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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED NOVEMBER 3, 2001

COMMISSION FILE NUMBER 000-27130

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

DELAWARE(State or other jurisdiction of
incorporation and organization)

94-1266151(I.R.S. Employer Identification No.)


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, $0.01 par value per share(Title of class)

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

Indicate
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. / /

The
aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $23,312,230 as of December 31, 2001, 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, 2001 the Registrant had outstanding 15,913,656 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 May 22, 2002 are incorporated by reference into Part III of this
Form 10-K Report.

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INDEX  WESTAFF, INC.

|         |  |                                                                                       |  | PAGE NO.
|-------- |  | ------------------------------------------------------------------------------------- |  | --------
|PART I   |  |                                                                                       |  |         
|ITEM 1.  |  | BUSINESS                                                                              |  | 3       
|ITEM 2.  |  | PROPERTIES                                                                            |  | 21      
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 21      
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 22      
|PART II  |  |                                                                                       |  |         
|ITEM 5.  |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |  | 22      
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 23      
|ITEM 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 23      
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 34      
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 34      
|PART III |  |                                                                                       |  |         
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 35      
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                |  | 37      
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 37      
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 38      
|PART IV  |  |                                                                                       |  |         
|ITEM 14. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                      |  | 38      
|         |  | SIGNATURES                                                                            |  | IV-2    
|         |  | POWER OF ATTORNEY                                                                     |  | IV-3    

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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 14 below and
elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K. This Form 10-K for the fiscal year ended November 3, 2001 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 certain 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 November 3, 2001, operated through over 340 business services offices in 45 states, the District of Columbia and six foreign countries. As of November 3,
2001, 72.8% of these offices were owned by the Company, 24.3% were operated by franchise agents and 2.9% were operated by licensees.

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

Effective
May 1, 2001, the Company appointed Tom D. Seip as President and Chief Executive Officer, as successor to W. Robert Stover, who had been serving as interim President and
Chief Executive Officer since May 3, 2000. Mr. Seip served in that capacity for approximately eight months until he resigned and was succeeded as President and Chief Executive Officer by
Dwight S. Pedersen effective January 14, 2002. Mr. Pedersen had served as a non-employee director of the Company and as a member of the Audit Committee of the Board of
Directors since May 1, 2001. He resigned from the Audit Committee upon becoming an employee of the Company.

In
November 1998, the Company announced its plan to sell its medical business, primarily operating through Western Medical Services, Inc., a wholly-owned subsidiary of the
Company ("Western Medical"). As a result of this decision, the Company has classified its medical operations as discontinued operations in the Company's Consolidated Financial Statements and provides
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."

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

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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 current objective is to enhance its position as a leading provider of temporary office and light industrial staffing services in secondary markets
throughout the United States and in selected international markets. As a result of a strategic planning process undertaken in the fourth quarter of fiscal 2001 and concurrent with the Company's change
in leadership, the key elements of the Company's business strategy were reevaluated and now include:

Focus on Sales and Marketing Within the Temporary Office and Light Industrial Staffing Services Sector.The Company focuses
on placing temporary office and light industrial staffing personnel. The Company believes that temporary office and light industrial staffing services are the foundation of the staffing industry and
will remain a significant market for the foreseeable future. The Company also believes that employees performing temporary office and light industrial staffing functions are, and will remain, an
integral part of the labor market in local, regional and national economies around the world. Based on this, the Company is actively seeking to expand its service offerings into this marketplace,
including direct placements, temp-to-hire placements and other services designed to aid personnel in securing employment. The Company believes that it is
well-positioned to capitalize on these business segments because of its ability to attract and retain temporary office and light industrial staffing 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 office and light industrial staffing 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 temporary office and light industrial staffing personnel is its payroll 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 a service bonus, 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 medium-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. In certain
circumstances, the Company augments this concentration on secondary markets by focusing on national contracts with customers having a large presence in these marketplaces. The Company's geographic
alignment allows it to effectively compete for some of these contracts and, therefore, the Company intends to pursue these opportunities.

Maintain Entrepreneurial Offices with Strong Corporate Support.The Company seeks to foster an entrepreneurial environment by
operating each office as a separate profit center, by providing certain managers considerable operational autonomy and financial incentives and by establishing franchise agent offices in appropriate
markets. Managers focus on business opportunities within markets and are

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provided centralized support to achieve success in those markets. 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 market development while relying on centralized services for support in back-office
operations, such as
risk management programs and unemployment insurance, credit, collections, accounting, advice on legal and regulatory matters, quality standards and marketing.

Improve Financial Performance of International Operations.The Company currently has operations in the United Kingdom,
Australia, New Zealand, Norway, Denmark and Mexico. The Company closely monitors financial performance and works aggressively with local management to improve the sales and operating performance of
its international operations. Furthermore, the Company periodically evaluates the performance of each of these operations and may consider alternative strategies for these operations including
possible sale or closure. Based on such evaluations, the Company plans to close its operations in Mexico in the second quarter of fiscal 2002.

Enhance Information Systems.The Company believes its management information systems are instrumental to the success of its
operations, as the Company's business is largely dependent on its ability to store, retrieve, process and manage significant amounts of data. The Company continually evaluates the quality,
functionality and performance of its systems in an effort to ensure that these systems meet the operational needs of the Company. During fiscal 2001, the Company completed the rollout of the Westaff
Automated Visionary Enterprise ("WAVE"), a full-featured branch office tool designed to assist in order management, candidate search and recruiting, customer service management, and sales
management that also allows for sharing of information between offices. The Company continues to pursue efforts to upgrade and improve the functionality, performance and utility of its systems.
However, the Company has recently determined to cease further development of the planned Lawson upgrade.See "Management Information Systems", "Factors Affecting Future Operating
ResultsReliance on Management Information Systems" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Control Costs Through Emphasis on Risk Management.Workers' compensation and unemployment insurance premiums are significant
expenses in the temporary staffing industry and are particularly high in the light industrial sector. Furthermore, there can be significant volatility in these costs as evidenced by the significant
hardening of workers' compensation insurance markets following the September 11, 2001 tragedy. Workers' compensation costs as a percentage of direct labor were 3.0%, 4.0% and 4.0%,
respectively, for fiscal 1999, 2000 and 2001. The Company estimates that workers' compensation costs as a percentage of direct labor will be in the range of 4.2% to 4.7% for fiscal 2002 as a result of
increased workers' compensation costs across the industry. The Company has developed risk management programs and loss control strategies 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 financial incentives for branch offices to implement its risk management procedures and aggressively manage these costs. The Company believes that its emphasis on controlling
employee-related costs enables market managers to price services more competitively and improve profitability. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Growth Strategy

The Company's current growth strategy focuses on internal growth and is contingent upon resolution of its financing challenges. The Company currently has no plans
to pursue strategic external or complementary acquisitions within at least the next fiscal year.

