 
Company's existing and future payroll and billing systems. The third phase 
will involve the implementation of a payroll, billing and activities 
management system integrating both branch office systems and financial 
systems. The Company anticipates incurring capital expenditures of 
approximately $12.0 million in connection with this project, of which $6.2 
was incurred during fiscal 1998, $4.8 million is expected to be incurred in 
fiscal 1999, and $1.0 million is expected to be incurred in fiscal 2000. 

     The Company believes that its existing management information systems, 
with minor modifications and planned software upgrades and enhancements, will 
be adequate to handle the needs of the Company through the end of fiscal 
2000, prior to which time the new systems are expected to become fully 
operational. The Company believes that the new enterprise-wide systems will 
provide significant operating efficiencies for both field and corporate 
office personnel.  However, there can be no assurance that the Company will 
meet anticipated completion dates for system replacements and enhancements 
consisting of next generation management information and support systems, 
that such replacements and enhancements will be completed in a cost-effective 
manner or that such replacements and enhancements will support the Company's 
future growth or provide significant gains in efficiency and productivity.  
The failure of the replacements and enhancements to meet these expected goals 
could result in increased system costs and could have a material adverse 
effect on the Company's business, results of operations, cash flows or 
financial condition.

     See "Factors Affecting Future Operating Results--Reliance on Management 
Information Systems" and "Management's Discussion and Analysis of Financial 
Condition and Results of Operations."

RISK MANAGEMENT PROGRAMS

     The Company is responsible for all employee-related expenses for the 
temporary staff employees of its Company-owned and franchise agent offices 
including workers' compensation, unemployment insurance, social security 
taxes, state and local taxes, and other general payroll expenses. 

     The Company's risk management programs employ a variety of loss 
prevention and loss control strategies, financial incentives and aggressive 
claims management techniques to help control and reduce risks, particularly 
with respect to workers' compensation programs. The Company's loss control 
strategies include actively screening work sites to ensure that temporary 
employees are placed within the Company's strict safety guidelines. The 
Company carefully monitors the job assignments to prevent placing employees 
in certain high risk jobs that are prohibited under the Company's guidelines. 
In 


<PAGE>
addition, the Company requires general and specific safety orientation 
training as well as appropriate personal protective equipment in certain 
assignments. Safety equipment includes back supports, safety glasses, 
protective footwear and cut-proof gloves. Each accident is carefully reviewed 
by the Company to ensure that safety procedures were followed and that 
additional safety considerations are implemented to avoid any future injuries 
at a customer's work site. 

     The Company has also developed financial incentives for field offices to 
ensure that risk management remains a high priority. Each Company-owned and 
franchise agent office is charged workers' compensation premiums through an 
internal experience modifier program which is based largely upon the local 
office's claims experience. The Company also employs a dividend program for 
its franchise agent offices which will return a portion of their premiums in 
the event of positive claims experience. The Company believes that its 
experience modifier and dividend programs provide strong incentives to the 
field offices to control workers' compensation risks. 

     The Company also employs a number of claims management techniques to 
help control losses.  In the event of an actual workers' compensation injury, 
for example, post-accident drug testing is performed as part of the initial 
examination.  In some circumstances, if the claimant tests positive for 
illegal drug usage, the claim may be denied in its entirety.  If the injury 
prevents the employee from returning to work immediately, the Company moves 
forward with aggressive claims management.  The Company has maintained a 
long-term relationship with its insurance carrier and claims administrator. 
This long-standing relationship has helped the Company to ensure consistency 
in applying its risk management programs.  The Company's corporate claims 
management team, as well as all regional managers, have frequent meetings and 
conference calls with the claims administrator, and can examine the claims 
adjusters' notes within 24 hours.  On an ongoing basis, the Company's 
workers' compensation specialists actively analyze claims to determine 
compensability issues, the appropriateness of medical treatment and whether 
reserve balances are properly established.  The Company also considers 
whether or not the customer or a third party may be a source for subrogation 
in the event civil recoveries are allowable to the injured employee. 

     Due to the nature of temporary work, state unemployment insurance costs 
can rise to the maximum statutory rates if not properly managed.  Through 
appropriate payroll tax planning, as well as utilization of an internally 
developed comprehensive claims management system, the Company believes it has 
developed methods to minimize these costs.  There can be no assurance, 
however, that such methods will be successful.  Any increase in such costs 
could have a material adverse effect on the Company's business, results of 
operations, cash flows or financial condition. See "Factors Affecting Future 
Operating Results--Variability of Employee-Related Costs." 

COMPETITION

     The temporary staffing industry is highly competitive with few barriers 
to entry.  The Company believes that the majority of commercial temporary 
staffing companies are local, full-service or specialized operations with 
less than five offices. Within local markets, typically no single company has 
a dominant share of the market. The Company also competes for qualified 
temporary personnel and customers with larger, national full-service and 
specialized competitors in local, regional, national and international 
markets. The principal national competitors are Adecco SA, Interim Services, 
Inc. (commercial services division), Kelly Services, Inc., Manpower Inc., 
Norrell Corporation (commercial services division), RemedyTemp, Inc., The 
Olsten Corporation (commercial services division) and Personnel Group of 
America, Inc..  Many of the Company's principal competitors have greater 
financial, marketing and other resources than the Company.  In addition, 
there are a number of medium-sized firms which compete with the Company in 
certain markets where they may have a stronger presence, such as regional or 
specialized markets. 

     The Company believes that the competitive factors in obtaining and 
retaining customers include understanding customers' specific job 
requirements, providing temporary personnel in a timely manner, monitoring 
quality of job performance and pricing of services.  The Company has 
experienced pricing pressure in all areas of its business and expects these 
pressures to continue. The Company believes that the primary competitive 
factors in obtaining qualified candidates for temporary employment 
assignments are wages, benefits and flexibility of work schedules.  In 
addition, the entire staffing industry is faced with recruiting challenges 
due to low unemployment rates.  There can be no assurance that the Company 
will not encounter increased competition in the future, which could limit the 
Company's ability to maintain or increase its market share or gross margin, 
and which could have a material adverse effect on the Company's business, 
results of 
<PAGE>
operations, cash flows or financial condition.  See "Factors 
Affecting Future Operating Results--Highly Competitive Market."

EMPLOYEES

     The Company estimates that as of October 31, 1998 it had approximately 
37,000 temporary employees on assignment through its business services 
division and employed approximately 1,266 regular staff in its business 
services division.  The Company's employees are not covered by any collective 
bargaining agreements.  The Company believes that its relationships with its 
employees are good. 

     The Company, as employer, is responsible for and pays the regular and 
temporary payrolls, Social Security taxes (FICA), federal and state 
unemployment taxes, workers' compensation insurance and other direct labor 
costs relating to its temporary employees (including temporary employees 
assigned by franchise agents). The Company offers various insurance programs 
and other benefits for certain of its temporary employees which are made 
available at the option of regional or branch office managers or franchise 
agents and licensees.  As part of health care reform, federal and certain 
state legislative proposals have from time to time included provisions that 
would extend health insurance benefits to temporary employees who are not 
currently provided with such benefits.  Due to the uncertainty associated 
with the ultimate enactment of any such health care reform initiatives and 
the form and content of any such initiatives once enacted, the Company is 
unable to estimate the impact any extension of health insurance benefits 
would have on its business, results of operations, cash flows or financial 
condition.

SERVICE MARKS

     The Company has various service marks registered with the United States 
Patent and Trademark Office, with the State of California and in various 
foreign countries. Federal and state service mark registrations may be 
renewed indefinitely as long as the underlying mark remains in use. The 
Company's service marks include, Western Staff Services-Registered 
Trademark-, Western Temporary Services-Registered Trademark-, Western 
Technical Services-Registered Trademark-, Westaff-Registered Trademark-, 
Westemp-Registered Trademark- and Be a Temp-Registered Trademark-.  The 
Company's applications to federally register the service marks USA Temp-SM- 
and The Essential Support Services Leader-SM- are pending. 

MEDICAL SERVICES 

     In November 1998, the Company announced its plan to sell Western 
Medical. The Company is currently involved in discussions with a number of 
parties who have expressed an interest in Western Medical.  As a result of 
this decision, the Company has classified its medical operations as 
discontinued operations and, accordingly, has segregated the net assets of 
the discontinued operations in the Consolidated Balance Sheet at October 31, 
1998, the operating results of the discontinued operations in the 
Consolidated Statements of Operations for fiscal 1998, fiscal 1997 and fiscal 
1996 and the cash flows from discontinued operations in the Consolidated 
Statement of Cash Flows for fiscal 1998.  See "Management's Discussion and 
Analysis of Financial Condition and Results of Operations--Discontinued 
Operations."  

     Through Western Medical, the Company provides temporary health care 
personnel to serve an array of home care and institutional health care needs, 
including registered nurses, licensed practical/vocational nurses, physical, 
occupational and speech therapists, medical social workers, certified home 
health and personal care aides, home care companions, and allied health 
personnel, such as pharmacists, medical technicians and phlebotomists. 
Approximately half of the medical services division's personnel are licensed. 
As of October 31, 1998, the medical services division comprised 56 domestic 
offices, with two regional managers. The medical services division sales of 
services and license fees for fiscal 1997 and fiscal 1998 were $46.7 million 
and $54.9 million, respectively.
 

     In home care, a registered nurse or appropriate home care professional 
initially assesses the home care case, then devises a plan of treatment for 
doctor approval, provides the necessary treatment, examines and records the 
patient's progress, and makes periodic reports to the physician or case 
manager. The medical services division also provides health care personnel 
for institutional staffing in hospitals, nursing homes, clinics, other health 
care facilities and prisons. Institutional staffing consists mainly of RNs, 
LPNs/LVNs, certified nurse aides and allied health personnel such as 
pharmacists, phlebotomists and x-ray and lab technicians. To maintain quality 
control, the medical services division sets policy and procedures for 
Company-owned, franchise agent and licensed offices through its own internal 
oversight 


<PAGE>
authority. These procedures include guidelines for compliance with local, 
state and federal regulations, improving quality of service, hiring criteria, 
training programs and professional guidance. 

     The Company began to serve Medicare patients in fiscal 1992. 
Approximately 28.5% and 15.3%, respectively, of the Company's medical 
services sales in fiscal 1997 and fiscal 1998 were attributable to Medicare 
services.  Over half the total of 35 Company-owned offices in the medical 
services division were certified to provide home health care services to 
Medicare patients as of October 31, 1998. 

     FRANCHISE AGENT OFFICES.  Franchise agents in the medical services 
division enter into agreements similar to those in the business services 
division. However, the agreements relating to the medical services division 
contain a separate agreement that covers home health agency business.  As of 
October 31, 1998, the Company had 12 medical services franchise agents 
operating a total of 13 offices.

     LICENSED OFFICES.  Under the Company's license program, the licensee is 
the employer of the temporary employees and the owner of the customer 
accounts receivable. In addition, the medical licensee retains the home 
health agency license and Medicare certification, if any, in its name. The 
Company retains 8.0% of the non-Medicare gross sales as a service fee and 
charges a service fee per visit for Medicare services.  As of October 31, 
1998, the Company's 4 medical services licensees operated a total of 8 
offices.

     MANAGEMENT INFORMATION SYSTEMS.  The Company's medical services division 
is largely independent from the Company's general information systems.  
During the first quarter of fiscal 1998, the medical services division 
completed the conversion to, and currently uses, a comprehensive, 
industry-specific clinical and financial accounting and reporting system, 
acquired from a nationally known medical information system company. It is 
designed to organize and present information in a manner that facilitates the 
ability of the Company to obtain appropriate and timely reimbursement under 
Medicare and other programs through electronic billing, while integrating the 
financial and clinical information which is vital to future managed care 
controls. The Company is currently working on additional enhancements to the 
systems of the medical services division to improve efficiency and 
performance.

     GOVERNMENTAL REGULATION. Legislative changes affecting the health care 
industry have been proposed, from time to time, in Congress and various 
states. Changes in the government's support of health care services, the 
methods by which such services are delivered and the prices for such services 
could each have a material adverse effect on the Company's business, results 
of operations, cash flows and financial condition. 

     A number of states have adopted laws regulating companies that provide 
health care services.  In many of the states, the Company need only be 
licensed. In 20 states, a certificate of need ("CON") from the state must be 
obtained to be a Medicare provider.  CON laws restrict the types of care that 
may be provided and can limit or prohibit the Company's ability to provide 
certain services and to establish or expand its medical operations.  CON 
requirements and restrictions vary substantially from state to state. 

     Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") 
accreditation has become an important criterion in providing home health care 
services.  As of December 31, 1998, 11 of the Company-owned offices, two 
franchise agent offices and four licensed offices were accredited by JCAHO, 
and an application for one JCAHO accreditation was pending for one franchise 
agent office.  Failure to obtain such accreditation or delays in the 
accreditation process could adversely affect the ability of the Company to 
compete in the home health care services area. 

     On August 5, 1997, President Clinton signed into law the Balanced Budget 
Act of 1997 (the "Budget Act"), resulting in significant changes to 
cost-based reimbursement for Medicare services provided by home health care 
providers, including the reduction of cost limits.  Under the Interim Payment 
System ("IPS"), home health agencies will be reimbursed the lowest of: (i) 
the actual costs of operating the agency's Medicare services; (ii) a reduced 
aggregate cost per visit rate; or (iii) an aggregate per beneficiary limit. 

     The Budget Act requires the Health Care Financing Administration of the 
U.S. Department of Health and Human Services ("HCFA") to implement a 
Prospective Payment System ("PPS") for fiscal years beginning on or after 
October 1, 1999 to replace this cost-based system. Under the PPS, home health 
agencies will be paid a fixed amount for services 
<PAGE>

rendered without regard to the cost of providing such services. There can be 
no assurance that such reimbursement rates will cover the costs incurred by 
the Company to provide Medicare home health care services. See "Factors 
Affecting Future Operating Results--Governmental Regulation Relating to 
Health Care Providers" and "Management's Discussion and Analysis of Financial 
Condition and Results of Operations."

     EMPLOYEES.  As of October 31, 1998, the Company had approximately 2,219 
temporary employees on assignment in the medical services division, and 
employed approximately 159 regular staff in connection with the division.  
The Company's medical services employees are not covered by any collective 
bargaining agreements.  The Company believes that its relationships with 
these employees are good. 

     As with its business services employees, the Company, as employer, is 
responsible for and pays the regular and temporary payrolls, Social Security 
taxes (FICA), federal and state unemployment taxes, workers' compensation 
insurance and other direct labor costs relating to its temporary employees 
(including temporary employees assigned by franchise agents). The Company 
offers various insurance programs and other benefits for certain of its 
temporary employees which are made available at the option of regional or 
branch office managers or franchise agents and licensees. In addition, 
temporary employees performing health care services are covered by 
professional liability insurance. As part of health care reform, federal and 
certain state legislative proposals have from time to time included 
provisions that would extend health insurance benefits to temporary employees 
who are not currently provided with such benefits.  Due to the uncertainty 
associated with the ultimate enactment of any such health care reform 
initiatives and the form and content of any such initiatives once enacted, 
the Company is unable to estimate the impact any extension of health 
insurance benefits would have on its business, results of operations, cash 
flows or financial condition.

     SERVICE MARKS. The Company's medical services division has various 
service marks registered with the United States Patent and Trademark Office 
and with the State of California. Federal and state service mark 
registrations may be renewed indefinitely as long as the underlying mark 
remains in use. With respect to the medical services division, the Company's 
service marks include, Western Medical Services-Registered Trademark- and 
Western Medical Services Home Health Agency-Registered Trademark-. The 
Company's pending application to federally register the service mark Western 
Independent Living-SM- is on hold. 

               FACTORS AFFECTING FUTURE OPERATING RESULTS

     This Form 10-K contains forward-looking statements concerning the 
Company's future products, expenses, revenue, liquidity and cash needs as 
well as the Company's plans and strategies.  These forward-looking statements 
are based on current expectations and the Company assumes no obligation to 
update this information.  Numerous factors could cause actual results to 
differ significantly from the results described in these forward-looking 
statements, including the following risk factors.

     POSSIBLE ADVERSE EFFECTS OF FLUCTUATIONS IN THE GENERAL ECONOMY.   
Demand for the Company's staffing services is significantly affected by the 
general level of economic activity and unemployment in the United States and 
the countries in which the Company operates. Companies use temporary staffing 
services to manage personnel costs and staffing needs. When economic activity 
increases, temporary employees are often added before full-time employees are 
hired. However, as economic activity slows, many companies reduce their 
utilization of temporary employees before releasing full-time employees. In 
addition, the Company may experience less demand for its services and more 
competitive pricing pressure during periods of economic downturn. Therefore, 
any significant economic downturn could have a material adverse effect on the 
Company's business, results of operations, cash flows or financial condition. 
See "Management's Discussion and Analysis of Financial Condition and Results 
of Operations."

     UNCERTAIN ABILITY TO CONTINUE AND MANAGE GROWTH; RISKS RELATED TO 
ACQUISITIONS.   The Company has experienced significant growth, principally 
through internal growth and, more recently, through acquisitions.  However, 
the Company has scaled back its near-term acquisition plans and, accordingly, 
sales growth from additional acquisitions will likely be minimal at least 
through the first two quarters of fiscal 1999 and possibly throughout fiscal 
1999.  There can be no assurance that the Company will be able to expand its 
current market presence or successfully enter other markets through 
acquisitions or the opening of new offices. The Company's ability to continue 
its growth and profitability will depend on a number of factors, including: 
(i) the strength of demand for temporary employees in the Company's markets; 
(ii) the availability of capital to 
<PAGE>

fund acquisitions; (iii) the ability to maintain or increase profit margins 
despite pricing pressures; and (iv) existing and emerging competition. The 
Company must also adapt its infrastructure and systems to accommodate growth 
and recruit and train additional qualified personnel. Competition for 
acquisitions may increase to the extent other temporary services firms, many 
of which have significantly greater financial resources than the Company, 
seek to increase their market share through acquisitions. In addition, the 
Company is subject to certain limitations on the incurrence of additional 
indebtedness under its credit facilities, which currently restrict the 
Company's ability to finance acquisitions. Further, there can be no assurance 
that the Company will be able to identify suitable acquisition candidates or, 
if identified, complete such acquisitions or successfully integrate such 
acquired businesses into its operations. Acquisitions also involve special 
risks, including risks associated with unanticipated problems, liabilities 
and contingencies, diversion of management's attention and possible adverse 
effects on earnings resulting from increased goodwill amortization, interest 
costs and workers' compensation costs, as well as difficulties related to the 
integration of the acquired businesses, such as retention of management. 
Furthermore, once integrated, acquisitions may not achieve comparable levels 
of revenue or profitability as the Company's existing locations. In addition, 
to the extent that the Company consummates acquisitions in which a portion of 
the consideration is in the form of Common Stock, current shareholders may 
experience dilution. The failure to identify suitable acquisitions, to 
complete such acquisitions or successfully integrate such acquired businesses 
into its operations could have a material adverse effect on the Company's 
business, results of operations, cash flows or financial condition. See 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations," "Business--Growth Strategy."