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Internal Growth.The principal element of the Company's growth strategy has been, and continues to be, its focus on internal
growth and consists of the following:





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Services

The Company's business services division places personnel in clerical, light industrial and light technical positions through an international network of offices.
Personnel often fill positions such as word processing, data entry, reception, customer service and telemarketing, warehouse labor, manufacturing and assembly. As of November 3, 2001, the
Company's domestic and international business services operations comprised over 340 offices.

The
Company markets its temporary and direct hire 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 and On-Location service locations. The Company coordinates significant amounts of its sales and marketing efforts through its corporate headquarters in
cooperation with branch and regional offices and targets small to medium-size companies in secondary markets as well as national and regional accounts. 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 November 3, 2001, the Company's international operations comprised 58 Company-owned offices: 24 in the United Kingdom; 19 in Australia; four in New Zealand; six in Norway;
four in Denmark; and one in Mexico. Through these offices, the Company provides regular, temporary and direct hire personnel services in the clerical and light industrial support areas. The Company
employs several managing directors who oversee all operations in one or more countries. For fiscal 2000 and fiscal 2001, 13.9% and 14.7% respectively, of total system revenues from continuing
operations were derived from the Company's international operations. A total of 24 offices in the United Kingdom, 19 offices in Australia and six offices in Norway have certification under ISO
9002, a total quality management program.

Operations

As of November 3, 2001, the Company operated through a network of over 340 business services offices in 45 states, the District of Columbia and six 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 market, 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.

|                                   |                 | Nov. 1,
1997 |     | Oct. 31,
1998 |     | Oct. 30,
1999 |     | Oct. 28,
2000 |     | Nov. 3,
2001
|---------------------------------- | --------------- | ------------ | --- | ------------- | --- | ------------- | --- | ------------- | --- | ------------
|Number of Offices by Ownership(1): |                 |              |     |               |     |               |     |               |     |             
|                                   | Company-owned   |              | 226 |               | 267 |               | 264 |               | 257 |             
|                                   | Franchise agent |              | 103 |               | 82  |               | 75  |               | 81  |             
|                                   | Licensed        |              | 11  |               | 25  |               | 24  |               | 16  |             
|                                   |                 |              |     |               |     |               |     |               |     |             
|                                   |                 | Total        |     | 340           |     | 374           |     | 363           |     | 354         
|                                   |                 |              |     |               |     |               |     |               |     |             
|Number of Offices by Location(1):  |                 |              |     |               |     |               |     |               |     |             
|                                   | Domestic        |              | 288 |               | 315 |               | 308 |               | 299 |             
|                                   | International   |              | 52  |               | 59  |               | 55  |               | 55  |             
|                                   |                 |              |     |               |     |               |     |               |     |             
|                                   |                 | Total        |     | 340           |     | 374           |     | 363           |     | 354         
|                                   |                 |              |     |               |     |               |     |               |     |             

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Company-Owned Offices.Employees of each Company-owned office report to a branch or market manager who is
responsible for day-to-day operations and the profitability of a market that consists of one to several offices. Market managers generally report to area and/or regional
managers. As of December 31, 2001, there were three zone managers, nine regional managers, and 25 area managers for the domestic Company-owned offices. The Company has a variety of incentive
plans in place for its domestic and international offices. One or more of these plans may be offered to branch staff as well as market, area, regional and zone managers. These plans are designed to
motivate employees to maximize the growth and profitability of their offices. 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 geographic territory. The Company's franchise agent agreements generally allow franchise agents to open
multiple offices within their exclusive territories. As of November 3, 2001, the Company's 39 business services franchise agents operated 85 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 1999, 2000, and 2001, franchise agents offices represented 20.2%, 19.8%, and 22.5% 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 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 or license agreements. In the past five fiscal years, the
Company has commenced two actions to enforce the non-competition covenants. Both those actions were resolved in the Company's favor. See

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"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
November 3, 2001, the Company's three business services licensees operated 10 licensed offices. During fiscal 2001, two licensees purchased the Company's interest in their licensed operations
and one licensee converted to the Company's franchise agent program. In the first quarter of fiscal 2002, the Company purchased the operations of one of its three remaining licensees.

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, N.A.
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 and the Company continually evaluates the quality,
functionality and performance of its systems in an effort to ensure that these systems meet the operational needs of the Company.

The
Company's management information systems provide functionality in both the field offices and in the corporate back-office to support the operations of the Company. Field
office functionality includes the WAVE, a full-featured branch office tool, designed to assist in order management, candidate search and recruiting, customer service management, and sales
management that also allows for sharing of information between offices. The Company began implementing the WAVE in fiscal 1999. As of December 31, 2001, all branch offices were live on the
WAVE. The Company also completed enhancements allowing customer and employee information in the WAVE to interface directly with the billing and payroll applications to improve efficiency. During
fiscal 2001, the Company completed its first major upgrade of its thin-client technology environment. This design affords high efficiency through
low-cost, low bandwidth data lines. Thin-client technology also affords the ability to deploy and upgrade applications quickly to all personnel. Since all applications reside
within the two corporate data centers located in Reno, NV and Walnut Creek, CA, application upgrades can be done

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centrally at the corporate data centers at reduced cost. Furthermore, new or upgraded applications will be immediately available to all desktops within the Company's network.

In
addition, field offices use 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, field offices capture and input customer, employee, billing and payroll information. This information is electronically transferred daily to centralized servers, where payroll,
billing and financial information is processed overnight. 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. Invoices are also processed daily and distributed from the Company's centralized corporate offices. This system also supports branch office operations with daily, weekly, monthly and quarterly
reports that provide information ranging from customer activity to office profitability.

Most
of the Company-owned, franchise agent and licensed offices are served by the Company's new systems architecture. The few offices that are not currently linked to the Company's
corporate offices via the wide area network ("WAN") access these systems by either a dial-up virtual private network ("VPN") or via dial-up access to the Company's remote file
transfer servers to transmit payroll data. All offices are supported by the Company's in-house Technical Support Department, which is responsible for computer installations, training and
technical support.