     RELIANCE ON MANAGEMENT INFORMATION SYSTEMS.   The Company believes its 
management information systems are instrumental to the success of its 
operations.  The Company's business depends on its ability to store, 
retrieve, process and manage significant amounts of data, and periodically to 
expand and upgrade its information processing abilities.  In the third 
quarter of fiscal 1998, the Company finalized its long-term strategic plan 
for its next generation management information and support systems.  The 
Company anticipates introducing these systems in a number of phases through 
replacements of, and enhancements to, various aspects of its current 
management information and support systems. The Company has, in the past, 
discovered problems in implementing new systems and may, in the future, 
experience delays or increased costs to correct such defects.  There can be 
no assurance that the Company will meet anticipated completion dates for 
system replacements and enhancements consisting of next generation management 
information and support systems, that such replacements and enhancements will 
be completed in a cost-effective manner, or that such replacements and 
enhancements will support the Company's future growth or provide significant 
gains in efficiency. The failure of the replacements and enhancements to meet 
these expected goals could result in increased system costs and could have a 
material adverse effect on the Company's business, results of operations, 
cash flows or financial condition. See "Management's Discussion and Analysis 
of Financial Condition and Results of Operations" and "Business--Management 
Information Systems."  

     RELIANCE ON EXECUTIVE MANAGEMENT.  The Company is highly dependent on 
its senior executives, including W. Robert Stover, now its Chairman and 
founder, and formerly its Chief Executive Officer, Michael K. Phippen, now 
its Chief Executive Officer and President, and Paul A. Norberg, its Executive 
Vice President and Chief Financial Officer, and on the other members of its 
executive management team. The Company has entered into a new employment 
agreement with Mr. Stover for continuing employment until he chooses to 
retire or until his death; moreover, the Company has entered into a five-year 
employment agreement with Mr. Phippen pursuant to which he became Chief 
Executive Officer effective January 1, 1999 and receives a specified 
compensation package. Employment arrangements with all of the Company's other 
executive officers are at-will. The loss of the services of any of these key 
executive personnel could have a material adverse effect on the Company's 
business, results of operations, cash flows or financial condition. 

     VARIABILITY OF OPERATING RESULTS; SEASONALITY.  The Company has 
experienced significant fluctuations in its operating results and anticipates 
that these fluctuations may continue. Operating results may fluctuate due to 
a number of factors, including the demand for the Company's services, the 
level of competition within its markets, the Company's ability to increase 
the productivity of its existing offices, control costs and expand 
operations, the timing and integration of acquisitions and the availability 
of qualified temporary personnel. In addition, the Company's results of 
operations could be, and have in the past been, adversely affected by severe 
weather conditions. The Company's fourth fiscal quarter consists of 16 or 17 
weeks, while its first, second and third fiscal quarters consist of 12 weeks 
each. Moreover, the Company's results of operations have also historically 
been subject to seasonal fluctuations. Demand for temporary staffing 
historically has been greatest during the Company's fourth fiscal quarter due 
largely to the planning cycles of many of its customers. Furthermore, sales 
for the first fiscal quarter are typically lower due to national holidays as 
well as plant shutdowns during and after the holiday season. These shutdowns 
and post-holiday season declines negatively impact job orders received by the 
Company, 


<PAGE>

particularly in the light industrial sector. Due to the foregoing factors, 
the Company has experienced in the past, and may possibly experience in the 
future, results of operations below the expectations of public market 
analysts and investors. The occurrence of such an event could likely have a 
material adverse effect on the price of the Common Stock. See "--Variability 
of Employee-Related Costs" and "Management's Discussion and Analysis of 
Financial Condition and Results of Operations--Results of Continuing 
Operations." 

     ABILITY TO ATTRACT AND RETAIN THE SERVICES OF QUALIFIED TEMPORARY 
PERSONNEL.  The Company depends upon its ability to attract and retain 
qualified personnel who possess the skills and experience necessary to meet 
the staffing requirements of its customers. During periods of increased 
economic activity and low unemployment, the competition among temporary 
staffing firms for qualified personnel increases. Many regions in which the 
Company operates are experiencing historically low rates of unemployment and 
the Company has experienced, and may continue to experience, significant 
difficulties in hiring and retaining sufficient numbers of qualified 
personnel to satisfy the needs of its customers. Furthermore, the Company may 
face increased competitive pricing pressures during such periods. Based on 
the current economic environment, competition for individuals with the 
requisite skills is expected to remain strong for the foreseeable future. 
There can be no assurance that qualified personnel will continue to be 
available to the Company in sufficient numbers and on terms of employment 
acceptable to the Company. The Company must continually evaluate and upgrade 
its base of available qualified personnel to keep pace with changing customer 
needs and emerging technologies. Furthermore, a substantial number of the 
Company's temporary employees during any given year will terminate their 
employment with the Company to accept regular staff employment with customers 
of the Company. The inability to attract and retain qualified personnel could 
have a material adverse effect on the Company's business, results of 
operations, cash flows or financial condition. See "Business--Operations." 

     VARIABILITY OF EMPLOYEE-RELATED COSTS.  The Company is responsible for 
all employee-related expenses for the temporary employees of its 
Company-owned and franchise agent offices, including workers' compensation, 
unemployment insurance, social security taxes, state and local taxes and 
other general payroll expenses. The Company maintains workers' compensation 
insurance for all claims in excess of a loss cap of $500,000 per incident, 
except with respect to locations in states where private insurance is not 
permitted and which are covered by state insurance funds. The Company accrues 
for workers' compensation costs based upon payroll dollars paid to temporary 
employees. The accrual rates vary based upon the specific risks associated 
with the work performed by the temporary employee. At the beginning of each 
policy year, the Company reviews the overall accrual rates with its outside 
actuaries and makes changes to the rates as necessary based primarily upon 
historical loss trends. Each year, the Company evaluates its historical 
accruals based on an actuarially developed estimate of the ultimate cost for 
each open policy year and adjusts such accruals as necessary. These 
adjustments can either be increases or decreases to workers' compensation 
costs, depending upon the actual loss experience of the Company. Although 
management believes that the Company's accruals for workers' compensation 
obligations are adequate, there can be no assurance that the actual cost of 
workers' compensation obligations will not exceed the accrued amounts. In 
addition, there can be no assurance that the Company's programs to control 
workers' compensation and other payroll-related expenses will be effective or 
that loss development trends will not require a charge to costs of services 
in future periods to increase workers' compensation accruals. Unemployment 
insurance premiums are set by the states in which the Company's employees 
render their services. A significant increase in these premiums or in 
workers' compensation-related costs could have a material adverse effect on 
the Company's business, results of operations, cash flows or financial 
condition. See "Management's Discussion and Analysis of Financial Condition 
and Results of Operations" and "Business--Risk Management Programs." 

     HIGHLY COMPETITIVE MARKET.  The temporary staffing industry is highly 
competitive with few barriers to entry. The Company believes that the 
majority of clerical, light industrial and light technical temporary staffing 
companies are local, full-service or specialized operations with fewer than 
five offices. Within local markets, typically no single company has a 
dominant share of the market.  The Company also competes for qualified 
temporary personnel and customers with larger, national, full-service and 
specialized competitors in local, regional, national and international 
markets.  Many of the Company's principal competitors have greater financial, 
marketing and other resources than the Company.   In addition, there are a 
number of medium-sized firms which compete with the Company in certain 
regional or specialized markets where such firms may have a stronger 
presence.  Furthermore, certain of its current and prospective customers may 
decide to fulfill their staffing needs independently.


<PAGE>

     The Company believes that the competitive factors in obtaining and 
retaining customers include understanding customers' specific job 
requirements, providing temporary personnel in a timely manner, monitoring 
quality of job performance and pricing of services. The Company has 
experienced pricing pressures in all areas of its business and expects these 
pressures to continue. The Company believes that the primary competitive 
factors in obtaining qualified candidates for temporary employment 
assignments are wages, benefits and flexibility of work schedules. In 
addition, the entire staffing industry is faced with recruiting challenges 
due to low unemployment rates. There can be no assurance that the Company 
will not encounter increased competition in the future, which could limit the 
Company's ability to maintain or increase its market share or gross margin, 
and which could have a material adverse effect on the Company's business, 
results of operations, cash flows or financial condition. See 
"Business--Competition." 

     RELIANCE ON FIELD MANAGEMENT.  The Company is dependent on the 
performance and productivity of its local managers, particularly branch 
office, area, regional and zone managers. The loss of some of the Company's 
key managers could have an adverse effect on the Company's operations, 
including the Company's ability to establish and maintain customer 
relationships. The Company's ability to attract and retain business is 
significantly affected by local relationships and the quality of services 
rendered by branch, area, regional and zone managerial personnel. If the 
Company is unable to attract and retain key employees to perform these 
services, the Company's business, results of operations, cash flows or 
financial condition could be adversely affected. Furthermore, the Company may 
be dependent on the senior management of companies that may be acquired in 
the future. If any of these individuals do not continue in their management 
roles, there could be a material adverse effect on the Company's business, 
results of operations, cash flows or financial condition. See 
"Business--Operations." 

     YEAR 2000 COMPLIANCE.  The Company is in the process of implementing a 
comprehensive plan to address the Year 2000 issue.  The Year 2000 issue is 
the result of computer programs being written using two digits, rather than 
four, to define the applicable year. Any programs that have time-sensitive 
software may recognize a date using "00" as the year 1900 rather than the 
year 2000, which could result in a major systems failure or miscalculations. 
There can be no assurance that the Company will be successful in implementing 
its plan, or that such plan, if implemented, will fully ensure Year 2000 
compliance. In addition, the Year 2000 issue may impact other entities with 
which the Company transacts business. There can be no assurance that such 
impact, or issues arising from the Company's own systems, will not have a 
material adverse effect on the business, results of operations, cash flows or 
financial condition of the Company. See "Management's Discussion and Analysis 
of Financial Condition and Results of Operations--Year 2000." 

     RISKS RELATED TO INTERNATIONAL OPERATIONS.  The Company presently has 
operations in Australia, the United Kingdom, Norway, New Zealand and Denmark. 
Operations in foreign markets are inherently subject to certain risks, 
including, in particular, different cultures and business practices, 
overlapping or differing tax structures, economic and political uncertainties 
and compliance issues associated with accounting and reporting requirements 
and changing and, in some cases, complex or ambiguous foreign laws and 
regulations, particularly as they relate to employment. All of the Company's 
sales outside of the United States are denominated in local currencies and, 
accordingly, the Company is subject to risks associated with fluctuations in 
exchange rates which could cause a reduction in the Company's profits. There 
can be no assurance that any of these factors will not have a material 
adverse effect on the Company's business, results of operations, cash flows 
or financial condition.  

     RISKS OF EURO INTRODUCTION.  Beginning in January 1999, a new currency 
called the "euro" was introduced in certain European countries that are part 
of the Economic and Monetary Union ("EMU").  During calendar year 2002, all 
EMU countries are expected to be operating with the euro as their single 
currency. A significant amount of uncertainty exists as to the effect the 
euro will have on the marketplace.  Additionally, all of the rules and 
regulations have not yet been defined and finalized by the European 
Commission with regard to the euro currency.  Currently, the Company does not 
operate in any countries that are part of the EMU; however, the Company 
operates in the United Kingdom and Denmark, which may join the EMU at a 
future date.  The Company is assessing the effect the euro formation will 
have on its internal systems and the sales of its services.  The Company 
expects to take appropriate actions based on the results of such assessment.  
The Company has not yet determined the costs of addressing this issue and 
there can be no assurance that this issue and its related costs will not have 
a material adverse effect on the Company's business, results of operations, 
cash flows or financial condition.  See "Business--Services" and 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations--European Currency."

<PAGE>

     EMPLOYER LIABILITY RISKS.  Providers of temporary staffing services 
place people in the work places of other businesses. An inherent risk of such 
activity includes possible claims of errors and omissions, discrimination or 
harassment, theft of customer property, misappropriation of funds, misuse of 
customers' proprietary information, employment of illegal aliens, other 
criminal activity or torts, claims under health and safety regulations and 
other claims.  There can be no assurance that the Company will not be subject 
to these types of claims, which may result in negative publicity and the 
payment by the Company of monetary damages or fines and which, if 
substantial, could have a material adverse effect on the Company's business, 
results of operations, cash flows or financial condition. 

     RISKS RELATED TO CUSTOMERS.  As is common in the temporary staffing 
industry, the Company's engagements to provide services to its customers are 
generally of a non-exclusive, short-term nature and subject to termination by 
the customer with little or no notice. During fiscal 1997 and 1998, no single 
customer of the Company accounted for more than 1.0% of the Company's sales 
of services. Nonetheless, the loss of any of the Company's significant 
customers could have an adverse effect on the Company's business, results of 
operations, cash flows or financial condition. The Company is also subject to 
credit risks associated with its trade receivables. Should any of the 
Company's principal customers default on their large receivables, the 
Company's business, results of operations, cash flows or financial condition 
could be adversely affected. See "Business--Services." 

     RISKS RELATED TO FRANCHISE AGENT AND LICENSED OPERATIONS.  Franchise 
agent and licensed operations comprise a significant portion of the Company's 
sales of services and license fees.  For fiscal 1997 and 1998, 26.1% and 
24.7%, respectively, of the Company's total sales of services and license 
fees were derived from franchise agent and licensed operations.  In addition, 
the Company's ten largest franchise agents for fiscal 1998 (based on sales 
volume) accounted for 9.8% of the Company's sales of services. The loss of 
one or more of the Company's franchise agents or licensees, and any 
associated loss of customers and sales, could have a material adverse effect 
on the Company's business, results of operations, cash flows or financial 
condition. See "Management's Discussion and Analysis of Financial Condition 
and Results of Operations."  

     The Company's franchise agent and license agreements contain two-year 
non-competition covenants, which the Company vigorously seeks to enforce. 
Efforts to enforce the non-competition covenants have resulted in litigation 
brought by the Company following termination of certain franchise agent 
agreements.  In the past five fiscal years, the Company has commenced four 
actions to enforce the non-competition covenants. Three of those actions were 
resolved in the Company's favor, and one is presently pending. Should former 
franchise agents prevail at trial of such actions, or successfully appeal, 
the Company's ability to prevent franchise agents or licensees from operating 
competitive temporary staffing businesses, could be adversely affected.  The 
Company has incurred, and may continue to incur, substantial attorneys' fees 
and litigation expenses for such lawsuits, both in furtherance of the 
Company's role as plaintiff and in defense of counterclaims or 
cross-complaints, for which insurance coverage typically is not available. 

     GOVERNMENTAL REGULATION RELATING TO HEALTH CARE PROVIDERS.  As a 
provider of home care services in connection with the Company's medical 
services division, the Company is subject to changing federal and state 
regulations relating to the licensing and certification of its offices and 
the sale and delivery of its services. Changes in the law and regulations, as 
well as new interpretations enforced by the relevant regulatory agencies, 
could have a material adverse effect on the Company's business, results of 
operations, cash flows or financial condition. On August 5, 1997, President 
Clinton signed into law the Budget Act, resulting in significant changes to 
cost-based reimbursement for Medicare services provided by home health care 
providers, including the reduction of cost limits. Under the IPS, home health 
agencies will be reimbursed the lowest of: (i) the actual costs of operating 
the agency's Medicare services; (ii) a reduced aggregate cost per visit rate; 
or (iii) an aggregate per beneficiary limit. 

     The Budget Act also requires the HCFA to implement a PPS for fiscal 
years beginning on or after October 1, 1999 to replace this cost-based 
system. Under the PPS, home health agencies will be paid a fixed amount for 
services rendered without regard to the costs of providing such services. 
There can be no assurance that such prospective payments will cover the costs 
incurred by the Company to provide Medicare home health care services. 

     Additionally, a number of states have adopted laws regulating companies 
that provide health care services. In many of the states, the Company need 
only be licensed. In 20 states, a CON from the state must be obtained in 
order to be a Medicare provider. CON laws restrict the types of care that may 
be provided and can limit or prohibit the Company's ability 


<PAGE>

to provide certain services and to establish or expand its medical 
operations. CON requirements and restrictions vary substantially from state 
to state. In addition to individual state regulation, JCAHO accreditation has 
become important in providing home health care services. As of December 31, 
1998, 11 of the Company-owned offices, two franchise agent offices and four 
licensed offices were accredited by JCAHO. and an application for JCAHO 
accreditation was pending for one franchise agent office.  Failure of the 
Company to obtain the necessary certification or accreditation could have a 
material adverse effect on the Company's business, results of operations, 
cash flows or financial condition. See "Business--Medical Services" and 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations--Discontinued Operations." 

ITEM 2.   PROPERTIES.

     The executive offices of the Company are located at 301 Lennon Lane, 
Walnut Creek, California. The Company owns six buildings, totaling 
approximately 75,585 square feet, which house its corporate headquarters. 
Certain of these buildings are subject to a trust deed. The Company is 
currently considering selling its current corporate headquarters and using 
the proceeds to retire debt and may lease new space to house its corporate 
headquarters.

     In addition, the Company leases space for its Company-owned offices in 
the United States and abroad. The leases generally are for terms of one to 
five years and contain customary terms and conditions. The Company believes 
that its facilities are adequate for its current needs and does not 
anticipate any difficulty replacing such facilities or locating additional 
facilities, if needed.

ITEM 3.   LEGAL PROCEEDINGS.

     In the ordinary course of its business, the Company is periodically 
threatened with or named as a defendant in various lawsuits. The principal 
risks that the Company insures against are workers' compensation, bodily 
injury, property damage, professional malpractice, errors and omissions and 
fidelity losses. No pending litigation exists which the Company anticipates 
will have a material adverse effect on the Company's business, results of 
operations, cash flows or financial condition.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     On August 13, 1998, the Stockholders of the Company held a Special 
Meeting in order to vote upon a change in the name of the Company from 
"Western Staff Services, Inc." to "Westaff, Inc."   Effective September 24, 
1998, 9,044,485 votes were cast in favor of the name change and no votes were 
cast against it. No proxies were solicited.


<PAGE>

                                   PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The Common Stock has been included for quotation in the Nasdaq National 
Market under the symbol "WSTF" since April 30, 1996. The following table sets 
forth, for the periods indicated, the high and low closing sales prices of 
the Common Stock as reported on the Nasdaq National Market, adjusted to 
reflect a three-for-two Common Stock split effected in the form of a stock 
dividend paid on May 29, 1998 to shareholders of record at the close of 
business on May 18, 1998.

<TABLE>
<CAPTION>

                                                                   HIGH         LOW
                                                                  ------       ------
<S>                                                             <C>         <C>
Fiscal 1997:
   First Quarter ended January 25, 1997 . . . . . . . . . . . .    10.00        6.08
   Second Quarter ended April 19, 1997. . . . . . . . . . . . .     6.92        4.83
   Third Quarter ended July 12, 1997. . . . . . . . . . . . . .     7.50        5.75
   Fourth Quarter ended November 1, 1997. . . . . . . . . . . .    11.83        7.17
Fiscal 1998:
   First Quarter ended January 24, 1998 . . . . . . . . . . . .    11.42        9.17
   Second Quarter ended April 18, 1998. . . . . . . . . . . . .    17.42       11.17
   Third Quarter ended July 11, 1998. . . . . . . . . . . . . .    21.33       15.83
   Fourth Quarter ended October 31, 1998. . . . . . . . . . . .    19.00        8.00
Fiscal 1999:
   First Quarter through January 28, 1999 . . . . . . . . . . .    11.63        5.94

</TABLE>


     On December 31, 1998, the last reported sales price on the Nasdaq National
Market for the Common Stock was $6.25 per share. As of December 31, 1998, there
were 2,159 beneficial owners of the Common Stock.