Currently,
temporary payroll is processed on the Company's legacy payroll system. Enhancements to this system were completed in fiscal 2001 that have significantly reduced payroll
processing times. During fiscal 1999 and fiscal 2000, the Company converted the majority of its back office functions to an application provided by Lawson Software. In August 2000, the Company
entered into a beta test agreement with Lawson Software to develop an assignment billing module designed to meet the needs of the staffing industry. During fiscal 2001, the Company initiated plans to
convert its front office temporary payroll functions to a seamlessly integrated front-to-back system. In September 2001, Lawson Software advised the Company that it was
no longer going to support the assignment billing module of this system as general release software. In January 2002, concurrent with the Company's announcement of a change in executive
leadership and implementation of a restructuring plan designed to improve the Company's profitability, the Company chose to cease further development of the assignment billing module and this entire
project, and is considering its rights and remedies. Accordingly, a first quarter fiscal 2002 restructuring charge will include a write-off of approximately $1.0 million of
expenditures capitalized to date, as well as $0.9 million related to office closures and severance costs.

The
Company continues to assess both short-term and long-term information systems needs and to invest in efforts to upgrade and improve the functionality,
performance and utility of its systems. However, there can be no assurance that the Company will meet anticipated completion dates for its system initiatives, that such systems will be completed in a
cost-effective manner or that such systems will support the Company's future growth or provide significant gains in efficiency and productivity. The
failure of these systems 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.

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 workers' compensation loss prevention and loss control strategies including: customer safety evaluations, individual local
office expense allocation formulas, and aggressive claims management techniques to help control and reduce risks.

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The Company's specific loss control strategies include a written screening process for light industrial work sites to ensure that temporary employees are placed within the Company's
strict safety guidelines The Company requires general as well as site-specific safety orientation training and appropriate personal protective equipment in light industrial 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. In addition, the Company carefully monitors the job assignments to prevent
placing employees in certain high-risk jobs that prove too risky or are prohibited under the Company's guidelines.

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 that is now adjusted quarterly and is based heavily upon the local office's actual claims experience. The Company also
employs a dividend program for its franchise agent offices that returns a portion of their premiums in the event of positive claims experience and a year-to-year cumulative
over accrual of workers' compensation costs. 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 creative and aggressive claims management techniques to help control losses. After each work-related injury requiring a medical
examination, 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 or benefits substantially reduced. 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, and this intricate relationship has helped the Company to ensure
consistency in carrying out 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 on-line. On an ongoing basis, the Company's workers' compensation specialists actively analyze claims to challenge compensability, 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 a 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, Spherion Corporation (commercial staffing segment), Kelly Services, Inc. (U.S. commercial staffing and international

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segments), Manpower Inc., RemedyTemp, Inc. (clerical and light industrial services), and Personnel Group of America, Inc. (commercial staffing services division). 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.
Furthermore, the United States economy is currently experiencing a recession and, consequently, competition for customers in the staffing industry has increased. The Company believes that the primary
competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and flexibility of work schedules. Rising unemployment rates may increase the available
pool of qualified candidates. 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 "Factors Affecting Future
Operating ResultsHighly Competitive Market."

Employees

The Company estimates that as of November 3, 2001 it had approximately 27,000 temporary employees on assignment through its business services division and
employed 1,103 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 market 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 Westaff®, Be a
Temp®, Western Staff Services®, The Essential Support Services Leader®, On Location & Essential®, Accountants USA®, Westaff
Wave® and It's About Respect®. The Company's applications to federally register Westaff People Mattersm and AUSAsm are pending. The Company is no
longer pursuing a USA Temp service mark.

Medical Services

In November 1998, the Company announced its plan to sell Western Medical. The Company's decision to sell the medical operations was prompted in large
measure by the increasingly complex and

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unfavorable regulatory environment affecting the Medicare business and the impact that changes in regulations had and likely would have had on the ability of the Company to operate profitably in the
medical sector.

As
a result of this decision, the Company has classified its medical operations as discontinued operations and, accordingly, segregated the net assets of the discontinued operations in
the accompanying Consolidated Financial Statements and Notes thereto. During fiscal 1999, the Company sold certain of its franchise agent and Company-owned medical offices and entered into a
termination agreement with one of its medical licensees. During the fourth quarter of fiscal 1999, the Company
completed the sale of the remaining medical business to Intrepid U.S.A. Inc. (Intrepid). Under the terms of the sale, the Company retained the trade and Medicare accounts receivable as well as due
from licensee balances. In fiscal 1999, the Company recorded after-tax losses relating to discontinued operations of $6.6 million or $0.42 per share. These losses represented
reserves for trade and Medicare accounts receivable and due from licensee balances, and also included additional operating losses resulting from the extended period required to close the sale and a
reduction in estimated proceeds from the sale.

During
fiscal 2000, the Company recorded additional after-tax losses related to discontinued operations of $784,000 or $0.05 per share. This charge was primarily due to lower
than expected settlements of Medicare cost reports. The Company has appealed a number of cost report settlements and hopes to recover additional funds in the future; however, there can be no assurance
that the Company will be successful in its appeals.

From
fiscal 1999 through fiscal 2001, the Company had received $1.7 million in cash proceeds from the sale of its medical operations with an additional $1.0 million due
from Intrepid as the balance of the purchase price under a guaranteed promissory note which was in default. In August 2000, Intrepid filed a demand for arbitration seeking compensatory and
punitive damages alleging, among other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. In fiscal 2001, the arbitrator awarded Intrepid
$1.1 million, mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and accounting fees of approximately
$0.4 million. The Company was awarded the $1.0 million due on the promissory note, plus interest. In addition, the arbitrator did not find fraud and denied Intrepid's claim for punitive
damages. The Company has paid the amounts awarded to the claimant in full, except for certain indemnity claims that may be subject to future determination. Primarily due to the unfavorable arbitration
award, the Company recorded an after-tax loss from discontinued operations of $1.8 million or $0.11 per share, in the second quarter of fiscal 2001. The after-tax loss
included additional reserves for potential liabilities, Medicare and other contingencies, as well as reserves for medical operations' net operating loss carryforwards which the Company believes will
expire unused over the next three years.