<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>

                                                                                      FISCAL YEAR 
                                                                --------------------------------------------------------
                                                                  1998        1997        1996        1995        1994
                                                                --------    --------    --------    --------    --------
                                                        (Amounts in thousands except per share amounts and number of offices)
<S>                                                          <C>         <C>         <C>          <C>         <C>
Sales of services and license fees                              $599,709    $530,076    $441,808    $361,768    $301,024
Operating income                                                  24,020      15,523      13,757      11,249       8,439
Income from continuing operations                                $13,748      $9,210      $2,725     $10,348      $8,536
                                                                --------------------------------------------------------
                                                                --------------------------------------------------------
Diluted earnings per share - continuing operations                 $0.87       $0.60       $0.19       $0.78       $0.64
                                                                --------------------------------------------------------
                                                                --------------------------------------------------------
Pro forma income from continuing operations (1)                                           $8,203      $7,042      $5,159
                                                                                        --------------------------------
                                                                                        --------------------------------
Diluted pro forma earnings per share - continuing operations (1)                           $0.57       $0.53       $0.39
                                                                                        --------------------------------
                                                                                        --------------------------------


BALANCE SHEET DATA (AT END OF PERIOD):
Working capital                                                  $57,702     $45,184     $31,982     $17,349     $24,293
Total assets                                                     197,145     154,530     120,780      96,169      76,367
Short-term debt                                                   20,423      21,298      11,193      16,838       3,895
Long-term debt (excluding current portion)                        44,708      17,631       3,603       5,623       4,776
Stockholders' equity                                              67,483      57,296      49,252      31,792      29,911

OTHER OPERATING DATA:
Number of offices (at end of period)
  Company-owned                                                      267         226         217         196         168
  Franchise agent                                                     82         103         103          90          89
  Licensed                                                            25          11           7          21          16
                                                                --------------------------------------------------------
    Total                                                            374         340         327         307         273
                                                                --------------------------------------------------------
                                                                --------------------------------------------------------

SYSTEM REVENUE DATA (EXCLUDING LICENSE FEES):
    Domestic business services                                  $549,689    $473,192    $418,546    $384,202    $327,193
    International business services                               77,492      72,554      58,872      48,528      35,641
                                                                --------------------------------------------------------
    Total                                                       $627,181    $545,746    $477,418    $432,730    $362,834
                                                                --------------------------------------------------------
                                                                --------------------------------------------------------

</TABLE>

(1)  Adjusted to reflect the effects of federal and state income taxes as if 
     the Company had been subject to income taxation as a C corporation 
     during each of the periods presented.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

       The following discussion is intended to assist in the understanding 
and assessment of significant changes and trends related to the results of 
operations and financial condition of Westaff, Inc., together with its 
consolidated subsidiaries.  This discussion and analysis should be read in 
conjunction with the Company's Consolidated Financial Statements and Notes 
thereto included herein.

       In addition to historical information, this management's discussion 
and analysis includes certain forward-looking statements regarding events and 
financial trends that may affect the Company's future operating results and 
financial position.  These forward-looking statements include, but are not 
limited to, statements regarding sales, acquisitions, gross margin, workers' 
compensation costs, selling and administrative expenses, interest expense, 
income taxes, capital 


<PAGE>

expenditures, capital resources, management information systems, Year 2000 
issues and medical operations.  Readers are cautioned not to place undue 
reliance on these forward-looking statements, which speak only as of the date 
hereof.  The Company undertakes no obligation to publicly release the results 
of any revisions to these forward-looking statements to reflect events or 
circumstances after the date hereof or to reflect the occurrence of 
unanticipated events.

       The forward-looking statements included herein are also subject to a 
number of other risks and uncertainties that could cause the Company's actual 
results and financial position to differ materially from those anticipated in 
the forward-looking statements.  Such risks and uncertainties include, but 
are not limited to:  demand for the Company's services, the competition 
within its markets, the loss of a principal customer and the Company's 
ability to increase the productivity of its existing offices, to control 
costs, to expand operations and the availability of sufficient personnel.  
There are also significant risks and uncertainties relating to the ability of 
the Company to dispose of its medical operations in a timely and cost 
effective manner.  Due to the foregoing factors, it is possible that in some 
future period the Company's results of operations may be below the 
expectations of public market analysts and investors.  In addition, the 
Company's results of operations have historically been subject to quarterly 
and seasonal fluctuations, with demand for temporary staffing historically 
highest in the fourth fiscal quarter, due largely to the planning cycles of 
many of the Company's customers, and typically lower in the first fiscal 
quarter, due, in part, to national holidays as well as to plant shutdowns 
during and after the holiday season.  These and other risks and uncertainties 
related to the Company's business are described in detail in "Factors 
Affecting Future Operating Results."

OVERVIEW

       The Company provides temporary staffing services primarily in suburban 
and rural markets ("secondary markets"), as well as in the downtown areas of 
major urban centers ("primary markets"), in the United States and selected 
international markets.  Through its network of Company-owned, franchise agent 
and licensed offices, the Company offers a wide range of temporary staffing 
solutions, including replacement, supplemental and on-site programs to 
businesses and government agencies.  The Company has over 50 years of 
experience in the staffing industry and operates over 370 business services 
offices in 45 states, the District of Columbia, Guam and five foreign 
countries.

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

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

DISCONTINUED OPERATIONS  

       In November 1998, the Company announced its plan to sell Western 
Medical.  As a result of this decision, the Company has classified its 
medical operations as discontinued operations and, accordingly, has 
segregated the net assets of the discontinued operations in the Consolidated 
Balance Sheet at October 31, 1998, the operating results of the discontinued 
operations in the Consolidated Statements of Operations for fiscal 1998, 
fiscal 1997 and fiscal 1996 and the cash flows from discontinued operations 
in the Consolidated Statement of Cash Flows for fiscal 1998 (see Note 3 of 
Notes to Consolidated Financial Statements).


<PAGE>

       The Company reported an after-tax loss from discontinued operations of 
$6.3 million or $0.40 per share in fiscal 1998. The loss is related primarily 
to reduced revenues in connection with Medicare's Interim Payment System 
enacted as part of the Budget Act, reduced revenues as a result of settlement 
of a prior year Medicate audit, additional reserves for Medicare accounts 
receivable, increases in allowances for doubtful accounts and other charges.  

       During the fourth quarter of fiscal 1998, the Company recorded an 
additional after-tax charge on the planned disposal of its medical operations 
of $3.5 million or $0.23 per share. This after-tax charge includes $2.5 
million for the write down of assets to estimated net realizable value, 
$240,000 of estimated costs to be incurred in selling the operation, and 
$740,000 of estimated operating losses to be incurred during the disposal 
period.   The Company is actively marketing its medical operations and is 
currently involved in discussions with a number of parties who have expressed 
an interest in the medical operations.  The Company's goal is to complete the 
sale of its medical operations by the end of the third quarter of fiscal 
1999.  However, there can be no assurance that the Company will be able to 
complete the sale of its medical operations by that time.  Furthermore, the 
amount of the loss on disposal of the medical operations is based on a number 
of assumptions including the estimated net realizable value of the 
operations, estimated selling expenses, estimated operating losses to be 
incurred during the disposal period and the length of time estimated to 
dispose of the operation.  There can be no assurance that the Company will be 
able to dispose of the medical operations on terms and costs similar to those 
estimated by the Company.  Should the actual sale period, terms or costs 
differ materially from those estimated by management, the Company would 
record additional losses (or gains) in future periods.  

       The Company's decision to sell the medical operations was prompted in 
large measure by the increasingly complex and unfavorable regulatory 
environment affecting the Medicare business and the impact that changes in 
regulations have had and will likely continue to have on the ability of the 
Company to operate profitably in the medical sector.  The disposition of the 
medical operations will enable the Company to focus on business services, 
where management believes that long-term growth prospects are more 
attractive. 

RESULTS OF CONTINUING OPERATIONS

       The table below sets forth, for the three most recent fiscal years, 
certain results of continuing operations data as a percentage of sales of 
services and license fees. 

<TABLE>
<CAPTION>
                                                        FISCAL YEAR
                                                  1998      1997      1996
                                                  ----      ----      ----
      <S>                                     <C>        <C>       <C>
        Sales of services                         99.7%     99.8%     99.4%
        License fees                               0.3%      0.2%      0.6%
                                                ---------------------------
        Total sales of services and license      100.0%    100.0%    100.0%
        Costs of services                         78.8%     79.9%     79.1%
                                                ---------------------------
        Gross profit                              21.2%     20.1%     20.9%
        Franchise agents' share of gross           2.8%      3.3%      3.7%
        Selling and administrative expenses       13.2%     12.9%     13.1%
        Depreciation and amortization              1.2%      1.0%      1.0%
                                                ---------------------------
        Operating income from continuing
         operations                                4.0%      2.9%      3.1%
        Interest expense                           0.3%      0.1%      0.1%
        Interest income                           -0.1%     -0.1%     -0.1%
                                                ---------------------------
        Income from continuing operations
         before income taxes                       3.8%      2.9%      3.0%
        Provision for income taxes                 1.5%      1.2%      2.4%
                                                ---------------------------
        Income from continuing operations          2.3%      1.7%      0.6%
                                                ---------------------------
                                                ---------------------------

</TABLE>

<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997

       SALES OF SERVICES AND LICENSE FEES.  Sales of services increased $68.6 
million, or 13.0%, for fiscal 1998 as compared to fiscal 1997.  The increase 
resulted from a 9.5% increase in billed hours and a 3.2% increase in average 
billing rates per hour.   Billed hours increased primarily due to 
acquisitions, increased demand for the Company's services in existing offices 
and new office openings.  Same store sales increased approximately 8.0% for 
fiscal 1998 as compared to fiscal 1997.  Acquisitions accounted for 
approximately $38.1 million of the increase in sales of services.  Sales of 
services for  fiscal 1998 increased 13.9% and 6.8%, respectively, for 
domestic business services and international business services as compared to 
fiscal 1997.  Excluding the effect of foreign currency rate fluctuations, 
sales of services increased 18.5% for international business services. The 
increase in average billing rates reflects the ongoing effects of the 
Company's gross profit improvement program, changes in the Company's overall 
business mix and inflationary factors.  In recent months the Company has seen 
a slowing in the rate of sales growth from levels experienced earlier in 
fiscal 1998.  This slowing is consistent with industry trends and is likely 
to continue into fiscal 1999.  Furthermore, the Company has scaled back its 
near-term acquisition plans and, accordingly, sales growth from additional 
acquisitions will likely be minimal at least through the first two quarters 
of fiscal 1999 and possibly throughout fiscal 1999.

       License fees are charged to licensed offices based either on a 
percentage of sales or of gross profit generated by the licensed offices.  
License fees increased $1.1 million, or 102.6%, for fiscal 1998 as compared 
to fiscal 1997. During the period from November 2, 1997 to October 31, 1998 
nine franchise agents converted to the license program and two licensees 
purchased the Company's interest in their licenses and became independent 
such that they are no longer affiliated with the Company.

       COSTS OF SERVICES.  Costs of services include hourly wages of 
temporary employees, employer payroll taxes, state unemployment and workers' 
compensation insurance and other employee-related costs.  Costs of services 
increased $49.4 million, or 11.7%, for fiscal 1998 as compared to fiscal 
1997.  Gross margin increased from 20.1% in fiscal 1997 to 21.2% in fiscal 
1998, primarily due to the Company's gross profit improvement program 
implemented during the first quarter of fiscal 1997 for its domestic business 
services offices and lower workers' compensation and unemployment insurance 
costs as a percentage of sales of services and license fees.   During the 
first quarter of fiscal 1997 the Company initiated a nationwide program 
designed to maximize gross margin by increasing prices to select customers 
and focusing on higher margin business. Primarily as a result of this 
program, the Company generated progressively higher gross margin throughout 
fiscal 1997.  Gross margin increased from 19.3% in the first quarter of 
fiscal 1997 to 19.8%, 20.1%, and 20.9% for the second, third and fourth 
quarters, respectively, of fiscal 1997.  Gross margin dropped slightly to 
20.4% for the first quarter of fiscal 1998 as compared to the fourth quarter 
of fiscal 1997 due to increased holiday pay and seasonal factors; however, 
gross margin once again increased to 21.0%, 21.3% and 21.6% for the second, 
third and fourth quarters, respectively, of fiscal 1998.  Gross margin for 
international business services decreased from 21.9% in fiscal 1997 to 21.5% 
in fiscal 1998, primarily due to increased sales of lower margin business in 
Australia.  The Company will continue its efforts to improve gross margin 
where feasible;  however, within the current business climate, the Company 
believes that there are fewer opportunities available to increase gross 
margin, and, in some areas, the Company anticipates increased downward 
pressures on margins due to competition.  There can be no assurance that the 
Company will be successful in either increasing or maintaining gross margin.  

       Workers' compensation costs were 3.2% of payroll for fiscal 1998 and 
3.5% for fiscal 1997.  These costs tend to vary depending upon the mix of 
business between clerical staffing and light industrial staffing. During the 
third quarter of fiscal 1998, the Company evaluated the loss development 
trends and historical accruals for policy years 1994, 1995 and 1997 as well 
as the preliminary trends for policy year 1998.  As a result of improvements 
in loss development trends for these years, during the third quarter of 
fiscal 1998, the Company reduced its current accrual rates related to 
workers' compensation costs.  The Company currently estimates that the 
accrual rates for workers' compensation costs will be in the range of 3.0% to 
3.3% of direct labor for fiscal 1999.  These rates will be evaluated 
throughout fiscal 1999 to ensure that they remain appropriate in light of the 
Company's loss trends.   There can be no assurance that the Company's 
programs to control workers' compensation expenses will be effective or that 
loss development trends will not require a charge to costs of services in 
future periods to increase workers' compensation accruals.

<PAGE>

       FRANCHISE AGENTS' SHARE OF GROSS PROFIT.  Franchise agents' share of 
gross profit represents the net distribution paid to franchise agents based 
either on a percentage of sales or of gross profit generated by the franchise 
agents' operation.  Franchise agents' share of gross profit decreased 
$598,000 or 3.5%, for fiscal 1998 as compared to fiscal 1997.  As a 
percentage of sales of services and license fees, franchise agents' share of 
gross profit declined from 3.3% during fiscal 1997 to 2.8% for fiscal 1998.  
This decrease is primarily the result of franchise conversions to the license 
program as noted above and to a decrease in the proportion of sales and gross 
profit attributable to franchise agent offices as compared to Company-owned 
offices.  

       SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND 
AMORTIZATION).  Selling and administrative expenses increased $12.3 million, 
or 16.6%, for fiscal 1998 as compared to fiscal 1997.  As a percentage of 
sales of services and license fees, selling and administrative expenses 
increased from 13.9% for fiscal 1997 to 14.4% for fiscal 1998. The increase 
in selling and administrative expenses as a percentage of sales of services 
and license fees was primarily due to higher incentive compensation costs, a 
higher proportion of business generated through licensed offices and 
Company-owned offices as compared to franchise agent offices, and higher 
amortization costs resulting from increased acquisition activity.  The 
Company's incentive compensation plans are directed towards increasing gross 
profit and operating income.  These incentive costs increased during fiscal 
1998 as a direct result of the significant increases in both gross profit and 
operating income for fiscal 1998 as compared to fiscal 1997.   The relative 
volume of franchise business also affects the overall selling and 
administrative costs.  As the proportion of franchise sales and gross profit 
declines relative to total sales (due to conversions from franchise agent 
offices to licensed offices or Company-owned offices), franchise agents' 
share of gross profit declines as a percentage of sales of services and 
license fees, and selling and administrative costs tend to increase as a 
percentage of sales of services and license fees.  

       Selling and administrative expenses are also impacted by the Company's 
management information systems.  In the third quarter of fiscal 1998, the 
Company finalized its long-term strategic plan for its next generation 
management information and support systems.  This plan calls for a phased 
migration from the Company's existing systems to the new systems over a 24 
month period.  Capital expenditures under the plan are expected to be 
approximately $12.0 million including costs of hardware, software and 
internal and external costs associated with the implementation of the 
project.  

       The initial phase will be to replace the Company's back-office 
financial reporting systems and should be completed during the second quarter 
of fiscal 1999.  Since the Company's existing back-office financial reporting 
systems are fully depreciated, the implementation of the new back-office 
systems will result in increased depreciation expenses starting in the second 
quarter of fiscal 1999.  The second phase will be the implementation and 
roll-out of a new branch office integrated search and retrieval and remote 
data capture module.  The initial pilot for this front-end system is expected 
to be completed during the second quarter of fiscal 1999, with roll-out to 
all domestic business services offices estimated to take approximately 18 to 
24 months.  The Company has also begun implementation and roll-out of a wide 
area network (WAN), which will allow enhanced communication and data 
transmission capabilities among the field and corporate offices.  The Company 
completed a pilot set-up of the WAN during the fourth quarter of fiscal 1998. 
 The actual roll-out of the network to the remaining field offices is planned 
to be completed over the next 6 to 12 months. As the individual branch 
offices are converted to the new integrated front-office system and network, 
the Company expects to incur increased training and depreciation costs.  
Furthermore, as each office is connected to the WAN, the Company will incur 
increased telecommunication costs.  The Company expects to realize 
productivity gains as a result of the enhanced communication capabilities and 
features of the front-end systems which may offset the incremental costs from 
the system;  however, there can be no assurance that such productivity gains 
or cost savings will be realized.

       The final phase of the new systems will be the implementation of new 
payroll, billing and activities management systems integrating both branch 
office systems and back-office financial systems. The Company has reduced the 
estimated useful life of its existing payroll/billing system to conform to 
the replacement schedule;  however, the incremental additional depreciation 
as a result of the reduced system life is immaterial to the Company's results 
of operations.  The Company anticipates completion of this project in fiscal 
2000 with a phased roll-out to offices over a 12 month period.  As this final 
phase is implemented, the Company expects to incur additional expenses for 
training and depreciation.  In addition, during the roll-out period, the 
Company will be required to operate the old payroll/billing systems and new 
integrated systems concurrently, which will  result in higher administrative 
expenses.


<PAGE>
       The Company believes that the new enterprise-wide systems will provide 
significant operating efficiencies for both field and corporate office 
personnel.  However, there can be no assurance that the Company will meet 
anticipated completion dates for system replacements and enhancements 
consisting of next generation management information and support systems, 
that such replacements and enhancements will be completed in a cost-effective 
manner or that such replacements and enhancements will support the Company's 
future growth or provide significant gains in efficiency and productivity.  
The failure of the replacements and enhancements to meet these expected goals 
could result in increased system costs and could have a material adverse 
effect on the Company's business, results of operations, cash flows or 
financial condition.

       INTEREST EXPENSE.  Interest expense increased $963,000, or 160.5%, for 
fiscal 1998 as compared to fiscal 1997, reflecting higher average borrowings 
outstanding during fiscal 1998 required to support the Company's internal 
growth and acquisitions.  