Recorded
estimated losses on the disposal of the medical operations are based on a number of assumptions. These include the estimated costs and write-offs required to collect
the remaining Medicare accounts receivable and due from licensee balances, and estimated costs to be incurred in filing and settling all remaining Medicare cost reports and other estimated legal and
incidental costs. Currently, the Company believes it has adequately reserved for the reasonable outcome of future events, as evidenced by the net liability position existing at November 3,
2001. However, should actual costs differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods. See "Management's Discussion and
Analysis of Financial Condition and Results of OperationsDiscontinued Operations."

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Factors Affecting Future Operating Results

This Form 10-K contains forward-looking statements concerning the Company's future programs, 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.

Financing Risks.The Company is faced with significant financing challenges during calendar year 2002. At November 3,
2001 the Company had $30.0 million outstanding principal under its 10-year senior secured notes, payable in equal annual installments beginning in the third quarter of fiscal 2002.
The Company was out of compliance with certain covenants of these senior notes as well as with certain covenants of its revolving credit facility at the end of fiscal 2001. The Company is currently
negotiating with the bank syndicate holding the revolving credit facility to amend and restate the credit facility agreement thereby waiving default attributable to the covenant violations that
existed at November 3, 2001. Although the Company had no amounts outstanding under the revolving credit facility at that date, it relies on the facility for purposes of meeting letter of credit
requirements in connection with its workers' compensation program and for working capital, if required. As of the date of this filing on Form 10-K, the Company had
$11.8 million in outstanding letters of credit, needs to arrange for an increase of $5.5 million in the letters of credit by March 15, 2002 and had no borrowings available to it
under the existing facility. The senior noteholders have indicated they are awaiting the outcome of the credit facility negotiations and if those are completed in a satisfactory manner, they have
indicated that they are willing to realign the covenants of the senior notes on a prospective basis and waive the covenant violations that existed at November 3, 2001. As of the date of this
filing on Form 10-K, the senior noteholders have not delivered a notice of default to the Company, as is their right due to the covenant violations. However, because these covenant
violations have not been cured, the Company has reclassified the entire $30.0 million of principal outstanding under the senior notes to a current liability on its balance sheet at
November 3, 2001 since the notes are currently callable.

As
noted above, the Company is currently negotiating with its bank syndicate as well as its senior noteholders to amend and restate its existing agreements, and has received proposed
terms for the amended and restated agreements. While there can be no assurance that the Company will be successful in closing the amended and restated agreements or that the proposed terms will remain
as is, the Company anticipates that the amended and restated agreements will result in significant up-front fees as well as higher borrowing rates and letter of credit fees as compared to
the current agreement.

In
addition to its outstanding senior notes and revolving credit facility, the Company has an outstanding financial guarantee bond in the amount of $11.8 million that secures a
portion of its workers' compensation premium and deductible obligations. This bond is renewable annually on November 1 and 90 days' advance written notice of non-renewal is required. The
bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond. Although no formal notice of non-renewal has been received, the bondholder has expressed its
desire to cancel this bond prior to November 1, 2002, if feasible. Discussions are underway for the purpose of reducing the bond to $9.0 million by April 30, 2002, which will
require the Company to either increase its outstanding letters of credit under the revolving credit facility or cash collateralize the net decrease of $2.8 million. Should
non-renewal of the bond occur as of November 1, 2002, the Company projects it will be required to
either restructure its workers' compensation program to reduce its letter of credit requirements, obtain additional letters of credit or financial guarantee bonds to replace the expiring financial
guarantee bond, or seek alternative financing.

The
Company's financing challenges present significant risks to investors, including the possibility that it may be unable to generate sufficient cash to pay the principal and interest
due on the senior

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secured notes. The Company's ability to make principal and interest payments on its debt will be dependent on its future operating performance and/or obtaining additional sources of capital, which
are dependent on a number of factors many of which are beyond its control. These factors include prevailing economic conditions and financial, competitive, regulatory and other elements affecting the
Company's business and operations, and may be dependent on the availability of borrowings. If the Company does not have sufficient available resources to repay the outstanding debt when it becomes due
and payable, it may find it necessary to refinance the debt, and such refinancing may not be available, or available on reasonable terms. A failure to negotiate an amended credit facility, or to
obtain alternative financing could have a material adverse effect on the Company's results of operations and financial condition, and may adversely affect the trading price of its stock.

Additionally,
the Company has not met certain covenant requirements of the existing senior notes or the existing revolving credit facility for periods subsequent to November 3,
2001. The Company considers it unlikely that it can meet existing covenant requirements for periods subsequent to that date. Therefore, if the Company is unable to timely secure an amended credit
facility and an amended senior note agreement, which provide relief from existing covenants, or secure alternate sources of financing with less restrictive covenants, there would be a material adverse
effect on the Company's results of operations and financial condition which may adversely affect the trading prices of its stock. There can be no assurance that the Company will be able to
successfully negotiate and implement an amended credit facility, an amended senior notes agreement or alternate financing.

Furthermore,
the Company may not be successful in implementing a new workers' compensation program prior to the anticipated expiration of the existing financial guarantee bond. Even if
it does implement such a new program, it may require similar or even increased amounts of letters of credit, financial guarantee bonds or cash collateralization. There can be no assurance that the
Company will be successful in restructuring its workers' compensation program. If the Company loses workers' compensation insurance program coverage or is forced to reduce the amount of coverage
available, there would be a material adverse effect on the Company's results of operations and financial condition which may adversely affect the trading price of its stock.

Moreover,
the Company's indebtedness or a lack of financing availability could significantly hamper its future operating performance, including, but not limited to, the following:



If
the Company is unable to satisfactorily resolve its financing, workers' compensation and other associated business issues, its ability to continue as a going concern may be impaired.

The Company's Accountants Have Issued a Going Concern Opinion.The Company's accountants have issued a report relating to the
audited financial statements of the Company which contains an explanatory paragraph with respect to the Company's ability to continue as a going concern because, among other things, it was out of
compliance with its debt covenants as of November 3, 2001, was unable to finalize amended agreements and the issuer of the Company's financial guarantee bond has

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indicated it does not intend to renew this bond. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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. The current economic downturn has had a material adverse effect on the Company's business, results of operations, cash flows and financial condition and a
continued downturn would likely have a further material adverse effect. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

During
fiscal 2001, the Company experienced significant declines in its sales of services, license fees and profitability as a result of the current economic recession. These sales
declines have continued into the first quarter of fiscal 2002. As a result, the Company expects to incur an operating loss in the first quarter of fiscal 2002 and possibly beyond. The Company has
implemented a number of cost reduction programs including layoffs and office closures in an effort to return the Company to profitability. However, there can be no assurance that the Company will be
successful in reducing costs sufficiently to return the Company to profitability. In addition, further decreases in sales of services and license fees 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."