       PROVISION FOR INCOME TAXES.  The provision for income taxes for fiscal 
1998 was $9.2 million as compared to $6.1 million for fiscal 1997.  This 
increase was due primarily to the increase in income before income taxes of 
$7.6 million. The effective income tax rate for both fiscal 1998 and fiscal 
1997 was 40.0%. The Company currently estimates that the effective income tax 
rate for fiscal 1999 will be approximately 40.0%.

FISCAL 1997 COMPARED TO FISCAL 1996

       SALES OF SERVICES AND LICENSE FEES.  Sales of services increased $89.7 
million, or 20.4%, in fiscal 1997 as compared to fiscal  1996.  The increase 
resulted from a 16.9% increase in billed hours and a 3.0% increase in average 
billing rates per hour.   Billed hours increased primarily due to increased 
demand for the Company's services in existing offices, acquisitions and new 
office openings.  Same store sales increased approximately 12.9% for fiscal 
1997 as compared to fiscal 1996.   Acquisitions accounted for approximately 
$30.3 million of the increase in sales of services.  This increase includes 
sales of services from offices of one of the Company's licensees, which were 
acquired and converted to Company-owned offices in the third quarter of 
fiscal 1996.  Sales of services for fiscal 1997 increased 20.0% and 23.2%,  
respectively, for the Company's domestic business services and international 
business services as compared to fiscal 1996.  The increase in average 
billing rates reflects inflationary factors, the effects of the Company's 
gross profit improvement program implemented during the first quarter of 
fiscal 1997 and changes in the Company's overall business mix.  Fiscal 1996 
included 53 weeks while fiscal 1997 included 52 weeks.

       License fees decreased $1.5 million, or 58.9%, for fiscal 1997 as 
compared to fiscal 1996.  Approximately $472,000 of the license fees for 
fiscal 1996 was associated with a major customer of one of the Company's 
licensees.  The contract with this licensee's customer was completed on 
December 31, 1995. License fees also decreased due to the acquisition of one 
of the Company's licensees during the third quarter of fiscal 1996 as noted 
above.   During fiscal 1997, three franchise agents converted to the license 
program and one licensee converted from the license program to the franchise 
program.

       COSTS OF SERVICES.  Costs of services increased $74.0 million, or 
21.2%, in fiscal 1997 as compared to fiscal 1996.  Gross margin decreased 
from 20.9% in fiscal 1996 to 20.1% in fiscal 1997 due to downward competitive 
pressures on margins, particularly within the light industrial and clerical 
segments in which the Company operates, a decrease in license fees noted 
above and higher workers' compensation costs.   Gross margin for 
international business services decreased from 22.5% in fiscal 1996 to 21.9% 
in fiscal 1997 due to similar competitive pressures.

       Workers' compensation costs increased to 3.5% of direct labor in 
fiscal 1997 as compared to 3.1% of direct labor during fiscal 1996.  This 
increase was primarily due to increases in the basic accrual rates for fiscal 
1997.  

       FRANCHISE AGENTS' SHARE OF GROSS PROFIT.  Franchise agents' share of 
gross profit increased $978,000, or 6.0%, for  fiscal 1997 as compared to 
fiscal 1996. As a percentage of sales of services and license fees, franchise 
agents' share of gross profit declined from 3.7% during fiscal 1996 to 3.3% 
for fiscal 1997. This decrease is primarily the result of a decrease in the 
proportion of sales and gross profits for franchise offices as compared to 
Company-owned offices. During fiscal 1996 and fiscal 1997, the Company 
acquired the operations of six of its franchise agents and converted these 
offices to Company-owned offices.

<PAGE>

       SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND 
AMORTIZATION).  Selling and administrative expenses increased $11.5 million, 
or 18.4%, for fiscal 1997 as compared to fiscal 1996.  As a percentage of 
sales of services and license fees, selling and administrative expenses were 
14.1% in fiscal 1996 and 13.9% in fiscal 1997.  Fiscal 1997 included 
approximately $618,000 in severance costs associated with staff reductions in 
an effort to reduce costs.  The relative volume of franchise business also 
affects the overall selling and administrative costs.  As the proportion of 
franchise sales and gross profits declines relative to total sales, franchise 
agents' share of gross profit declines as a percentage of sales of services 
and license fees, and selling and administrative costs tend to increase as a 
percentage of sales of services and license fees.  

       Selling and administrative costs for fiscal years 1995 through 1997 
were affected by the implementation of the payroll and billing portion of the 
Company's management information systems.  Due to the comprehensive scope of 
the systems, which affected all major processing functions within the 
Company, and the need to operate both the old and new systems during the 
conversion period, the Company incurred increased expenses to administer and 
implement the new systems.  As of November 1997, the Company had completed 
the conversion of essentially all its domestic business services processing 
sites to the payroll and billing portion of the new system. 

       INTEREST EXPENSE.  Interest expense increased $40,000 or 7.1% for 
fiscal 1997 as compared to fiscal 1996, reflecting higher average borrowings 
outstanding during the fiscal 1997 period to support acquisitions and 
internal growth.

       PROVISION FOR INCOME TAXES.  Provision for income taxes decreased from 
$10.7 million for fiscal 1996 to $6.1 million for fiscal 1997.  On April 30, 
1996 and in conjunction with the Company's initial public offering, the 
Company elected to terminate its S corporation status.  In connection with 
this termination, the Company was required by the Internal Revenue Service 
Code to change its method of accounting for income tax reporting purposes 
from the cash basis to the accrual basis.  The termination resulted in a 
non-recurring net income tax charge of $7.5 million in fiscal 1996.  This 
charge was primarily due to temporary differences resulting from the 
Company's historical use of the cash method of accounting for income tax 
purposes.  The effective income tax rate decreased from 79.7% for fiscal 1996 
to 40.0% for fiscal 1997.  The fiscal 1996 effective rate was higher due to 
the termination of the S corporation status of the Company.

LIQUIDITY AND CAPITAL RESOURCES

       Historically, the Company has financed its operations through cash 
generated by operating activities and through various forms of debt and 
equity financings and bank lines of credit.  The Company's principal use of 
cash is for financing of accounts receivable, particularly during periods of 
growth and, in recent years, for acquisitions.  Temporary personnel are 
generally paid on a weekly basis while payments from customers are generally 
received 30 to 60 days after billing for business services.  As a result of 
seasonal fluctuations, accounts receivable balances are historically higher 
in the fourth fiscal quarter and are generally at their lowest during the 
first fiscal quarter. Accordingly, short-term borrowings used to finance 
accounts receivable generally follow a similar seasonal pattern.  For 
purposes of the following discussion of cash flows, the cash flows from 
discontinued operations have been segregated for fiscal 1998.  Fiscal 1997 
and fiscal 1996 cash flows are presented on a consolidated basis.

       Net cash provided by (used in) operating activities was $4.4 million, 
($5.3) million and $2.2 million for fiscal 1998, fiscal 1997 and fiscal 1996, 
respectively.  The fluctuations in cash from operating activities is 
primarily due to increases in income from continuing operations, the effects 
of the discontinued medical operations, changes in accounts receivable 
balances, the effect of the Company's change from an S corporation to a C 
corporation for income tax reporting purposes, changes in due from licensee 
balances and increases in depreciation and amortization resulting from 
increased capital expenditures and acquisition activity.  Income from 
continuing operations increased from $2.7 million in fiscal 1996 to $9.2 
million  and $13.7 million in fiscal 1997 and fiscal 1998, respectively.  In 
fiscal 1998, cash flows decreased $6.2 million for discontinued medical 
operations.  This decrease primarily relates to operating losses and the 
estimated loss on the disposal of the operations, partially offset by 
increases in accrued liabilities.  Accounts receivable balances increased 
$21.1 million and $23.4 million in fiscal 1996 and fiscal 1997, primarily due 
to sales growth and to increases in the average number of days outstanding 
for the accounts receivable, largely due to the timing of Medicare 
reimbursements.  Accounts receivable from continuing operations increased 
$9.1 million in fiscal 1998 primarily due to growth. Income taxes payable and 
deferred income taxes have also impacted cash flows. In fiscal 1996, cash 
flows relating to income taxes increased primarily due to the deferral of tax 
payments relating to the Company's change from the cash basis to the accrual 
basis for income tax 


<PAGE>

purposes (taxes relating to this change were payable over a four-year 
period).  In fiscal 1997 and fiscal 1998, a portion of these deferred taxes 
were paid resulting in reduced cash flows.  Also during fiscal 1998, 
additional deferred tax assets were established in connection with the 
Company's workers' compensation program and in connection with the estimated 
loss on the sale of the medical operations.  Cash flows relating to due from 
licensees have fluctuated primarily due to changes in the number of licensees 
and the volume of licensee sales.

       Cash used for capital expenditures, which are generally for software, 
computers and peripherals, and office furniture and equipment, totaled $8.9 
million, $5.8 million and $6.4 million for fiscal 1998, fiscal 1997 and 
fiscal 1996, respectively.  The increase in capital expenditures during 
fiscal 1998 is associated with initial payments for the Company's next 
generation management information and support systems.  Capital expenditures 
for these systems are expected to be approximately $12.0 million including 
costs of hardware, software and internal and external costs associated with 
implementation of the project. The Company incurred $6.2 million of such 
capital expenditures during fiscal 1998 and expects to spend approximately 
$4.8 million during fiscal 1999 and approximately $1.0 million during fiscal 
2000. 

       During fiscal 1998, fiscal 1997 and fiscal 1996, cash outflows for new 
acquisitions and for contingent payments under existing acquisitions totaled 
$15.4 million, $7.7 million and $4.8 million, respectively.  Payments of $2.3 
million and $30,000 related to acquisitions are due for fiscal 1999 and 
fiscal 2000, respectively, with additional consideration contingent on sales, 
gross profit or pre-tax income of the acquired businesses in future periods.  
During fiscal 1998, notes receivable increased by a net $2.1 million, 
primarily as a result of advances to a licensee to assist in financing an 
acquisition of an independent temporary staffing company as well as advances 
to franchise agents and licensees to support their operations and internal 
growth.  Cash outflows of $2.6 million from the discontinued medical 
operations primarily represented payments for acquisitions and capital 
expenditures.

       During fiscal 1998 and fiscal 1997 the Company increased borrowings by 
a net $25.0 million and $24.1 million, respectively, primarily to fund 
acquisitions and capital expenditures and to support the Company's internal 
growth.  Net proceeds to the Company in fiscal 1996 from its initial public 
offering were approximately $19.0 million.  Net cash used for debt reduction 
totaled $7.7 million in fiscal 1996.  On May 20, 1998, the Company executed 
private placements of 10-year senior secured notes totaling $30.0 million 
payable in equal annual installments beginning in the year 2002.  Proceeds 
from the notes were used to repay outstanding borrowings under the revolving 
agreement of $22.6 million, with the remainder to be used for working capital 
and general corporate purposes.  Under the senior secured notes payable, the 
Company is required to comply with certain financial and other covenants, the 
most restrictive of which is the maximum total debt to capitalization ratio. 
The Company was in compliance with these covenants as of October 31, 1998. 
Distributions to stockholders totaled $2.5 million in each of fiscal 1996 and 
fiscal 1997 representing the remaining undistributed S corporation earnings 
of the Company.  The Company does not anticipate declaring or paying any cash 
dividends on its common stock in the foreseeable future.

       During fiscal 1998 and fiscal 1997, the Company repurchased 180,000 
and 178,500 shares of common stock on the open market for aggregate cash 
consideration of $3.0 million and $1.2 million, respectively.   During fiscal 
1998 and fiscal 1997, 186,000 and 64,623 shares were reissued under the 
employee stock option and purchase plans with aggregate cash proceeds of $1.8 
million and $310,000, respectively.

       The Company has senior secured credit facilities for up to $108.0 
million consisting of a $90.0 million, five-year revolving agreement and an 
$18.0 million six-year term loan for working capital needs and  general 
corporate purposes, including capital expenditures and acquisitions.  Direct 
advances under the revolving credit agreement are limited by outstanding 
irrevocable standby letters of credit up to a maximum amount of $20.0 
million.  Total advances are also limited under formulas based on earnings 
before interest, taxes, depreciation and amortization (EBITDA) and total debt 
to total capitalization.   The credit facility contains covenants which, 
among other things, require the Company to maintain certain financial ratios 
and generally restrict, limit or, in certain circumstances,  prohibit the 
Company with respect to capital expenditures, disposition of assets, 
incurrence of debt, mergers and acquisitions, loans to affiliates and 
purchases of investments.  As of October 31, 1998, the Company had $10.0 
million in outstanding letters of credit and had borrowed $15.6 million under 
the revolving agreement.  At  October 31, 1998, the Company was not in 
compliance with the EBITDA and certain other financial covenants, primarily 
as a result of charges related to the discontinuation of its medical 
operations.  The Company was also not in compliance with the capital 
expenditure covenants.  The Company has received waivers with respect to all 
such covenants from its bank lenders.


<PAGE>
       The Company is currently marketing its medical operations with a goal 
to complete the sale of these operations by the end of the third quarter of 
fiscal 1999.  Proceeds from the sale will be used to pay off debt.  

       On June 2, 1998, the Company filed a Form S-4 shelf registration 
statement with the Securities and Exchange Commission registering 1.5 million 
shares of its $.01 par value common stock which may be offered in the future 
in connection with the Company's acquisition program, of which approximately 
1.1 million shares remain available for issuance.

       The Company has filed registration statements under the Securities Act 
with respect to an aggregate of 2.3 million shares of common stock reserved 
for issuance under its equity incentive plans, thus permitting the resale of 
such shares by non-affiliates in the public market without restriction under 
the Securities Act upon the exercise of stock options.  As of October 31, 
1998, options to purchase an aggregate of 785,814 shares of common stock were 
outstanding under the Company's equity incentive plans.

       The Company believes that cash from operations and the Company's 
current borrowing capacity will be sufficient to meet anticipated needs for 
working capital and capital expenditures at least through the next twelve 
months.  

YEAR 2000

       The Company is in the process of implementing a comprehensive plan to 
address the Year 2000 issue, particularly with respect to its mission 
critical systems.  Mission critical systems are those whose failure poses a 
risk of disruption to the Company's ability to provide employment to its 
temporary employees and temporary staffing services to its customers.   The 
Year 2000 issue is the result of computer programs being written using two 
digits rather than four to define the applicable year.  Any programs that 
have time-sensitive software may recognize a date using "00" as the year 1900 
rather than the year 2000.  This could result in a major system failure or 
miscalculations. The Company's plan includes three phases; (i) a complete 
inventory and evaluation of all mission critical systems including both 
information technology (IT) systems and non-IT systems such as hardware 
containing embedded technology, for Year 2000 compliance; (ii) modification 
or replacement of hardware and software affected by the Year 2000 issue; and 
(iii) testing of the modified systems and formulation of a contingency plan 
in the event non-compliant systems are not in place prior to January 1, 2000. 
The Company is using both internal and external resources to assess its 
systems, develop and implement its plan.

       The Company has essentially completed its initial system inventory and 
evaluation phase.  For its domestic operations, the Company has identified 
one group of non-compliant mission critical back-office systems and is in the 
process of installing Year 2000 compliant replacement systems.  The Company 
expects that these systems will be implemented during the second quarter of 
fiscal 1999.  The Company identified one additional mission critical system 
that is not fully Year 2000 compliant and is in the process of modifying this 
system to bring it into compliance.  The Company estimates that it has  
completed approximately 50% of the remediation efforts with respect to this 
system and expects to complete all modifications and testing of this system 
by the end of April 1999.  The Company expects to bring its domestic 
operations systems to full Year 2000 compliance by the end of the second 
quarter of fiscal 1999.  For the international operations, the Company will 
be required to replace or upgrade the payroll/billing systems in two of its 
international operations and will also be required to upgrade or replace a 
number of back office support systems.  The Company is currently in the 
process of making these changes and/or making final selection of the 
replacement systems.  The Company currently plans to have all international 
operations fully compliant during the fourth quarter of fiscal 1999.  
Although the Company does not expect that the impact of the Year 2000 issue 
will be material to the Company's domestic or international operations, there 
can be no assurance that the Company will not discover additional Year 2000 
issues that would have a material adverse effect on the Company's business, 
results of operations, cash flows or financial condition.

       Testing of modified systems, along with quantification of the impact, 
if any, of failure to complete any necessary corrective action, is expected 
to be completed by the end of the third quarter of fiscal 1999, along with 
the completion of contingency plans.  Although the Company cannot currently 
estimate the magnitude of the impact if mission critical systems have not 
been made Year 2000 compliant prior to the end of calendar year 1999, if such 
systems are not compliant, there would be a material adverse effect on the 
Company's business, results of operations, cash flows or financial condition.

<PAGE>

       Estimated costs associated with the replacement of the domestic 
back-office systems are included in the cost estimates as discussed above 
relating to the Company's next generation management information systems.  To 
date, the remaining costs incurred by the Company with respect to domestic 
Year 2000 compliance have not been material and are not expected to be 
material for fiscal 1999.  For international operations, costs incurred to 
date are not material. Total estimated costs to be incurred for international 
operations, including costs associated with upgrading and replacing hardware 
and software, are currently estimated to be $650,000.  The Company believes 
that cash from operations and the Company's current borrowing capacity will 
be sufficient to cover the costs of Year 2000 compliance efforts.

       The Company has also begun to survey third-party suppliers and 
vendors, including key financial institutions, as well as major customers and 
landlords, for Year 2000 compliance.  The Company expects to complete this 
survey in the second quarter of fiscal 1999.  At this time the Company cannot 
estimate the effect, if any, that non-compliant systems at these entities 
could have on the Company's business, results of operations, cash flows or 
financial condition, and there can be no assurance that the impact, if any, 
will not be material.

EUROPEAN CURRENCY

       Beginning in January 1999, a new currency called the "euro" was 
introduced in certain European countries that are part of the Economic and 
Monetary Union (EMU).  During calendar year 2002, all EMU countries are 
expected to be operating with the euro as their single currency.  A 
significant amount of uncertainty exists as to the effect the euro will have 
on the marketplace.  Additionally, all of the rules and regulations have not 
yet been defined and finalized by the European Commission with regard to the 
euro currency.  Currently, the Company does not operate in any countries that 
are part of the EMU; however, the Company operates in the United Kingdom and 
Denmark, which may join the EMU at a future date.  The Company is assessing 
the effect the euro formation will have on its internal systems and the sales 
of its services.  The Company expects to take appropriate actions based on 
the results of such assessment.  The Company has not yet determined the costs 
of addressing this issue and there can be no assurance that this issue and 
its related costs will not have a material adverse effect on the Company's 
business, results of operations, cash flows and financial condition.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Financial Statements and Supplementary Data of the Company 
required by this item are set forth at the pages indicated at item 14(a).  

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.


<PAGE>

                                 PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

       The following table sets forth certain information as of January 29,
1999 with respect to each person who is a director or executive officer of the
Company. 