Reliance on Executive Management.The Company has experienced turnover in the position of Chief Executive Officer since
May 3, 2000, when the termination of a management-led recapitalization transaction was announced and the then current President and Chief Executive Officer resigned. Three
individuals have served as Chief Executive Officer since then. The failure to retain the current incumbent or find a suitable successor candidate for the position of Chief Executive Officer, should
the need arise, or the result of a prolonged search for that candidate, could have a material adverse effect on the Company's ability to manage its personnel and efficiently address changes in the
business and its operations. In addition, without a Chief Executive Officer, the Company would be even more dependent on its senior executives and outside directors. The Company is highly dependent on
its senior executives, including W. Robert Stover, its Chairman and Founder; Dwight S. Pedersen, who has been serving as the newly hired President and Chief Executive Officer since January 14,
2002; and Dirk A. Sodestrom, Senior Vice President and Chief Financial Officer, who has been serving in that capacity since January 1, 2001; and on the other members of its senior
management team. The Company entered into an employment agreement with Mr. Stover effective January 1, 1999 for continuing employment until he chooses to retire or until his death and
that agreement remains in effect. The Company has an employment agreement with Mr. Pedersen that provides for six months' salary in the event of termination without cause. The Company has
entered into an employment agreement with Mr. Sodestrom that contains a requirement for six-months' advance notice of termination. Employment arrangements with all of the Company's
executive officers other than Mr. Stover are at-will. The loss of the services of Mr. Stover, Mr. Pedersen, or Mr. Sodestrom and other senior executives or
other key executive personnel could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition.

Uncertain Ability to Continue and Manage Growth.The Company has historically experienced significant growth, principally
through both internal growth and acquisitions. However, during recent fiscal years, internal growth rates have been slowing and the Company experienced a significant

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decrease in sales during fiscal 2001. Growth through acquisitions occurred prior to fiscal 1999, when the Company scaled back its near-term acquisition plans other than franchise
buybacks. The Company's ability to return to 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 fund operations; (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. Furthermore, the United States economy is currently
experiencing an economic recession. Should the economic recession
continue, competition for customers in the staffing industry would increase and may adversely impact management's allocation of the Company's resources and result in declining revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "BusinessGrowth Strategy."

Control by Significant Stockholder.The Company's Chairman and Founder, W. Robert Stover, beneficially owns directly or
indirectly, or has voting power over, more than 50% of the Company's outstanding stock. As the principal stockholder of the Company, Mr. Stover has the ability to control substantially all
matters submitted to the stockholders for approval and to exert significant influence on the Company's management and affairs, including appointments to the Board of Directors and executive management
positions.

Reliance on Management Information Systems.The Company believes its management information systems are instrumental to the
success of its operations, as the Company's business is largely dependent on its ability to store, retrieve, process and manage significant amounts of data. The Company continually evaluates the
quality, functionality and performance of its systems in an effort to ensure that these systems meet the operational needs of the Company. The Company continues to pursue efforts to upgrade and
improve the functionality, performance and utility of its systems. The Company has, in the past, discovered problems in implementing, upgrading or enhancing 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, upgrades or enhancements, that such work
will be completed in a cost-effective manner, or that such replacements, upgrades and enhancements will support the Company's future growth or provide significant gains in efficiency. The
failure of the replacements, upgrades 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."

Risks Related to International Operations.The Company presently has operations in the United Kingdom, Australia, New
Zealand, Norway, Denmark, and Mexico. The Company is planning to close its operations in Mexico during the second quarter of fiscal 2002. 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, 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.

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

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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. Periodically, 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."

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 2000 and 2001, no single
customer of the Company accounted for more than 3.0% and 5.6%, respectively, 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. During fiscal
2000 and fiscal 2001, the Company incurred costs of $4.0 million and $1.4 million, respectively, for bad debts. 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."

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, 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

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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 have in the past and may continue to experience 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. 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."

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. 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 virtually 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. 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 market, 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 market,
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. 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."

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Employer Liability Risks.Providers of 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 undocumented workers, 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 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 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 2000 and fiscal 2001, 20.1% and 22.7% 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 2001 (based on sales volume) accounted for 13.0% of the Company's sales of services. The
loss of one or more of the Company's franchise agents 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 or license agreements. In the past five fiscal years, the
Company has commenced two actions to enforce the non-competition covenants. Both actions were resolved in the Company's favor. 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.

Risk of Nasdaq Delisting.There are several requirements for continued listing on the Nasdaq National Market ("Nasdaq")
including, but not limited to, a minimum stock price of one dollar per share and $4.0 million in tangible net worth. If the Company's Common Stock price closes below one dollar per share for 30
consecutive days, the Company may receive notification from Nasdaq that its Common Stock will be delisted from the Nasdaq unless the stock closes at or above one dollar per share for at least ten
consecutive days during the 90-day period following such notification. In the future, the Company's Common Stock price or tangible net worth may fall below the Nasdaq listing requirements,
or the Company may not comply with other listing requirements, with the result being that its Common Stock might be delisted. If its Common Stock is delisted, the Company may list its Common Stock for
trading over-the-counter or may apply for listing on the Nasdaq Smallcaps Market, subject to Nasdaq's approval. Delisting from the Nasdaq could adversely affect the liquidity
and price of the Company's Common Stock and it could have a long-term impact on the Company's ability to raise future capital through a sale of its Common Stock. In addition, it could make
it more difficult for investors to obtain quotations or trade this stock.

Risks Related to Acquisitions.In fiscal 2001, the Company did not make any strategic external acquisitions. The Company did
acquire the interest of one franchise agent and it also bought out the interest of one licensee; however, these transactions were not significant. The Company has no near-term acquisition
plans other than possible franchise agent buybacks or other licensee buyouts.

Management
of the Company assesses the recoverability of its long-lived assets, including goodwill and other intangible assets, by determining whether the amortization of the
assets' balance over its remaining life can be recovered through projected undiscounted future cash flows from operations.