<TABLE>
<CAPTION>

                  NAME                AGE                       POSITION
                  ----                ---                       --------
  <S>                              <C>    <C>
    W. Robert Stover(1)(2)(3).......   77   Chairman of the Board of Directors
    Michael K. Phippen..............   46   President, Chief Executive Officer and Director
    Paul A. Norberg.................   58   Executive Vice President, Chief Financial Officer and Director
    Robin A. Herman.................   47   Senior Vice President, General Counsel and Secretary
    Michael W. Ehresman.............   41   Senior Vice President and Treasurer
    Dirk A. Sodestrom...............   41   Senior Vice President and Controller
    Ronald C. Picco.................   50   Senior Vice President, Operations
    Elizabeth P. Bade...............   51   Vice President, Information Services
    Gilbert L. Sheffield(1)(2)(3)...   69   Director
    Jack D. Samuelson(1)(2)(3)......   74   Director

---------------
</TABLE>

       (1)  Member of the Audit Committee of the Board of Directors. 

       (2)  Member of the Compensation Committee of the Board of Directors.

       (3)  Member of the Strategic Planning Committee of the Board of 
            Directors.

DIRECTORS AND EXECUTIVE OFFICERS

       Set forth below is a description of the backgrounds of the directors 
and executive officers of the Company. There are no family relationships 
among any of the Company's directors and executive officers. 

       W. ROBERT STOVER.  Mr. Stover founded the Company in 1948 and has been 
continuously involved in the management of the Company since that time. Since 
the Company's incorporation in 1954, Mr. Stover has held the position of 
Chairman of the Board of Directors. From 1954 to 1985, Mr. Stover served as 
President of the Company, and from 1985 to the end of calendar year 1998 as 
Chief Executive Officer. 

       MICHAEL K. PHIPPEN.  Mr. Phippen joined the Company in October 1995 as 
an Executive Vice President. Mr. Phippen became President, Chief Operating 
Officer and a director of the Company in January 1996. As of January 1, 1999, 
Mr. Phippen became President and Chief Executive Officer of the Company. Mr. 
Phippen directed the operations of the Company's corporate office and all 
operating divisions of the Company from July 1997, at which time the Company 
announced a management restructuring, to December 31, 1998. From October 1995 
to January 1996, he directed the daily field operations of all light 
industrial, clerical and light technical offices in the United States, as 
well as the Company's planning, sales, marketing and franchise operations. 
Mr. Phippen's affiliation with the Company began in 1987 with the opening of 
his first franchise. Under his leadership, the affiliate group, Merbco Inc., 
grew to encompass 14 offices. The Company acquired the assets of Merbco Inc. 
in October 1995. From 1977 to 1987, Mr. Phippen served in various positions 
for Kelly Services, Inc., including as Branch Manager and Regional Manager.

       PAUL A. NORBERG.  Mr. Norberg has been employed by the Company since 
1979, initially as Vice President and Chief Financial Officer, then in 1985 
as Senior Vice President and since 1988 as Executive Vice President. 
Previously he had been employed by Liken Home Furnishings Division of 
Beatrice Foods Co., a manufacturer of window coverings, from 1973 


<PAGE>

to 1979 in the position of Controller and, subsequently, Vice President, 
Finance. He is a certified public accountant on inactive status. 

       ROBIN A. HERMAN.  Ms. Herman has been employed by the Company as a 
lawyer since February 1986 after leaving private practice. She was employed 
by the Company initially as Litigation Counsel and in January 1991 was 
elected to the position of Vice President and named Assistant General 
Counsel. In March 1992, she became General Counsel and was elected to the 
additional position of Secretary. In May 1996, Ms. Herman was named a Senior 
Vice President of the Company. 

       MICHAEL W. EHRESMAN.  Mr. Ehresman joined the Company in July 1992 as 
Director of Corporate Taxes.  In October 1995, Mr. Ehresman assumed the 
positions of Vice President and Treasurer.  In June 1998, Mr. Ehresman was 
named a Senior Vice President of the Company. From 1988 to 1992, Mr. Ehresman 
was with Price Waterhouse LLP, most recently as a Senior Tax Manager. From 
1982 to 1988, Mr. Ehresman was employed by KPMG Peat Marwick. He is a 
certified public accountant on inactive status. 

       DIRK A. SODESTROM.  Mr. Sodestrom joined the Company as Controller in 
February 1991  In December 1992, he was elected to the additional position of 
Vice President. In June 1998, Mr. Sodestrom was named a Senior Vice President 
of the Company.  Mr. Sodestrom was employed from 1980 to 1991 by Price 
Waterhouse LLP, most recently as a Senior Audit Manager. He is a certified 
public accountant on inactive status. 

       RONALD C. PICCO.  Mr. Picco joined the Company in September 1995 as 
Vice President, Office Development, and was named Senior Vice President, 
Operations in November 1996. In November 1998, Mr. Picco was made responsible 
for interim oversight of the Company's medical subsidiary in anticipation of 
its sale. Mr. Picco was employed by Interim Services Inc. from April 1992 to 
February 1995, most recently as Vice President, Branch Operations. From 
January 1991 to January 1992, Mr. Picco served as President of Alliance 
Hospital Services, which contracted to provide hospital-based home care 
agency management, and from 1985 to 1991 he held various corporate and 
regional positions with Adia Services, Inc., a temporary staffing services 
company. 

       ELIZABETH P. BADE.  Ms. Bade  joined the Company in September 1995 as 
Applications Manager.  She held that position until November 1998, when she 
was promoted to Vice President, Information Services.  Ms. Bade's previous 
employer was Computer Associates (ASK Corporation), where she was employed 
for over eight years from March 1987 until September 1995, most recently as 
IS Applications Manager. 

       GILBERT L. SHEFFIELD.  Mr. Sheffield has been a director of the 
Company since March 1995. He has served in a number of capacities in the 
telecommunications industry, most recently as the President, Chief Executive 
Officer and a director of PacTel Communications Companies from 1987 to 1990. 
Mr. Sheffield began his career in 1953 with Pacific Telephone and Telegraph, 
where he was employed until 1969, when he was appointed the first Director of 
the California Department of Human Resources Development. In 1971, Mr. 
Sheffield returned to Pacific Telephone and Telegraph, from which he retired 
in 1984 as Executive Vice President of Operations. Following two years in the 
real estate investment business, he returned to Pacific Telesis in 1986 as 
Executive Vice President and Chief Operating Officer of PacTel Corporation. 
Mr. Sheffield is now retired.

       JACK D. SAMUELSON.  Mr. Samuelson has been a director of the Company 
since March 1995. Mr. Samuelson co-founded Samuelson Brothers in 1957 to 
engage in general construction and commercial real estate development. Mr. 
Samuelson has been its President and Chairman of the Board from incorporation 
to the present. Samuelson Brothers sold its construction business in 1979 and 
since then has continued to develop industrial and commercial real estate. 
Mr. Samuelson is also a director of Nationwide Health Properties, Inc., a New 
York Stock Exchange-listed real estate investment trust focused on 
healthcare-related properties. 

       Information concerning directors and executive officers under the 
caption "Election of Directors," "Board Meetings and Committees," "Security 
Ownership of Certain Beneficial Owners and Management" and "Compliance with 
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy 
Statement for the Annual Meeting of Stockholders to be held on March 30, 1999 
(the "Proxy Statement"), is incorporated herein by reference.


<PAGE>

ITEM 11.    EXECUTIVE COMPENSATION.

       The information included in the Company's Proxy Statement under the 
captions "Directors' Compensation," "Executive Compensation," "Aggregate 
Option Exercises and Fiscal Year End Values," "Compensation Committee 
Interlocks and Insider Participation" and "Employment Agreements" is 
incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       The information included in the Company's Proxy Statement under the 
captions "Security Ownership of Certain Beneficial Owners and Management" and 
"Employment Agreements" is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       See Note 5 of "Notes to Consolidated Financial Statements" under Item 
14 of this Form 10-K. In addition, the information included in the Company's 
Proxy Statement under the caption "Certain Transactions" is incorporated 
herein by reference.


<PAGE>

                                  PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

       (a)  The following documents have been filed as a part of this Annual
                 Report on Form 10-K.

<TABLE>

     <S>                                                    <C>
      1.   Financial Statements

                Report of Independent Accountants...........  F-1

                Consolidated Balance Sheets--As of the       
                Fiscal Year Ended October 31, 1998 and the  
                Fiscal Year Ended November 1, 1997..........  F-2
                     

                Consolidated Statements of Operations--For   
                the Three-Year Period Ended October 31, 
                1998........................................  F-3
                     

                Consolidated Statements of Stockholders'      
                Equity--For the Three-Year Period Ended     
                October 31, 1998............................ F-4

                Consolidated Statements of Cash Flows--For   
                the Three-Year Period Ended October 31, 
                1998........................................ F-5
                     

                Notes to Consolidated Financial Statements.. F-7



      2.  Financial Statement Schedules.  The following Financial Statement
          Schedule of the Registrant is filed as part of this report:

</TABLE>

          Schedule II:  Valuation and Qualifying Accounts (included at page 61)
            
          All other schedules are omitted because they are not applicable 
          or not required or because the required information is included 
          in the Consolidated Financial Statements or the Notes thereto.


<PAGE>

      3.  Exhibits.  The following exhibits are filed as a part of, or
          incorporated by reference into, this report:


<TABLE>
<CAPTION>

 EXHIBIT                                        
  NUMBER                                DESCRIPTION
 --------  ------------------------------------------------------------------
<C>      <S>
 2.1       Agreement for Purchase and Sale of Stock of Western Video Images,
           Inc. and Purchase and Sale of Promissory Notes dated as of October
           27, 1994 by and between Western Staff Services (USA), Inc. and W.
           Robert Stover. (1)

 3.1       The Company's Third Amended and Restated Certificate of
           Incorporation.(1)

 3.1.1     Certificate of Amendment of the Company's Third Amended and Restated
           Certificate of Incorporation.

 3.2       The Company's Restated Bylaws. (1)

 3.2.1     Amendment of the Amended and Restated Bylaws, dated as of March 26,
           1998.

 3.2.2     Amendment of the Amended and Restated Bylaws, effective September
           24, 1998.

 4.1       Form of Specimen Certificate for the Company's Common Stock. (1)

 4.1.1     Form of New Specimen Certificate for the Company's Common Stock.

 10.1      Form of Indemnification Agreement between the Company and the
           Officers and Key Employees of the Company. (1)

 10.2      Form of Indemnification Agreement between the Company and the
           Directors of the Company. (1)

 10.3      Employment Agreement between the Company and W. Robert Stover. (1)

 10.3.1    Amendment to the Employment Agreement between the Company and W.
           Robert Stover. (2)

 10.3.2    Second Amendment to the Employment Agreement between the Company and
           W. Robert Stover. (2)

 10.3.3    Employment Agreement between the Company and Michael K. Phippen. (8)

 10.3.4    Employment Agreement with W. Robert Stover.

 10.5      Nonstatutory Stock Option Agreement for fiscal 1989.(1)

 10.6      Nonstatutory Stock Option Agreement for fiscal 1990.(1)

 10.7      Western Staff Services, Inc. 1996 Stock Option/Stock Issuance Plan.
           (9)

 10.7.1    Form of Notice of Grant of Stock Option. (9)

 10.7.2    Form of Stock Option Agreement. (9)

 10.7.3    Form of Addendum to Stock Option Agreement (Involuntary Termination
           Following a Corporate Transaction). (2)

<PAGE>

<CAPTION>

 EXHIBIT                                        
  NUMBER                                DESCRIPTION
 --------  ------------------------------------------------------------------
<C>      <S>
 10.7.4    Form of Notice of Grant of Automatic Stock Option. (2)

 10.7.5.   Form of Automatic Stock Option Agreement. (2)

 10.7.6.   Form of Stock Issuance Agreement. (2)

 10.8      Credit Agreement dated as of February 21, 1996 among Western Staff
           Services, Inc., Bank of America National Trust and Savings
           Association, Sanwa Bank California and certain other financial
           institutions.(1)

 10.8.1    Waiver and First Amendment to Credit Agreement dated as of June 9,
           1996 (3)

 10.8.2    Waiver and Second Amendment to Credit Agreement dated as of
           September 30, 1996.  (2)

 10.8.3    Third Amendment to Credit Agreement and Assumption Agreement dated
           as of March 31, 1997. (4)


 10.8.4    Waiver and Fourth Amendment to Credit Agreement dated as of August
           22, 1997. (5)

 10.8.5    Waiver and Fifth Amendment to Credit Agreement dated as of September
           30, 1997. (5)

 10.8.6    Waiver and Sixth Amendment to Credit Agreement dated as of November
           14, 1997. (5)

 10.8.7    Credit Agreement dated as of March 4, 1998. (6)

 10.8.8    First Amendment to Credit Agreement dated as of May 15, 1998. (7)

 10.8.9    Note Purchase Agreement dated May 15, 1998. (7)

 10.8.10   Second Amendment to Credit Agreement dated as of July 23, 1998. (8)

 10.8.11   First Amendment to Note Purchase Agreement dated as of November 16,
           1998.

 10.9      Deed of Trust & Assignment of Rents dated June 21, 1994 by and
           between Western Staff Services, Inc., First Bancorp and Sanwa Bank
           California.(1)

 10.9.1    Tax Indemnification Agreement by and among the Company and the
           current stockholders of the  Company.(1)

 10.9.2    Amendment of Commercial Credit Agreement and Modification of Deed of
           Trust as of June 6, 1996.(2)

 10.10     Form of Tax Indemnification Agreement by and among the Company and
           certain stockholders of the Company.(1)

 10.11     Western Staff Services, Inc. 1996 Employee Stock Purchase Plan. (2)

 10.11.1   Stock Purchase Agreement for 1996 Employee Stock Purchase Plan. (2)

<PAGE>

<CAPTION>

 EXHIBIT                                        
  NUMBER                                DESCRIPTION
 --------  ------------------------------------------------------------------
<C>      <S>
 10.11.2   Form of Enrollment/Change Form for 1996 Employee Stock Purchase
           Plan. (2)

 10.11.3   International Employee Stock Purchase Plan. (2)

 10.11.4   Stock Purchase Agreement for International Employee Stock Purchase
           Plan. (2)

 10.11.5   Form of Enrollment/Change Form for International Employee Stock
           Purchase Plan. (2)

 10.12     Exchange Agreement between the Company and W. Robert Stover.(1)

 10.13     Form of Employment Contract with certain Named Executive
           Officers.(1)

 21.1      Subsidiaries of the Company.

 23.1      Consent of PricewaterhouseCoopers LLP, independent accountants.

 24.1      Power of Attorney. (see page 39)

 27.1      Financial Data Schedule.

 (1)       Incorporated herein by reference to the exhibit with the same number
           filed with Company's Registration Statement on Form S-1 (File No.
           33-85536) declared effective by the Securities and Exchange
           Commission on April 30, 1996.

 (2)       Incorporated herein by reference to the exhibit with the same number
           filed with the Company's Annual Report on Form 10-K for the fiscal
           year  ended November 2, 1996.

 (3)       Incorporated herein by reference to the exhibit with the same number
           filed with the Company's Quarterly Report on Form 10-Q for the
           quarter ended  July 6, 1996.

 (4)       Incorporated herein by reference to the exhibit with the same number
           filed with the Company's Quarterly Report on Form 10-Q for the
           quarter ended  July 6, 1996.

 (5)       Incorporated herein by reference to the Company's Annual Report on
           Form 10-K for the fiscal year ended November 1, 1997.

 (6)       Incorporated herein by reference to the exhibit with the same number
           filed with the Company's Quarterly Report on Form 10-Q for the
           quarter ended March 10, 1998.

 (7)       Incorporated herein by reference to the exhibit with the same number
           filed with the Company's Quarterly Report on Form 10-Q for the
           quarter ended June 2, 1998.

 (8)       Incorporated herein by reference to the exhibit with the same number
           filed with the Company's Quarterly Report on Form 10-Q for the
           quarter ended August 25, 1998.

 (9)       Incorporated herein by reference to Exhibit A to the Company's Proxy
           Statement for its 1998 Annual Meeting of Stockholders.

(b)  Reports on Form 8-K

</TABLE>

<PAGE>

       There were no Reports filed on Form 8-K by the Company during the
fiscal year ended October 31, 1998.



<PAGE>

                                   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.

                                     WESTAFF, INC.
       
       
                                     By:    /s/ Michael K. Phippen
                                        --------------------------------
                                         President and Chief Executive Officer
       
                                     Date:     January 29, 1999


<PAGE>

                                 POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

       That the undersigned officers and directors of Westaff, Inc., a 
Delaware corporation, do hereby constitute and appoint Michael K. Phippen and 
Paul A. Norberg, and each of them, the lawful attorneys-in-fact, each with 
full power of substitution, for him or her in any and all capacities, to sign 
any amendments to this report on Form 10-K and to file the same, with 
exhibits thereto and other documents in connection therewith, with the 
Securities and Exchange Commission, hereby ratifying and confirming all that 
each of said attorneys-in-fact or their substitute or substitutes may do or 
cause to be done by virtue hereof.
       
       IN WITNESS WHEREOF, each of the undersigned has executed this Power of 
Attorney as of the date indicated.

       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.

<TABLE>
<CAPTION>

           SIGNATURE                                TITLE                                  DATE
 -----------------------------    -----------------------------------------          ----------------
<S>                             <C>                                              <C>
     /s/ W. Robert Stover          Chairman of the Board                              January 29, 1999
----------------------------
  W. Robert Stover

    /s/ Michael K. Phippen         President, Chief Executive Officer and             January 29, 1999
----------------------------       Director (Principal Executive Officer)
  Michael K. Phippen              

     /s/ Paul A. Norberg           Executive Vice President, Chief                    January 29, 1999
----------------------------       Financial Officer and Director
  Paul A. Norberg                 

    /s/ Dirk A. Sodestrom          Senior Vice President and Controller               January 29, 1999
----------------------------       (Principal Accounting Officer)
  Dirk A. Sodestrom               

  /s/ Gilbert L. Sheffield         Director                                           January 29, 1999
----------------------------
 Gilbert L. Sheffield                                                                 

    /s/ Jack D. Samuelson          Director                                           January 29, 1999
---------------------------- 
Jack D. Samuelson                                                                     

</TABLE>

<PAGE>

                          REPORT OF INDEPENDENT ACCOUNTANTS






To the Board of Directors and Stockholders
   of Westaff, Inc.

In our opinion, the consolidated financial statements listed in the index 
appearing under Item 14(a)(1) and (2) on page 33 present fairly, in all 
material respects, the financial position of Westaff, Inc. and its 
subsidiaries at October 31, 1998 and November 1, 1997, and the results of 
their operations and their cash flows for each of the three years in the 
period ended October 31, 1998, in conformity with generally accepted 
accounting principles.  These financial statements are the responsibility of 
the Company's management; our responsibility is to express an opinion on 
these financial statements based on our audits.  We conducted our audits of 
these statements in accordance with generally accepted auditing standards 
which 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 the opinion expressed above.

/s/ PricewaterhouseCoopers LLP
------------------------------

PRICEWATERHOUSECOOPERS LLP
San Francisco, California
January 22, 1999



                                         F-1
<PAGE>

WESTAFF, INC.