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During fiscal 2001, a number of businesses the Company acquired over the past several years were negatively impacted by the economic recession. Based on management's assessment of projected
undiscounted future cash flows and estimates of market value based on industry specific multiples, it was determined that a portion of the carrying amount of goodwill and other intangibles related to
specific acquisitions had been permanently impaired in the fourth quarter of fiscal 2001. As a result, the Company recorded a pre-tax charge of approximately $19.1 million to write
down these assets to estimated current net realizable values. Should the adverse effect of the economic recession continue to impact the profitability of the remaining businesses the Company has
acquired, it is possible that further impairment may be assessed and that additional write downs may be recorded.

ITEM 2. PROPERTIES.

The executive offices of the Company are located at 301 Lennon Lane, Walnut Creek, California. As of December 31, 2001, the Company owned four buildings,
totaling approximately 66,000 square feet, which house its corporate headquarters. Certain of these buildings were subject to a trust deed that has been fully repaid. In fiscal 2000, the Company sold
two buildings consisting of approximately 10,000 total square feet for cash proceeds of $1.0 million and consolidated its corporate operations utilizing office space made available from the
discontinuation of its medical operations.

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, general liability, property damage, errors and omissions, fidelity losses and fiduciary liability.

On
March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior Court of the State of California for the County of Los Angeles, Central District. The defendants
named in the case were Westaff, Inc., W. Robert Stover, Michael K. Phippen, Paul A. Norberg, Jack D. Samuelson, Gilbert L. Sheffield, Mike Ehresman and Does 1-10. The complaint
alleged, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. The plaintiff sought to have the court grant a jury
trial, and award the plaintiff compensatory and punitive damages and attorneys' fees and other costs. The Company's petition for an order compelling arbitration was granted, the Superior Court lawsuit
was stayed, and a demand for arbitration was made that asserted the legal theories of interference with prospective economic advantage and fraud. Discovery was completed in mid November 2001,
and an arbitration hearing before a three-member panel commenced on December 3, 2001. The Company's earlier motion for partial summary judgment was granted at the outset of the hearing,
resulting in the dismissal of all the individual defendants except Mr. Norberg. The hearing proceeded against the Company and Mr. Norberg, and closing arguments were made on
December 10, 2001. The majority of the arbitrators on the panel rendered an interim award on January 9, 2002 in favor of the claimant and against the Company and Mr. Norberg on
the fraud theory, jointly and severally, with one arbitrator dissenting. The interim award was for the principal amount of $2,224,327 plus interest at the legal rate from the date of the award. The
panel reserved jurisdiction to issue a final award which will include reasonable attorneys' fees and costs to which the claimant is entitled, subject to an application process. The Company moved to
modify the principal amount of the award. The panel granted the Company's motion and issued an Order Modifying Interim Award on February 11, 2002, crediting the respondents for $800,000
previously paid under a price protection clause in the asset purchase agreement and thereby reducing the principal

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amount of the award to $1,424,327. The Company has paid the principal plus interest at the legal rate from January 9, 2002. The claimant's application for an award of reasonable attorneys'
fees and reimbursement of litigation costs was due to be filed by February 18, 2002 and respondents will have 20 days from that date in which to respond. A charge of $3.6 million
was recorded as of November 3, 2001 as the estimated cost of the modified award plus expenses. Except as disclosed above, the Company is not currently a party to any material litigation.
However, from time to time the Company has been threatened with, or named as a defendant in, lawsuits, including countersuits brought by former franchise agents or licensees, and administrative claims
and lawsuits brought by employees or former employees.

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

Not applicable.

PART II

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

The Company's Common Stock has been included for quotation in the Nasdaq National Market ("Nasdaq") 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 Nasdaq.

High

LowFiscal 2000:First Quarter ended January 22, 2000

8.63

5.63Second Quarter ended April 15, 2000

9.25

7.06Third Quarter ended July 8, 2000

8.38

3.86Fourth Quarter ended October 28, 2000

5.06

3.00Fiscal 2001:First Quarter ended January 20, 2001

3.25

1.50Second Quarter ended April 14, 2001

3.03

2.31Third Quarter ended July 7, 2001

3.35

2.05Fourth Quarter ended November 3, 2001

3.30

1.35Fiscal 2002:First Quarter ended January 26, 2002

2.50

1.75


On
January 25, 2002, which was the last trading day of the first quarter of fiscal 2002, the last reported sales price on Nasdaq for the Common Stock was $2.32 per share. As of
January 25, 2002, there were approximately 1,292 beneficial owners of the Common Stock.

On
June 20, 2000, the Company's Board of Directors declared a special cash dividend of $0.30 per share of Common Stock payable to shareholders of record as of July 5, 2000.
The distribution, totaling $4.7 million, was paid on July 18, 2000.

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ITEM 6. SELECTED FINANCIAL DATA.

|                                                        |                                 | Fiscal Year
|------------------------------------------------------- | ------------------------------- | -----------
|
|
|Sales of services and license fees                      |                                 | $          
|Operating income (loss)                                 |                                 |            
|Income (loss) from continuing operations                |                                 |            
|                                                        |                                 |            
|Diluted earnings (loss) per sharecontinuing operations |                                 | $          
|                                                        |                                 |            
|BALANCE SHEET DATA (AT END OF PERIOD):                  |                                 |            
|Working capital                                         |                                 | $          
|Total assets                                            |                                 |            
|Short-term debt                                         |                                 |            
|Long-term debt (excluding current portion)              |                                 |            
|Stockholders' equity                                    |                                 |            
|OTHER OPERATING DATA:                                   |                                 |            
|Number of offices (at end of period)                    |                                 |            
|                                                        | Company-owned                   |            
|                                                        | Franchise agent                 |            
|                                                        | Licensed                        |            
|                                                        |                                 |            
|                                                        |                                 | Total      
|                                                        |                                 |            
|SYSTEM REVENUE DATA (EXCLUDING LICENSE FEES):           |                                 |            
|                                                        | Domestic business services      |            
|                                                        | International business services |            
|                                                        |                                 |            
|                                                        |                                 | Total      
|                                                        |                                 |            

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

23

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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: financing risks, fluctuation in the economy and financial
markets, the risk of losing key employees, the Company's ability to expand operations, the effectiveness of the Company's current and future management information systems, the risks related to
international operations and associated with foreign currency, the variability of employee-related costs, the risk associated with controlling operating expenses, the risk of losing customers, the
Company's ability to increase the productivity of existing offices, the demand for temporary workers, the availability of temporary workers, the highly competitive industry, the effectiveness of
management, employer liability risks, the risks related to franchise and license operations, the risk of Nasdaq delisting and the risks associated with acquisitions. Due to the foregoing factors, it
is possible that in some future period the Company's results of operations may be below the expectations of public market analysts and investors. In addition, the Company's results of operations have
historically been subject to quarterly and seasonal fluctuations. Demand for temporary staffing is historically highest in the fourth fiscal quarter, due largely to the planning cycles of many of the
Company's customers, and typically lower in the first fiscal quarter, due, in part, to national holidays as well as to plant shutdowns during and after the holiday season. 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 staffing services to, and employment opportunities at, competitive businesses in global markets. Through its network of Company-owned,
franchise agent and licensed offices, the Company offers a wide range of staffing solutions, including temporary, direct hire, 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 340 business services offices in 45 states, the District of Columbia and six
foreign countries.

The
Company differentiates itself from other large temporary staffing companies by primarily focusing on recruiting and placing support personnel in secondary markets. These 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 and
assembly. These assignments support either core or non-core functions of the customer's business.

The
general level of economic activity and unemployment in the United States and the countries in which the Company operates significantly affects demand for the Company's staffing
services. Companies generally 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. Consequently, the Company may experience less demand for its services and more competitive pricing pressure during periods of economic
downturn. Therefore, a continued economic downturn could continue to have a material adverse effect on the Company's business, results of operations, cash flows or financial condition.

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Recent Developments

On January 14, 2002, the Company announced a change in leadership. Effective as of that date, Tom D. Seip, appointed President and Chief Executive Officer
of the Company on May 1, 2001, resigned and was replaced by Dwight S. Pedersen. Mr. Pedersen had been serving as a member of the Company's Board of Directors since May 2001.

Concurrent
with the change in management, the Company implemented a restructuring plan designed to improve the Company's profitability. This restructuring plan will result in a fiscal
2002 first quarter pretax charge to operations of approximately $1.9 million. The restructuring charge includes costs associated with the abandonment of certain management information systems
which were under development as well as severance, lease termination and other costs related to the Company's announced layoffs and office closures.

At
November 3, 2001 the Company had $30.0 million outstanding principal under its 10-year senior secured notes, payable in equal annual installments beginning
in the third quarter of fiscal 2002. The Company was out of compliance with certain covenants of these senior notes as well as with certain covenants of its revolving credit facility at the end of
fiscal 2001. The Company is currently negotiating with the bank syndicate holding the revolving credit facility to amend and restate the credit facility
agreement, thereby waiving default attributable to the covenant violations that existed at November 3, 2001. Although the Company had no amounts outstanding under the revolving credit facility
at that date, it relies on the facility for purposes of meeting letter of credit requirements in connection with its workers' compensation program and for working capital, if required. As of the date
of this filing on Form 10-K, the Company had $11.8 million in outstanding letters of credit, needs to arrange for an increase of $5.5 million in the letters of credit
by March 15, 2002 and had no borrowings available to it under the existing facility. The senior noteholders have indicated they are awaiting the outcome of the credit facility negotiations and
if those are completed in a satisfactory manner, they are willing to realign the covenants of the senior notes on a prospective basis and waive the covenant violations that existed at
November 3, 2001.

In
addition to its outstanding senior notes and revolving credit facility, the Company has an outstanding financial guarantee bond in the amount of $11.8 million that secures a
portion of its workers' compensation premium and deductible obligations. This bond is renewable annually on November 1 and 90 days advance written notice of non-renewal is required. The
bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond. Whereas no formal notice of non-renewal has been received, the bondholder has expressed its
desire to cancel this bond prior to November 1, 2002, if feasible. Discussions are underway for the purpose of reducing the bond to $9.0 million by April 30, 2002, which will
require the Company to either increase its outstanding letters of credit under the revolving credit facility or cash collateralize the net decrease of $2.8 million. Should
non-renewal of the bond occur as of November 1, 2002, the Company projects is will be required to either restructure its workers' compensation program to reduce its letter of credit
requirements, obtain additional letters of credit or financial guarantee bonds to replace the expiring financial guarantee bond, or seek alternative financing.

The
Company's financing challenges present risks to investors during calendar year 2002. See Item 1. BusinessFactors Affecting Future Operating Results and "Liquidity
and Capital Resources" within this Item 7 for further information on these recent developments.

Discontinued Operations

During fiscal 1999, the Company sold certain of its franchise agent and Company-owned medical offices and entered into a termination agreement with one of its
medical licensees. During the fourth quarter of fiscal 1999 the Company completed the sale of the remaining medical business to Intrepid U.S.A. Inc. (Intrepid) under an asset purchase
agreement. Under the terms of the sale, the Company

25

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retained the trade and Medicare accounts receivable balances as well as the due from licensee balances. In fiscal 1999, the Company recorded after-tax losses relating to discontinued
operations of $6.6 million or $0.42 per share. These losses primarily represented reserves for trade and Medicare accounts receivable and due from licensee balances, and also included
additional operating losses resulting from the extended period required to close the sale and a reduction in the estimated proceeds from the sale.

During
fiscal 2000, the Company recorded additional after-tax losses relating to discontinued operations of $0.8 million or $0.05 per share. This charge was primarily
due to lower than expected settlements of Medicare cost reports. The Company has appealed a number of cost report settlements and hopes to recover additional funds in the future; however, there can be
no assurance that the Company will be successful in its appeals.

From
fiscal 1999 through fiscal 2001, the Company had received $1.7 million in cash proceeds from the sale of its medical operations with an additional $1.0 million due
from Intrepid as the balance of the purchase price under a guaranteed promissory note which was in default. In August 2000, Intrepid filed a demand for arbitration seeking compensatory and
punitive damages alleging, among other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. In fiscal 2001, the arbitrator awarded Intrepid
$1.1 million, mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and accounting fees of approximately
$0.4 million. The Company was awarded the $1.0 million due on the promissory note, plus interest. In addition, the arbitrator did not find fraud and denied Intrepid's claim for punitive
damages. The Company has paid the amounts awarded to the claimant in full, except for certain indemnity claims that may be subject to future determination, which the Company currently believes will
not be significant. Primarily due to the unfavorable arbitration award, the Company recorded an after-tax loss from discontinued operations of $1.8 million or $0.11 per share, in
the second quarter of fiscal 2001. The after-tax loss included additional reserves for potential liabilities, Medicare and other contingencies, as well as reserves for medical operations'
net operating loss carryforwards which the Company believes will expire unused over the next three years.