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    OCTOBER 31,          NOVEMBER 1,
                                                                                       1998                 1997
                                                                                 -------------------  -------------------
<S>                                                                              <C>                  <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                    $            4,651   $            4,796
    Trade accounts receivable, less allowance for doubtful
       accounts of $786 and $879                                                             87,552               96,502
    Due from licensees                                                                        3,235                6,825
    Deferred income taxes                                                                     6,725                2,511
    Net assets of discontinued operations                                                    23,753
    Other current assets                                                                      5,705                3,421
                                                                                 -------------------  -------------------
      Total current assets                                                                  131,621              114,055

Property, plant and equipment, net                                                           21,320               19,583
Deferred income taxes                                                                         3,981                  143
Intangible assets, net of accumulated amortization of $7,773 and $6,818                      37,678               19,181
Other long-term assets                                                                        2,545                1,568
                                                                                 -------------------  -------------------
                                                                                 $          197,145   $          154,530
                                                                                 -------------------  -------------------
                                                                                 -------------------  -------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Short-term borrowings                                                        $           15,600   $           19,700
    Current portion of loans payable                                                          3,851                  625
    Current portion of note payable to related party                                            972                  973
    Accounts payable and accrued expenses                                                    52,787               42,787
    Income taxes payable                                                                        709                4,786
                                                                                 -------------------  -------------------
       Total current liabilities                                                             73,919               68,871

Loans payable                                                                                44,708               16,659
Note payable to related party                                                                                        972
Deferred income taxes                                                                                                494
Other long-term liabilities                                                                  11,035               10,238
                                                                                 -------------------  -------------------
       Total liabilities                                                                    129,662               97,234
                                                                                 -------------------  -------------------

Commitments and contingencies (Notes 2, 12 and 14)

Stockholders' equity:
    Preferred stock, $.01 par value; authorized and unissued: 1,000 shares
    Common stock, $.01 par value; authorized: 25,000 shares; issued:  15,948
       shares at October 31, 1998 and 15,507 shares at November 1, 1997                         159                  103
    Additional paid-in-capital                                                               37,341               29,073
    Retained earnings                                                                        32,679               28,994
    Cumulative currency translation                                                            (774)                 (89)
                                                                                 -------------------  -------------------
                                                                                             69,405               58,081
    Less treasury stock at cost, 108 shares at October 31, 1998 and
       114 shares at November 1, 1997                                                         1,922                  785
                                                                                 -------------------  -------------------
       Total stockholders' equity                                                            67,483               57,296
                                                                                 -------------------  -------------------
                                                                                 $          197,145   $          154,530
                                                                                 -------------------  -------------------
                                                                                 -------------------  -------------------
</TABLE>

             See accompanying notes to consolidated financial statements.

                                         F-2
<PAGE>

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            FISCAL YEAR ENDED
                                                                  ------------------------------------
                                                                  OCTOBER 31,  NOVEMBER 1,  NOVEMBER 2,
                                                                     1998        1997         1996
                                                                  ----------   ----------   ----------
<S>                                                               <C>          <C>          <C>
Sales of services                                                 $ 597,614    $ 529,042    $ 439,294
License fees                                                          2,095        1,034        2,514
                                                                  ---------    ---------    ---------

Total sales of services and license fees                            599,709      530,076      441,808

Costs of services                                                   472,783      423,334      349,300
                                                                  ---------    ---------    ---------

Gross profit                                                        126,926      106,742       92,508

Franchise agents' share of gross profit                              16,709       17,307       16,329
Selling and administrative expenses                                  79,245       68,368       57,929
Depreciation and amortization                                         6,952        5,544        4,493
                                                                  ---------    ---------    ---------

Operating income from continuing operations                          24,020       15,523       13,757

Interest expense                                                      1,563          600          560
Interest income                                                        (457)        (413)        (251)
                                                                  ---------    ---------    ---------

Income from continuing operations before income taxes                22,914       15,336       13,448
Provision for income taxes                                            9,166        6,126       10,723
                                                                  ---------    ---------    ---------

Income from continuing operations                                    13,748        9,210        2,725
                                                                  ---------    ---------    ---------

Discontinued operations:

(Loss) income from discontinued operations, net of income taxes      (6,275)         346          558
Estimated loss on disposal, net of income taxes                      (3,543)
                                                                  ---------    ---------    ---------
Total discontinued operations, net of income taxes                   (9,818)         346          558
                                                                  ---------    ---------    ---------

Net income                                                        $   3,930    $   9,556    $   3,283
                                                                  ---------    ---------    ---------
                                                                  ---------    ---------    ---------

Earnings (loss) per share:

     Continuing operations:
        Basic                                                     $    0.88    $    0.60    $    0.19
                                                                  ---------    ---------    ---------
        Diluted                                                   $    0.87    $    0.60    $    0.19
                                                                  ---------    ---------    ---------
     Discontinued operations:
        Basic                                                     $   (0.63)   $    0.02    $    0.04
                                                                  ---------    ---------    ---------
        Diluted                                                   $   (0.62)   $    0.02    $    0.04
                                                                  ---------    ---------    ---------
     Net income:
        Basic                                                     $    0.25    $    0.62    $    0.23
                                                                  ---------    ---------    ---------
        Diluted                                                   $    0.25    $    0.62    $    0.23
                                                                  ---------    ---------    ---------
Weighted average shares outstanding - basic                          15,569       15,420       14,373
                                                                  ---------    ---------    ---------
Weigthed average shares outstanding - diluted                        15,774       15,424       14,388
                                                                  ---------    ---------    ---------
</TABLE>

             See accompanying notes to consolidated financial statements.

                                         F-3
<PAGE>

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                   COMMON STOCK           ADDITIONAL                   
                                             --------------------------    PAID-IN        RETAINED     
                                                SHARES        AMOUNT       CAPITAL        EARNINGS     
                                             -------------  -----------  -------------  -------------  
<S>                                          <C>            <C>          <C>            <C>            
Balance at October 28, 1995                        13,257   $       50   $      3,999   $     27,386   
    Net income                                                                                 3,283   
    Distributions to stockholders                                                             (5,000)  
    Transfer of undistributed
       S corporation earnings                                                   6,142         (6,142)
    Currency translation adjustments                                                                   
    Common stock offering                           2,250           53         18,927                  
                                             -------------  -----------  -------------  -------------  

Balance at November 2, 1996                        15,507          103         29,068         19,527   
    Net income                                                                                 9,556   
    Purchase of treasury stock                                                                         
    Stock issued under employees' stock
       purchase and option plans                                                    5            (89)  
    Currency translation adjustments                                                                   
                                             -------------  -----------  -------------  -------------  

Balance at November 1, 1997                        15,507          103         29,073         28,994   
    Net income                                                                                 3,930   
    Three-for-two common stock split                                52            (52)
    Purchase of treasury stock                                                                         
    Stock issued under employees' stock
       purchase and option plans                       20                         169           (245)  
    Stock issued in connection with
       acquisitions                                   421            4          7,996                  
    Currency translation adjustments                                                                   
    Other                                                                         155                  
                                             -------------  -----------  -------------  -------------  

Balance at October 31, 1998                        15,948   $      159   $     37,341   $     32,679   
                                             -------------  -----------  -------------  -------------  
                                             -------------  -----------  -------------  -------------  
<CAPTION>
                                              CUMULATIVE          TREASURY STOCK                      
                                               CURRENCY     --------------------------                
                                             TRANSLATION      SHARES       AMOUNT          TOTAL      
                                             -------------  ----------- -------------- -------------- 
<S>                                          <C>            <C>         <C>            <C>            
Balance at October 28, 1995                  $        357               $              $      31,792  
    Net income                                                                                 3,283  
    Distributions to stockholders                                                             (5,000) 
    Transfer of undistributed                                                                         
       S corporation earnings                                                                         
    Currency translation adjustments                  197                                        197  
    Common stock offering                                                                     18,980  
                                             -------------  ----------- -------------- -------------- 
                                                                                                      
Balance at November 2, 1996                           554                                     49,252  
    Net income                                                                                 9,556  
    Purchase of treasury stock                                     179         (1,179)        (1,179) 
    Stock issued under employees' stock                                                               
       purchase and option plans                                   (65)           394            310  
    Currency translation adjustments                 (643)                                      (643) 
                                             -------------  ----------- -------------- -------------- 
                                                                                                      
Balance at November 1, 1997                           (89)         114           (785)        57,296  
    Net income                                                                                 3,930  
    Three-for-two common stock split                                                                  
    Purchase of treasury stock                                     180         (3,026)        (3,026) 
    Stock issued under employees' stock                                                               
       purchase and option plans                                  (186)         1,889          1,813  
    Stock issued in connection with                                                                   
       acquisitions                                                                            8,000  
    Currency translation adjustments                 (685)                                      (685) 
    Other                                                                                        155  
                                             -------------  ----------- -------------- -------------- 
                                                                                                      
Balance at October 31, 1998                  $       (774)         108  $      (1,922) $      67,483  
                                             -------------  ----------- -------------- -------------- 
                                             -------------  ----------- -------------- -------------- 
</TABLE>

             See accompanying notes to consolidated financial statements.

                                         F-4
<PAGE>

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                      FISCAL YEAR ENDED
                                                                   --------------------------------------------------------
                                                                     OCTOBER 31,         NOVEMBER 1,        NOVEMBER 2,
                                                                        1998                1997               1996
                                                                   -----------------   ----------------   -----------------
<S>                                                                <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                      $          3,930    $         9,556    $          3,283
   Adjustments to reconcile net income to net cash
      from operating activities:
        Loss from discontinued operations                                     9,818
        Depreciation                                                          5,241              4,642               3,855
        Amortization of intangible assets                                     1,711              1,370                 825
        Provision for losses on doubtful accounts                             1,094              1,170                 466
        Deferred income taxes                                                (8,451)            (4,089)              3,339
        Other non-cash charges                                                  153 
        Changes in assets and liabilities:
           Trade accounts receivable                                         (9,086)           (23,379)            (21,031)
           Due from licensees                                                (1,192)            (3,260)              3,578
           Other assets                                                      (2,451)               741                (838)
           Accounts payable and accrued expenses                             13,100              4,970               5,267
           Income taxes payable                                              (4,160)             1,683               2,118
           Other long-term liabilities                                          905              1,306               1,374
                                                                   -----------------

Net cash provided by continuing operations                                   10,612
Net cash used in discontinued operations                                     (6,185)
                                                                   -----------------   ----------------   -----------------

Net cash provided by (used in) operating activities                           4,427             (5,290)              2,236
                                                                   -----------------   ----------------   -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures                                                      (8,946)            (5,831)             (6,437)
   (Increase) decrease in notes receivable                                   (2,080)                50                (148)
   Payments for intangibles and other investments                           (15,386)            (7,672)             (4,825)
   Investing activities of discontinued operations                           (2,645)
   Other, net                                                                   724                 95                 188
                                                                   -----------------   ----------------   -----------------

Net cash used in investing activities                                       (28,333)           (13,358)            (11,222)
                                                                   -----------------   ----------------   -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net (repayments) borrowings under line of credit
      agreements                                                             (4,100)            10,900              (3,800)
   Repayments of note to related party                                         (973)              (973)             (1,495)
   Proceeds from issuance of loans payable                                   50,900             15,626
   Principal payments on loans payable                                      (20,824)            (1,420)             (2,371)
   Issuance of common stock                                                   1,813                310              18,980
   Repurchase of common stock                                                (3,026)            (1,179)
   Distributions to stockholders                                                                (2,500)             (2,500)
                                                                   -----------------   ----------------   -----------------

Net cash provided by financing activities                                    23,790             20,764               8,814
                                                                   -----------------   ----------------   -----------------

Effect of exchange rate on cash                                                 (29)              (169)                  7
                                                                   -----------------   ----------------   -----------------

Net change in cash and cash equivalents                                        (145)             1,947                (165)
Cash and cash equivalents at beginning of year                                4,796              2,849               3,014
                                                                   -----------------   ----------------   -----------------
Cash and cash equivalents at end of year                           $          4,651    $         4,796    $          2,849
                                                                   -----------------   ----------------   -----------------
                                                                   -----------------   ----------------   -----------------
</TABLE>

             See accompanying notes to consolidated financial statements.

                                         F-5
<PAGE>

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                      FISCAL YEAR ENDED
                                                                   --------------------------------------------------------
                                                                     OCTOBER 31,         NOVEMBER 1,        NOVEMBER 2,
                                                                        1998                1997               1996
                                                                   -----------------   ----------------   -----------------
<S>                                                                <C>                 <C>                <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the year for:
    Interest                                                       $          2,478    $         1,783    $          1,235
    Income taxes (net of refunds)                                            15,373              8,148               5,096

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES:
  Common stock issued for acquisitions                             $          8,000
  Increase in distributions payable to stockholders                                                       $          2,500

</TABLE>

             See accompanying notes to consolidated financial statements.

                                         F-6
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

1.   BASIS OF PRESENTATION

     BASIS OF PRESENTATION
     Westaff, Inc. (the Parent and formerly Western Staff Services, Inc.) and
     its domestic and foreign subsidiaries (together, the Company), provide
     temporary staffing services in the United States, the United Kingdom,
     Denmark, Australia, New Zealand and Norway.  The consolidated financial
     statements include the accounts of Westaff, Inc. and its domestic and
     foreign subsidiaries.  Material intercompany accounts and transactions have
     been eliminated.

     DISCONTINUED OPERATIONS
     In November 1998, the Company announced its plan to sell its medical 
     business, primarily operating through Western Medical Services, Inc. 
     (Western Medical), a wholly owned subsidiary of the Company (see Note 
     3).  As a result of this decision, the Company has classified its 
     medical operations as discontinued operations and, accordingly, has 
     segregated the net assets of the discontinued operations in the 
     Consolidated Balance Sheet at October 31, 1998, has segregated the 
     operating results of the discontinued operations in the Consolidated 
     Statements of Operations for fiscal 1998, fiscal 1997 and fiscal 1996 
     and has segregated cash flows from discontinued operations in the 
     Consolidated Statement of Cash Flows for fiscal 1998. The Notes to 
     Consolidated Financial Statements reflect the classification of the 
     medical operations as discontinued operations.

     COMMON STOCK SPLIT
     On May 7, 1998, the Board of Directors declared a three-for-two common
     stock split effected in the form of a stock dividend payable on May 29,
     1998 to shareholders of record at the close of business on May 18, 1998.
     All share and per share data in the consolidated financial statements and
     notes thereto have been retroactively adjusted for the stock split.

     INITIAL PUBLIC OFFERING OF COMMON STOCK
     On May 3, 1996, the Company completed an initial public offering (the IPO)
     of 3,450 shares of common stock at $9.33 per share, of which 2,250 shares
     were sold by the Company and 1,200 shares were sold by certain of the
     Company's stockholders.  The net proceeds to the Company from the sale of
     the 2,250 shares of common stock, after deduction of associated expenses,
     were $18,980.

     Prior to the consummation of the IPO, the Company declared a dividend
     payable to its then current stockholders consisting of the lesser of the
     remaining undistributed earnings of the Company accumulated from November
     1, 1987 to April 30, 1996 (the effective date of the Company's S
     corporation termination - see Note 2) which were subject to taxation at the
     stockholder level, or $5,000.  The final undistributed earnings of the
     Company from November 1, 1987 to April 30, 1996 totaled $11,142.  The
     difference between the actual distribution of $5,000 and the undistributed
     earnings of $11,142 has been reclassified for financial reporting purposes
     from retained earnings to additional paid-in-capital.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ACCOUNTING ESTIMATES
     The preparation of 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
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period.  Actual results could differ from those
     estimates.

     FISCAL YEAR
     The Company's fiscal year is a 52 or 53 week period ending the Saturday
     nearest the end of October.  Fiscal years 1998 and 1997 each included 52
     weeks while fiscal 1996 included 53 weeks.  For interim reporting purposes,
     the first three fiscal quarters comprise 12 weeks each while the fourth
     fiscal quarter consists of 16 or 17 weeks.


                                         F-7
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

     CASH AND CASH EQUIVALENTS
     The Company considers all investments with initial maturities at purchase
     of three months or less to be cash equivalents.

     CONCENTRATIONS OF CREDIT RISK
     The Company's financial instruments that potentially subject the Company to
     concentrations of credit risk consist principally of trade receivables.
     However, concentrations of credit risk are limited due to the large number
     of customers comprising the Company's customer base and their dispersion
     across different business and geographic areas.  Furthermore, the Company
     routinely assesses the financial strength of its customers.

     REVENUE RECOGNITION
     Revenue from the sale of services is recognized at the time the service is
     performed.  A portion of the Company's sales of services and license fees
     is derived from affiliate operations which consist of franchise agent and
     license operations.

     Revenues generated by franchise agents and related costs of services are
     included as part of the Company's consolidated sales of services and costs
     of services, respectively, since the Company has the direct contractual
     relationships with the customers, holds title to the related customer
     receivables and is the legal employer of the temporary employees. The net
     distribution paid to the franchise agent for services rendered is based
     either on a percentage of sales or of the gross profit generated by the
     franchise agent's operation and is reflected as franchise agents' share of
     gross profit.

     The Company also has a licensing program in which the licensee has the
     direct contractual relationships with the customers, holds title to the
     related customer receivables and is the legal employer of the temporary
     employees.  Accordingly, sales and costs of services generated by the
     license operation are not included in the Company's consolidated financial
     statements.  The Company advances funds to the licensee for payroll,
     payroll taxes, insurance and other related items. Fees are paid to the
     Company based either on a percentage of sales or of gross profit generated
     by the licensee and such license fees are recorded by the Company as
     license fees. Due from licensees represents advances made under these
     financing agreements.  These advances are secured by a pledge of the
     licensee's trade receivables, tangible and intangible assets and the
     license agreement. Advances due from licensees bear interest at prime plus
     two percent but only to the extent the aggregate advances exceed the amount
     of qualified trade receivables securing the outstanding advances.  Under
     the terms of a lockbox arrangement between the Company and the licensee,
     the advances are reduced as remittances are received related to the
     licensee trade accounts receivable.  Licensees have pledged trade
     receivables of  $5,132 and $7,687 at October 31, 1998 and November 1, 1997,
     respectively, as collateral for such advances. Sales from continuing
     operations generated by license offices were $29,567, $16,704, and $38,124
     for fiscal 1998, fiscal 1997 and fiscal 1996, respectively.

     PROPERTY, PLANT AND EQUIPMENT
     Property, plant and equipment is stated at cost.  Depreciation is computed
     using the straight-line method over the estimated useful lives of the
     related assets, which are twenty-five to thirty-one years for buildings and
     three to ten years for furniture and equipment.  Major improvements to
     leased office space are capitalized and amortized over the shorter of their
     useful lives or the terms of the leases.

     ACQUISITION AND AMORTIZATION
     Business acquisitions have been accounted for under the purchase method of
     accounting.  The Company considers acquisitions under its "acquisition and
     franchise back" program to be business combinations within the meaning of
     Accounting Principles Board Opinion No. 16.  Under the terms of these
     arrangements, the Company acquires an existing temporary staffing service
     business and the acquired business becomes a franchise agent upon
     acquisition.


                                         F-8
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

     During fiscal years 1998, 1997 and 1996 the Company consummated
     acquisitions with total purchase prices of $25,724, $7,053 and $3,802,
     respectively.  Tangible assets and specifically identifiable intangible
     assets associated with these acquisitions amounted to $931 for fiscal 1998
     and $1,125 for fiscal 1997.  The remaining purchase prices for these
     acquisitions were allocated to goodwill.  Specifically identifiable
     intangible assets consist primarily of covenants not to compete and are
     amortized on a straight-line basis over the stated term of the agreement.
     Goodwill ($34,809 and $17,211 at October 31, 1998 and November 1, 1997,
     respectively) is amortized over the useful life of the specific acquired
     entity and ranges from 20 to 40 years.  Certain of these acquisitions
     included additional consideration contingent on sales, gross profits or
     pre-tax income of the acquired businesses in future periods.  When such
     contingencies are earned, the additional cost is added to the affected
     intangible assets and amortized over the remaining life of the asset.
     Contingencies earned during fiscal 1998 and 1997 on acquisitions
     consummated during fiscal 1997 and 1996 totaled $1,597 and $645,
     respectively.  Unaudited pro forma information regarding revenues and net
     income has not been provided since the effect of these acquisitions was not
     material.

     IMPAIRMENT OF LONG-LIVED ASSETS
     Management of the Company assesses the recoverability of its long-lived
     assets by determining whether the amortization of the asset's balance over
     its remaining life can be recovered through projected undiscounted future
     cash flows from operations.  Management of the Company continually
     evaluates the existence of potential impairment by analyzing operating
     results, trends and prospects of its acquired operating offices.
     Management also takes into consideration any other events or circumstances
     that might indicate potential impairment.  Based upon these evaluations,
     the Company has determined that no impairment of recorded intangible and
     other long-lived assets from continuing operations has occurred.

     WORKERS' COMPENSATION
     The Company self-insures the deductible amount related to workers'
     compensation claims under its paid loss retrospective program. The
     deductible amount was $500 per claim for policy years 1998 and 1997 and
     $350 per claim for policy year 1996.  The Company accrues the estimated
     costs of workers' compensation claims based upon the expected loss rates
     incurred within the various temporary employment categories provided by the
     Company.  Annually, the Company obtains an independent actuarially
     determined calculation of the estimated costs of claims incurred and
     reported and claims incurred but not reported, based on the Company's
     historical loss development trends.  The amounts calculated may be
     subsequently revised by the actuary based on developments relating to such
     claims.  In order to give recognition to obligations associated with the
     Company's workers' compensation program which are not expected to be paid
     in the following fiscal year, the Company has included $10,600 and $9,800
     in other long-term liabilities at October 31, 1998 and November 1, 1997,
     respectively.

     INCOME TAXES
     The Company records income taxes using 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 financial statements or tax returns.  In estimating future tax
     consequences, the Company generally considers all expected future events
     other than enactments of changes in the tax law or rates.

     Beginning with fiscal 1988, the Parent elected to be taxed as an
     S corporation for federal and state income tax purposes.  Pursuant to this
     election, earnings or losses up to the date of the IPO were subject to tax
     at the stockholder level rather than the corporate level.  Therefore, no
     provision was made for federal income tax on earnings or losses of the
     Parent prior to the IPO.   State taxes were provided according to relative
     state tax laws.  On April 30, 1996 and in conjunction with the IPO, the
     Company elected to terminate its S corporation status.  In connection with
     the termination, the Company was required by the Internal Revenue Code to
     change its method of accounting for income tax reporting purposes from the
     cash basis to the accrual basis.  The termination resulted in a
     non-recurring net charge to earnings of $7,460 in the third quarter of
     fiscal 1996.  This charge was due primarily to temporary differences
     resulting from the Company's historical use of the cash method of
     accounting for income tax purposes.


                                         F-9
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

     Prior to April 30, 1996, certain subsidiaries of the Parent had not elected
     S corporation status and were subject to federal and state income taxes at
     the Company level.

     ACCOUNTING FOR STOCK BASED COMPENSATION
     The Company measures compensation cost for employee stock options and
     similar equity instruments using the intrinsic value-based method of
     accounting prescribed by Accounting Principles Board Opinion No. 25,
     "Accounting for Stock Issued to Employees"(APB 25).

     TRANSLATION OF FOREIGN CURRENCIES
     All assets and liabilities that are denominated in foreign currencies are
     translated into U.S. dollars at year-end exchange rates and all revenue and
     expense accounts are translated using weighted average exchange rates.
     Translation adjustments and gains or losses on intercompany foreign
     currency transactions that are of a long-term investment nature are
     included as a separate component of stockholders' equity.

     RECENTLY ISSUED ACCOUNTING STANDARDS
     In June 1997, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards No. 131, "Disclosures about
     Segments of an Enterprise and Related Information" (SFAS 131).  SFAS 131
     requires disclosure of certain financial and descriptive information for
     each reportable operating segment based on management's internal
     organizational decision-making structure.  SFAS 131 is effective for fiscal
     years ending after December 15, 1998.  SFAS 131 allows, and the Company has
     elected, early adoption of this statement for the fiscal year ended October
     31, 1998 (see Note 13).

     In February 1997, the FASB issued Statement of Financial Accounting
     Standards No. 128, "Earnings Per Share" (SFAS 128).  SFAS 128 establishes
     new standards for computing and disclosing earnings per share (EPS).  SFAS
     128 is effective for both interim and annual periods ending after December
     15, 1997.  SFAS 128  required the Company to replace its traditional EPS
     disclosures with a dual presentation of "Basic" and "Diluted" EPS and to
     restate all prior period EPS data presented (see Note 4).

     RECLASSIFICATIONS
     The Company has reclassified certain amounts in the fiscal 1997 and fiscal
     1996 consolidated financial statements in order to conform to the
     presentation adopted for fiscal 1998 and as required with respect to
     discontinued operations.

3.   DISCONTINUED OPERATIONS

     In November 1998, the Company announced its decision to sell Western
     Medical.  Western Medical provides temporary health care personnel to serve
     an array of home care and institutional health care needs, including
     Medicare patients, through a network of geographically dispersed
     company-owned, franchise agent and license offices.  The Company has
     solicited buyers and is in the process of evaluating responses from several
     interested parties, each of whom have signed confidentiality agreements.

     During the fourth quarter of fiscal 1998, the Company recorded an 
     after-tax charge on the planned disposal of its medical operations of 
     approximately $3,480 or $0.23 per share.  This after-tax charge includes 
     $2,500 for the write down of assets to estimated net realizable value, 
     $240 of estimated costs to be incurred in selling the operation, and 
     $740 of estimated operating losses to be incurred during the disposal 
     period.  Summarized information on the discontinued operations is as 
     follows:

                                         F-10
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                        FISCAL YEAR ENDED
                                                                        --------------------------------------------------
                                                                         OCTOBER 31,       NOVEMBER 1,       NOVEMBER 2,
                                                                            1998              1997               1996
                                                                        ---------------   --------------    --------------
<S>                                                                     <C>               <C>               <C>
Income statement data:
    Revenues                                                            $       54,904    $      46,732     $      40,265
    Costs and expenses                                                          65,268           46,145            39,333
                                                                        ---------------   --------------    --------------
    Operating (loss) income                                                    (10,364)             587               932
    Income tax (benefit) expense                                                (4,089)             241               374
                                                                        ---------------   --------------    --------------
    (Loss) income from discontinued operations, net of income taxes             (6,275)             346               558
                                                                        ---------------   --------------    --------------

    Estimated loss on disposal                                                  (6,000)
    Income tax benefit                                                          (2,457)
                                                                        ---------------
    Estimated loss on disposal, net of income taxes                             (3,543)

                                                                        ---------------   --------------    --------------
    Total discontinued operations                                       $       (9,818)   $         346     $         558
                                                                        ---------------   --------------    --------------
                                                                        ---------------   --------------    --------------

Balance sheet data:
    Current assets (primarily receivables)                              $       21,675
    Property, plant and equipment, net                                           2,085
    Intangible assets, net                                                       5,712
    Other assets                                                                   285
    Current liabilities                                                         (5,930)
    Noncurrent liabilities                                                         (74)
                                                                        ---------------
    Net assets of discontinued operations                               $       23,753
                                                                        ---------------
                                                                        ---------------
</TABLE>

4.   EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted
     earnings per share:
<TABLE>
<CAPTION>
                                                                                 FISCAL YEAR ENDED
                                                               -------------------------------------------------------
                                                                 OCTOBER 31,        NOVEMBER 1,         NOVEMBER 2,
                                                                    1998               1997                 1996
                                                               ----------------   -----------------   ----------------
<S>                                                            <C>                <C>                 <C>
Income from continuing operations                              $        13,748    $          9,210    $         2,725
                                                               ----------------   -----------------   ----------------

Denominator for basic earnings per share -
      weighted average shares                                           15,569              15,420             14,373

Effect of dilutive securities:
      Stock options                                                        205                   4                 15
                                                               ----------------   -----------------   ----------------
Denominator for diluted earnings per share - adjusted
      weighted average shares and assumed conversions                   15,774              15,424             14,388
                                                               ----------------   -----------------   ----------------
                                                               ----------------   -----------------   ----------------

Basic earnings per share                                       $          0.88    $           0.60    $          0.19
                                                               ----------------   -----------------   ----------------
                                                               ----------------   -----------------   ----------------
Diluted earnings per share                                     $          0.87    $           0.60    $          0.19
                                                               ----------------   -----------------   ----------------
                                                               ----------------   -----------------   ----------------

Antidilutive weighted shares excluded from diluted
      earnings per share                                                     -                 610                  -
                                                               ----------------   -----------------   ----------------
                                                               ----------------   -----------------   ----------------
</TABLE>

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


                                         F-11
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

5.   TRANSACTIONS WITH RELATED PARTIES

     The Company has a management agreement with Western Video Images, Inc.
     (WVI), a company wholly owned by the Chairman of the Board and principal
     stockholder of the Parent, whereby the Company provides certain accounting,
     tax, legal, administrative and management services to WVI and charges a fee
     based upon the gross sales of WVI.  Management fees charged to WVI were
     $149, $180, and $197, respectively, for fiscal 1998,  1997 and  1996.  The
     Parent is also the lessee for one of the facilities in which WVI operates;
     however, WVI is charged for all costs of the lease.  Future minimum lease
     payments under this obligation are as follows:  fiscal 1999 - $367 and
     fiscal 2000 - $336.

     During October 1995, the Company bought the operations of one of its
     franchise agents for a total purchase price of $5,913.  Of this purchase
     price, $5,793 was allocated to goodwill, $25 was allocated to covenants not
     to compete and $95 was allocated to property, plant and equipment.  This
     franchise agent became an employee of the Company as a result of this
     transaction.  The Company paid $1,500 in cash on the closing date and paid
     an additional $3,441 during fiscal 1996, 1997 and 1998.  The balance of
     $972 is payable in fiscal 1999. The note payable bears interest at 6.5%.
     The fair value of this note approximates the carrying value as of October
     31, 1998 based on the current rates available to the Company for debt with
     similar terms.

6.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
                                                                              OCTOBER 31,         NOVEMBER 1,
                                                                                 1998                1997
                                                                           ------------------  ------------------
<S>                                                                        <C>                 <C>
Land                                                                       $           1,366   $           1,366
Buildings                                                                              7,493               7,514
Equipment, furniture and fixtures                                                     34,765              29,563
                                                                           ------------------  ------------------

                                                                                      43,624              38,443

Less accumulated depreciation and amortization                                       (22,304)            (18,860)
                                                                           ------------------  ------------------

                                                                           $          21,320   $          19,583
                                                                           ------------------  ------------------
                                                                           ------------------  ------------------
</TABLE>

7.   SHORT-TERM BORROWINGS AND LOANS PAYABLE

     As of March 4, 1998, the Company entered into an agreement with its
     existing syndicated bank group to provide senior secured credit facilities
     totaling $108,000.  The facilities consist of a $90,000 five-year revolving
     credit agreement and an $18,000 six-year term loan to provide working
     capital needs and for general corporate purposes, including capital
     expenditures and acquisitions. The new credit facility replaced the credit
     facility existing as of November 1, 1997 which was to expire on March 31,
     1998.

     On May 20, 1998, the Company completed a private placement of 10-year
     senior secured notes totaling $30,000 payable in equal annual installments
     beginning in the year 2002.  Proceeds from the notes were used to repay
     outstanding borrowings of $22,600 under the revolving credit agreement,
     with the remainder to be used for working capital and general corporate
     purposes.  Under the senior secured notes payable, the Company is required
     to comply with certain financial and other covenants, the most restrictive
     of which is a maximum total debt to capitalization ratio of 55%.  The
     Company was in compliance with these covenants as of October 31, 1998.


                                         F-12
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

     Short-term borrowings outstanding at October 31, 1998 and November 1, 1997
     amounted to $15,600 and $19,700, respectively, with weighted average
     interest rates of 6.4% at October 31, 1998 and 6.8% at November 1, 1997.
     At October 31, 1998, the Company had irrevocable standby letters of credit
     totaling $10,000 outstanding as collateral to support the workers'
     compensation program. These letters of credit expire one year from date of
     issuance, but are automatically renewed for one additional year unless
     written notice is given to the holder.

     The credit facility contains covenants which, among other things, require
     the Company to maintain certain financial ratios and generally restrict,
     limit or, in certain circumstances, prohibit the Company with respect to
     capital expenditures, disposition of assets, incurrence of debt, mergers
     and acquisitions, loans to affiliates and purchases of investments. Direct
     advances under the revolving credit agreement are limited by outstanding
     irrevocable standby letters of credit up to a maximum of $20,000.  Total
     advances are also limited under formulas based on total debt to total
     capitalization and on earnings before interest, taxes, depreciation and
     amortization (EBITDA).  At October 31, 1998, the Company was not in
     compliance with the EBITDA and certain other financial covenants, primarily
     as a result of charges related to the discontinuance of its medical
     operations (see Note 3).  The Company was also not in compliance with the
     capital expenditures covenant. The Company has received waivers with
     respect to all such covenants from its bank lenders.

     Loans payable consist of the following:
<TABLE>
<CAPTION>
                                                                                 OCTOBER 31,         NOVEMBER 1,
                                                                                   1998                 1997
                                                                              ------------------   -----------------
<S>                                                                           <C>                  <C>
Variable and fixed rate notes payable, collateralized by deeds of trust,
    interest 7.4% at October 31, 1998, due monthly
    to 2001                                                                   $           1,559    $          1,659
Variable rate term loan, collateralized by the assets of the Company,
    weighted average interest 6.1% at October 31, 1998 and 7.8% at
    November 1, 1997                                                                     16,250              15,100
Senior secured notes payable, collateralized by the assets of the Company
    with semi-annual interest payments at 6.8% per annum                                 30,000
Other                                                                                       750                 525
                                                                              ------------------   -----------------

                                                                                         48,559              17,284
Less current portion                                                                     (3,851)               (625)
                                                                              ------------------   -----------------

                                                                              $          44,708    $         16,659
                                                                              ------------------   -----------------
                                                                              ------------------   -----------------
</TABLE>

     The fair value of the loans payable approximates the carrying value as of
     October 31, 1998 based on current rates available to the Company for debt
     with similar terms.  Maturities of loans payable for each of the next five
     fiscal years are as follows:  1999 - $3,851; 2000 - $3,100; 2001 - $4,358;
     2002 - $7,286; 2003 - $7,286; and thereafter; $22,678.

8.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consist of the following:


                                         F-13
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                              OCTOBER 31,         NOVEMBER 1,
                                                                                 1998                1997
                                                                           ------------------  ------------------
<S>                                                                        <C>                 <C>
Accounts payable                                                           $           4,105   $           2,605
Checks outstanding in excess of bank balances                                          8,424               6,189
Accrued payroll and payroll taxes                                                     19,587              16,552
Accrued insurance/workers' compensation                                               11,052              10,186
Other                                                                                  9,619               7,255
                                                                           ------------------  ------------------

                                                                           $          52,787   $          42,787
                                                                           ------------------  ------------------
                                                                           ------------------  ------------------
</TABLE>

9.   INCOME TAXES

     The domestic and foreign components of income from continuing operations
     before income taxes are as follows:
<TABLE>
<CAPTION>
                                                                             Fiscal year ended
                                                           ------------------------------------------------------
                                                             October 31,        November 1,        November 2,
                                                                1998               1997               1996
                                                           -----------------  -----------------  ----------------
<S>                                                        <C>                <C>                <C>
Domestic                                                   $         21,400   $         13,004   $        11,730
Foreign                                                               1,514              2,332             1,718
                                                           -----------------  -----------------  ----------------

Income from continuing operations before income taxes      $         22,914   $         15,336   $        13,448
                                                           -----------------  -----------------  ----------------
                                                           -----------------  -----------------  ----------------
</TABLE>

     The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED
                                                           ------------------------------------------------------
                                                             OCTOBER 31,        NOVEMBER 1,        NOVEMBER 2,
                                                               1998               1997               1996
                                                           -----------------  -----------------  ----------------
<S>                                                        <C>                <C>                <C>
CURRENT:
    State and local                                        $          3,190   $          1,618   $         1,376
    Federal                                                          13,811              7,743             5,389
    Foreign                                                             836                767               442
                                                           -----------------  -----------------  ----------------

                                                                     17,837             10,128             7,207
                                                           -----------------  -----------------  ----------------

DEFERRED:
    State and local                                                  (1,379)              (832)              130
    Federal                                                          (7,181)            (3,165)            3,274
    Foreign                                                            (111)                (5)              112
                                                           -----------------  -----------------  ----------------

                                                                     (8,671)            (4,002)            3,516
                                                           -----------------  -----------------  ----------------

                                                           $          9,166   $          6,126   $        10,723
                                                           -----------------  -----------------  ----------------
                                                           -----------------  -----------------  ----------------
</TABLE>

     The difference between income taxes at the statutory federal income tax
     rate and income taxes reported in the Consolidated Statements of Operations
     are as follows:

                                         F-14
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED
                                                           ------------------------------------------------------
                                                             OCTOBER 31,        NOVEMBER 1,        NOVEMBER 2,
                                                               1998               1997               1996
                                                           -----------------  -----------------  ----------------
<S>                                                        <C>                <C>                <C>
Federal statutory income tax rate                                        35%                35%               35%
Tax on income of foreign subsidiaries                                     1                 (1)
State taxes, net of federal income tax benefit                            5                  5                 4
S corporation income not subject to federal
    income taxes                                                                                             (11)
Effect of termination of S corporation election                                                               52
Effect of IRS examination                                                                                     (2)
Other                                                                    (1)                 1                 2
                                                           -----------------  -----------------  ----------------

Effective income tax  rate                                               40%                40%               80%
                                                           -----------------  -----------------  ----------------
                                                           -----------------  -----------------  ----------------
</TABLE>

     The approximate tax effect of temporary differences and carryforwards that
     give rise to deferred tax balances are as follows:
<TABLE>
<CAPTION>
                                                                    FISCAL YEAR ENDED
                                                           ------------------------------------
                                                             OCTOBER 31,        NOVEMBER 1,
                                                                1998               1997
                                                           -----------------  -----------------
<S>                                                        <C>                <C>
Workers' compensation                                      $         11,033   $          8,597
Accruals relating to discontinued operations                          2,351
Other liabilities and accruals                                        1,536              1,201
Foreign net operating loss carryforwards                                                    64
Other                                                                   169
                                                           -----------------  -----------------

    Gross deferred tax assets                                        15,089              9,862
Valuation allowance                                                                        (64)
                                                           -----------------  -----------------

                                                                     15,089              9,798
                                                           -----------------  -----------------

Depreciation and amortization                                           954              1,705
S corporation cash basis accounting adjustment                        3,136              5,806
Other                                                                   293                127
                                                           -----------------  -----------------

    Gross deferred tax liabilities                                    4,383              7,638
                                                           -----------------  -----------------

Net deferred tax asset                                     $         10,706   $          2,160
                                                           -----------------  -----------------
                                                           -----------------  -----------------
</TABLE>

     No valuation allowance has been established for temporary differences other
     than foreign net operating loss carryforwards.  Based on historical income,
     internal forecasts and industry trends, management believes that it is more
     likely than not that the Company will generate future pretax income in
     sufficient amounts to realize the full benefit of these temporary
     differences.

     At October 31, 1998, the Parent had cumulative undistributed earnings from
     foreign subsidiaries of approximately $3,547.  Income taxes have not been
     provided on the undistributed earnings because they have been permanently
     reinvested in the foreign subsidiary.  These earnings could become subject
     to additional tax if


                                         F-15
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

     they were remitted as dividends, or if foreign earnings were lent to the
     Company.  However, such income taxes would not be material to the Company's
     financial position or results of operations.  Income taxes have not been
     provided on foreign currency translation adjustments since such taxes would
     be immaterial.

10.  SAVINGS PLANS

     The Company has a nonqualified deferred savings plan for highly compensated
     employees and a 401(k) savings plan for eligible employees.  Under both the
     deferred and 401(k) savings plans, employees may elect to contribute up to
     15% of their annual compensation, with the Company matching 25% of
     participant contributions up to the first 10% of annual compensation.

11.  STOCKHOLDERS' EQUITY

     TREASURY STOCK
     During fiscal 1998, the Company repurchased 180 shares of common stock on
     the open market for aggregate cash consideration of $3,026.  The
     repurchased shares may be used for reissuance under the Company's stock
     option and employee stock purchase plans.  During fiscal 1998, the Company
     reissued 186 shares with aggregate cash proceeds of $1,813.  When treasury
     shares are reissued, any excess of the proceeds over the acquisition cost
     of the shares is credited to additional paid-in-capital.  Excess
     acquisition cost over the proceeds from reissuance is first charged to
     additional paid-in-capital to the extent of previous net "gains", and then
     to retained earnings.

     STOCK OPTION PLANS
     The Company has two stock option plans (the Plans).  The 1989/1990 Stock
     Option Plan provides for the granting of nonqualified options to executives
     and key employees to purchase the Company's common stock.  The options
     vested during fiscal 1994 and fiscal 1995 and are exercisable at $6.40 per
     share for options granted in fiscal 1989 and $7.01 per share for options
     granted in fiscal 1990. Options must be exercised within five years
     subsequent to the vesting date.  Options to purchase 16 shares are
     outstanding at October 31, 1998.  No further grants may be made under the
     1989/1990 plan.

     The 1996 Stock Option/Stock Issuance Plan provides for the granting of
     incentive and nonqualified stock options and stock appreciation rights.
     The plan has authorized 1,551 shares of common stock for issuance.
     Incentive stock options may be granted at a price not less than 100% of the
     fair market value of the Company's common stock at the date of grant.
     Nonqualified options may be granted at a price not less than 85% of the
     fair market value of the Company's common stock at the date of grant. The
     options' vesting schedules vary subject to the participant's period of
     future service or to the Company's or the option holder's attainment of
     designated performance goals, or otherwise at the discretion of the Board
     of Directors. No option may have a term in excess of 10 years. No stock
     appreciation rights have been granted under the plan.

     The Company applies APB 25 and related interpretations in accounting for
     the Plans.  Accordingly, compensation cost is not  recognized for incentive
     and nonqualified stock options.  Pro forma information regarding net income
     and earnings per common share is required by Statement of Financial
     Accounting Standards No. 123 (SFAS 123) as if the Company had accounted for
     its employee stock options under the fair value method rather than the
     intrinsic method under APB 25.  If compensation cost had been determined
     under SFAS 123, the Company's net income would have been reduced by $965,
     $788 and $421 for fiscal 1998, 1997 and 1996, respectively, and earnings
     per share for those years would have been reduced by $0.06, $0.05 and
     $0.03, respectively.  Since stock options generally become exercisable over
     several years and additional grants are likely to be made in future years,
     the pro forma amounts for compensation cost may not be indicative of the
     effects on net income and earnings per share for future years.

     The fair value of each option included in the following table is estimated
     on the date of grant using the Black-Scholes option-pricing model with the
     following weighted average assumptions for options granted in fiscal


                                         F-16
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

     1998, 1997 and 1996, respectively:  zero dividend yield, expected
     volatility of 69.0%, 63.0% and 63.0%,  expected lives of 6 years; and
     risk-free interest rates of  5.7%, 6.6%  and 6.4% .

     The following summarizes the stock option transactions under the two plans:
<TABLE>
<CAPTION>
                                                 October 31, 1998              November 1, 1997            November 2, 1996
                                         ------------------------------ ----------------------------  ---------------------------
                                                            Weighted                     Weighted                    Weighted
                                                            average                      average                      average
                                            Shares       exercise price    Shares     exercise price     Shares    exercise price
                                         ------------------------------ ----------------------------  ---------------------------
<S>                                      <C>        <C>                 <C>           <C>             <C>       <C>
Options outstanding, beginning of year         648  $            9.13        650  $          9.24           23  $          6.73
     Granted                                   295              11.16         26             6.35          644             9.33
     Exercised                                (127)              9.19         (2)            9.33
     Cancelled                                 (30)              8.34        (26)            9.29          (17)            9.33
                                         ------------------------------ ----------------------------  ---------------------------
Options outstanding, end of year               786  $            9.91        648  $          9.13          650  $          9.24
                                         ------------------------------ ----------------------------  ---------------------------
                                         ------------------------------ ----------------------------  ---------------------------

Options exercisable, end of year               288  $            9.09        238  $          9.08           23  $          6.73
                                         ------------------------------ ----------------------------  ---------------------------
                                         ------------------------------ ----------------------------  ---------------------------

Options available for grant, end of year       658                           929                           929
                                         ------------------------------ ----------------------------  ---------------------------
                                         ------------------------------ ----------------------------  ---------------------------

Weighted average fair value of options
     granted during the year                        $            7.42               $          4.08               $          5.92
</TABLE>

     The following table summarizes information about stock options outstanding
     at October 31, 1998:
<TABLE>
<CAPTION>
                                       Options outstanding                              Options exercisable
                      ------------------------------------------------------     ----------------------------------
                                      Weighted average
      Range of                            remaining        Weighted average                     Weighted average
  exercise prices        Shares       contractual life      exercise price          Shares       exercise price
--------------------- --------------------------------------------------------   ----------------------------------
<S>                   <C>             <C>                  <C>                   <C>            <C>
$     6.08 -  8.50              41                   6.24        $        7.03           26           $        6.59
$     9.33 -  9.50             460                   7.50                 9.35          262                    9.34
$     9.58 - 16.17             285                   9.30                11.25
--------------------- --------------------------------------------------------   ----------------------------------
$     6.08 - 16.17             786                   8.09        $        9.91          288           $        9.09
--------------------- --------------------------------------------------------   ----------------------------------
--------------------- --------------------------------------------------------   ----------------------------------
</TABLE>

     EMPLOYEE STOCK PURCHASE PLAN
     Under the Company's 1996 Employee Stock Purchase Plan, eligible employees
     may authorize payroll deductions of up to 10% of eligible compensation for
     the purchase of stock during each semi-annual purchase period.  The
     purchase price will equal the lower of 85% of the fair market value at the
     beginning of the purchase period or on the last day of the purchase period.
     The plan provides for the issuance of up to 750 shares of the Company's
     common stock.  As of October 31, 1998 shares issued under the plan totaled
     141.  The effect of this plan on the pro forma disclosures under SFAS 123
     has not been included as the impact on net income and earnings per share is
     not material.

12.  LEASES

     The Company leases real and personal property under operating leases which
     expire on various dates. Some of these leases have renewal options for
     periods ranging from one to five years and contain provisions for
     escalation based on increases in certain costs incurred by the landlord and
     on Consumer Price Index adjustments. U.S. rental expense from continuing
     operations amounted to $4,337 in fiscal 1998, $3,382 in fiscal 1997, and
     $2,631 in fiscal 1996. Rental expense for foreign subsidiaries was $1,080
     in fiscal 1998, $999 in fiscal 1997, and $937 in fiscal 1996. The Company
     also receives rental income from owned property and


                                         F-17
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

     subleases which expire on various dates.  Sublease income was not material
     to the Company's results of operations for any periods presented.

     Future minimum lease payments for all leases at October 31, 1998 are as
     follows:

<TABLE>
<CAPTION>
FISCAL YEAR
<S>                                                          <C>
1999                                                         $         4,330
2000                                                                   3,065
2001                                                                   1,916
2002                                                                     815
2003                                                                     320
Thereafter                                                               178
                                                             ----------------

Total minimum lease payments                                 $        10,624
                                                             ----------------
                                                             ----------------
</TABLE>

13.  OPERATING SEGMENTS

     The Company has three reportable segments:  domestic business services,
     international business services and medical services.  Domestic business
     services provides temporary staffing services in clerical, light industrial
     and light technical positions through a network of company-owned, franchise
     agent and licensed offices.  The segment consists of 18 geographically
     diverse company regions under the direction of regional managers and one
     combined franchise region, each identified as an operating segment.
     Revenues from domestic business services are derived wholly from the United
     States and its territories.  The operating segments meet the aggregation
     criteria specified under SFAS 131 for reporting purposes.  International
     business services comprises company-owned offices providing clerical and
     light industrial temporary staffing services in Australia, New Zealand,
     Norway, Denmark and the United Kingdom.  The Company employs a managing
     director for each country who oversees all operations in that country.
     Revenues are attributed to each country based on the location of the
     respective country's principal offices.  International operations have been
     combined into one reportable segment under the provisions of SFAS 131 as
     they share a majority of the aggregation criteria and are not individually
     reportable.  The Company is discontinuing the operations of its medical
     services segment (see Notes 1 and 3).

     The Company evaluates the performance of and allocates resources to the
     reportable segments based on operating income.  The accounting policies of
     the segments are the same as those described in Note 2.  Certain operating
     expenses of the Company's corporate headquarters, which are included in
     domestic business services, are charged to international business services
     in the form of royalties.  Assets relating to these costs, primarily
     property, plant and equipment, have not been allocated due to
     impracticality and are not considered material for purposes of assessing
     performance and making operating decisions.

     The following summarizes reporting segment data for fiscal years 1998, 1997
     and 1996:


                                         F-18
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended October 31, 1998
                                                 ------------------------------------------------------------------------

                                                    Domestic         International      Adjustments (1)   Consolidated
                                                 ----------------   ----------------    -------------    ----------------
<S>                                              <C>                <C>                 <C>              <C>
Total sales of services and license fees          $      522,217      $      77,492                       $      599,709

Operating income from continuing operations               22,428              1,592                               24,020

Depreciation and amortization                              6,348                604                                6,952

Expenditures for puchases of fixed assets                  8,441                505                                8,946
Payments for intangibles and other                        13,953              1,433                               15,386
                                                 ----------------   ----------------                     ----------------
Total expenditures for long lived assets          $       22,394      $       1,938                       $       24,332
                                                 ----------------   ----------------                     ----------------
                                                 ----------------   ----------------                     ----------------

Total long lived assets                           $       55,254      $       3,744                       $       58,998
                                                 ----------------   ----------------                     ----------------
                                                 ----------------   ----------------                     ----------------

Total assets                                      $      160,496      $      18,774      $    17,875      $      197,145
                                                 ----------------   ----------------    -------------    ----------------
                                                 ----------------   ----------------    -------------    ----------------
<CAPTION>
                                                                   Fiscal Year Ended November 1, 1997
                                                 ------------------------------------------------------------------------

                                                    Domestic         International      Adjustments (1)   Consolidated
                                                 ----------------   ----------------    -------------    ----------------
<S>                                              <C>                <C>                 <C>              <C>
Total sales of services and license fees          $      457,521      $      72,555                       $      530,076

Operating income from continuing operations               13,073              2,450                               15,523

Depreciation and amortization                              5,024                520                                5,544

Expenditures for puchases of fixed assets                  4,174                649      $     1,008               5,831
Payments for intangibles and other                         2,915                917            3,840               7,672
                                                 ----------------   ----------------    -------------    ----------------
Total expenditures for long lived assets          $        7,089      $       1,566      $     4,848      $       13,503
                                                 ----------------   ----------------    -------------    ----------------
                                                 ----------------   ----------------    -------------    ----------------

Total long lived assets                           $       30,096      $       2,811      $     5,857      $       38,764
                                                 ----------------   ----------------    -------------    ----------------
                                                 ----------------   ----------------    -------------    ----------------

Total assets                                      $      115,528      $      15,870      $    23,132      $      154,530
                                                 ----------------   ----------------    -------------    ----------------
                                                 ----------------   ----------------    -------------    ----------------
<CAPTION>
                                                                   Fiscal Year Ended November 2, 1996
                                                 ------------------------------------------------------------------------

                                                    Domestic         International      Adjustments (1)   Consolidated
                                                 ----------------   ----------------    -------------    ----------------
<S>                                              <C>                <C>                 <C>              <C>
Total sales of services and license fees          $      382,936      $      58,872                       $      441,808

Operating income                                          11,930              1,827                               13,757

Depreciation and amortization                              4,042                451                                4,493

Expenditures for puchases of fixed assets                  5,586                468      $       383               6,437
Payments for intangibles and other                         3,673                347              805               4,825
                                                 ----------------   ----------------    -------------    ----------------
Total expenditures for long lived assets          $        9,259      $         815      $     1,188      $       11,262
                                                 ----------------   ----------------    -------------    ----------------
                                                 ----------------   ----------------    -------------    ----------------
</TABLE>

(1)  Adjustments reflect assets and expenditures related to discontinued
     operations and elimination of domestic investments in international
     subsidiaries


                                         F-19
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

14.  COMMITMENTS AND CONTINGENCIES

     The Company is subject to claims and other actions arising in the ordinary
     course of business. Some of these claims and actions have resulted in
     lawsuits where the Company is a defendant. Management believes that the
     ultimate obligations, if any, which may result from unfavorable outcomes of
     such lawsuits will not have a material adverse effect on the financial
     position, results of operations or cash flows of the Company and that such
     obligations, if any, would be adequately covered by insurance.

15.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     The following is a summary of the unaudited quarterly financial information
     for the fiscal years ended October 31, 1998 and November 1, 1997.  The
     fourth quarter of fiscal years 1998 and 1997 consist of 16 weeks while all
     other quarters consist of 12 weeks.
<TABLE>
<CAPTION>
                                                             First             Second              Third             Fourth
                                                            Quarter            Quarter          Quarter (2)          Quarter
                                                       -----------------  ----------------   ----------------   ----------------
<S>                                                    <C>                <C>                <C>                <C>
FISCAL YEAR ENDED OCTOBER 31, 1998 (1)
Sales of services and license fees                     $        127,248   $       128,338    $       134,209    $       209,914
Gross profit                                                     25,969            26,999             28,640             45,318

Income from continuing operations                                 2,003             2,532              3,194              6,019
Income (loss) from discontinued operations                          233               168               (606)            (9,613)
                                                       -----------------  ----------------   ----------------   ----------------
Net income                                             $          2,236   $         2,700    $         2,588    $        (3,594)
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------

Income (loss) per common share
   Income from continuing operations
      Basic                                            $           0.13   $          0.16 $             0.21    $          0.38
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------
      Diluted                                          $           0.13   $          0.16 $             0.20    $          0.38
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------
   Income (loss) from discontinued operations
      Basic                                            $           0.02   $          0.01 $            (0.04)   $         (0.61)
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------
      Diluted                                          $           0.02   $          0.01 $            (0.04)   $         (0.60)
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------
   Net income
      Basic                                            $           0.15   $          0.17 $             0.17    $         (0.23)
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------
      Diluted                                          $           0.15   $          0.17    $          0.16    $         (0.22)
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------

FISCAL YEAR ENDED NOVEMBER 1, 1997 (1)
Sales of services and license fees                     $        109,238   $       113,586    $       120,990    $       186,262
Gross profit                                                     21,069            22,489             24,305             38,879

Income from continuing operations                                 1,043             1,260              1,948              4,959
Income from discontinued operations                                  95                82                 35                134
                                                       -----------------  ----------------   ----------------   ----------------
Net income                                             $          1,138   $         1,342    $         1,983    $         5,093
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------

Basic and diluted income per common share
   Income from continuing operations                   $           0.06   $          0.08    $          0.13    $          0.32
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------
   Income from discontinued operations                 $           0.01   $          0.01    $             -    $          0.01
                                                       -----------------  ----------------   ----------------   ----------------
                                                       -----------------  ----------------   ----------------   ----------------
   Net income                                          $           0.07   $          0.09    $          0.13    $          0.33
                                                       -----------------  ----------------   ----------------   ----------------
</TABLE>

     (1)  Fiscal 1997 and fiscal 1998 quarterly financial information has been
          restated to reflect the Company's medical operations as discontinued
          operations.
     (2)  The discontinued medical operations for the third quarter of fiscal
          1998 have been restated to correct for certain procedural and clerical
          errors that occurred during the third quarter in connection with the
          calculation of the interim estimated fiscal 1998 Medicare revenues.
          This restatement has no effect on continuing operations.  The effect
          of the restatement on amounts reported on the Company's Quarterly


                                         F-20
<PAGE>

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

Report on Form 10-Q for the period ended July 11, 1998 was to reduce net income
by $565 or $0.03 per basic share.




















                                         F-21
<PAGE>

               VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                                              SCHEDULE II
                                                         (AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                               ADDITIONS
                                                ----------------------------------------
                                                BALANCE AT     CHARGED TO     CHARGED TO                    BALANCE AT
                                                BEGINNING      COSTS AND      OTHER                         END OF
        DESCRIPTION                             OF YEAR        EXPENSES       ACCOUNTS       DEDUCTIONS     YEAR
---------------------------------------------   ----------     --------       --------       ----------     ------
<S>                                             <C>            <C>            <C>            <C>            <C> 
Fiscal Year Ended November 2, 1996
   Allowance for doubtful accounts              $  823         $  466         $    0         $  520         $  769
   Reserve on notes receivable                     620              0              0            570             50
   Valuation allowance on deferred tax asset       123              0              0             50             73


Fiscal Year Ended November 1, 1997
   Allowance for doubtful accounts              $  769         $1,170         $    0         $1,060         $  879
   Reserve on notes receivable                      50              0              0              0             50
   Valuation allowance on deferred tax asset        73              0              0              9             64


Fiscal Year Ended October 31, 1998
    Allowance for doubtful accounts             $  729         $  900         $    0         $  843         $  786
    Reserve on notes receivable                     50              0            244             40            254
    Valuation allowance on deferred tax asset       64              0              0             64              0
    Allowance for doubtful accounts -
         discontinued operations                   150          1,854              0            116          1,888
    Disposal of discontinued operations              0          6,000              0              0          6,000


</TABLE>