Recorded
estimated losses on the disposal of the medical operations are based on a number of assumptions. These include the estimated costs and write-offs required to collect
the remaining Medicare accounts receivable and due from licensee balances, and estimated costs to be incurred in filing and settling all remaining Medicare cost reports and other estimated legal and
incidental costs. Currently, the Company believes it has adequately reserved for the reasonable outcome of future events, as evidenced by the net liability position existing at November 3,
2001. However, should actual costs differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods.

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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.

|                                                             |  | Fiscal Year |   
|------------------------------------------------------------ |  | ----------- | --
|
|Sales of services                                            |  | 99.8        | % 
|License fees                                                 |  | 0.2         | % 
|                                                             |  |             |   
|Total sales of services and license fees                     |  | 100.0       | % 
|Costs of services                                            |  | 79.7        | % 
|                                                             |  |             |   
|Gross profit                                                 |  | 20.3        | % 
|Franchise agents' share of gross profit                      |  | 3.0         | % 
|Selling and administrative expenses                          |  | 15.3        | % 
|Depreciation and amortization                                |  | 1.3         | % 
|Loss on impairment of intangible assets                      |  | 3.4         | % 
|Arbitration award                                            |  | 0.6         | % 
|                                                             |  |             |   
|Operating income (loss) from continuing operations           |  | (3.3        | )%
|Interest expense                                             |  | 0.4         | % 
|Interest income                                              |  | (0.1        | )%
|                                                             |  |             |   
|Income (loss) from continuing operations before income taxes |  | (3.6        | )%
|Provision for income taxes                                   |  | 2.1         | % 
|                                                             |  |             |   
|Income (loss) from continuing operations                     |  | (5.7        | )%
|                                                             |  |             |   

Fiscal 2001 compared to Fiscal 2000

Sales of Services and License Fees.Sales of services decreased $93.7 million, or 14.2%, for fiscal 2001 as compared
to fiscal 2000. While average bill rates increased 4.2% in fiscal 2001 as compared to fiscal 2000, billed hours declined 17.7%. Fiscal 2001 included fifty-three weeks while fiscal 2000 included
fifty-two weeks. After eliminating the effect of the extra week in fiscal 2001, billed hours declined 19.2%. Sales of services decreased 14.6% for domestic business services and 12.0% for
international business services. The decline in domestic business services primarily reflects the economic slowdown during the year and the resulting current recession, which has decreased demand for
staffing services across the majority of the Company's geographic regions. In the latter portion of fiscal 2001, the economic environment placed strong competitive pressures on pricing which
negatively affected sales of
services. Contingent on the duration of the U.S. economic recession, its recovery period and the extent of economic recovery attained, the Company currently estimates that year over year decrease in
sales will continue through at least the first half of fiscal 2002, and possibly beyond. Global economic conditions and declines in foreign currency exchange rates negatively impacted the
international results. Excluding the effect of rate fluctuations, fiscal 2001 international sales of services decreased 1.8% as compared to fiscal 2000.

License
fees are charged to licensed offices based either on a percentage of sales or a percentage of gross profit generated by the license offices. License fees decreased
$1.8 million or 57.7%, for fiscal 2001 as compared to fiscal 2000, primarily due to a decrease in licensees. During the fourth quarter of fiscal 2000, the Company purchased the operations of
one of its licensees, two licensees converted to the Company's franchise agent program, and two licensees essentially closed operations. In the second quarter of fiscal 2001, two licensees purchased
the Company's interest in their licensed operations. A $2.1 million pre-tax gain from the sale of these operations is included in fiscal 2001 selling and administrative expenses.
License fee income from these operations ceased. In the fourth quarter of

27

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fiscal 2001 one of the remaining licensees converted to the Company's franchise agent program. Additionally, in the first quarter of fiscal 2002 the Company purchased the operations of one of its
three remaining licensees. Consequently, the Company expects license fee revenue in fiscal 2002 periods to be significantly lower than comparable fiscal 2001 periods.

Cost of Services.Costs of services include hourly wages of temporary employees, employer payroll taxes, state unemployment
and workers' compensation insurance and other employee-related costs. Costs of services decreased $74.4 million, or 14.1%, for fiscal 2001 as compared to fiscal 2000. Gross margin declined from
20.6% in fiscal 2000 to 20.3% in fiscal 2001; however, during the fourth quarter of fiscal 2000 the Company recorded an additional charge for workers' compensation costs of $2.1 million. The
effective decrease in gross margin for fiscal 2001 is primarily due to lower license fees and the overall effects of the current recession. The Company strives to improve gross margin where feasible;
however, with the recession and competitive pressures on prices, the opportunities available to increase gross margin are limited. The Company currently estimates that year over year decreases in
gross margin will continue through at least the first half of fiscal 2002, and possibly beyond.

Workers'
compensation costs were 4.0% of direct labor for fiscal 2001 and 4.0% for fiscal 2000. These costs tend to vary depending upon the mix of business between clerical staffing and
light industrial staffing. Recent upward trends in the Company's actuarially estimated ultimate costs for all open policy years have resulted in an increase in the Company's workers' compensation
accruals for these costs. The Company currently estimates that the accrual rates for workers' compensation costs will be in the range of 4.2% to 4.7% of direct labor for fiscal 2002, as a result of
increased workers' compensation costs across the industry. The Company reviews interim actuarial estimates and monitors accrual rates to ensure that they remain appropriate in light of loss trends;
however, there can be no assurance that the Company's programs to control workers' compensation costs will be effective or that loss development trends will not require additional increases in
workers' compensation accruals in future periods.

Franchise Agents' Share of Gross Profit.Franchise agents' share of gross profit represents the net distribution paid to
franchise agents based either on a percentage of sales or of gross profit generated by the franchise agents' operation. Franchise agents' share of gross profit decreased $0.8 million, or 4.4%,
for fiscal 2001 as compared to fiscal 2000. As a percentage of sales of services and license fees, franchise agents' share of gross profit increased from 2.7% during fiscal 2000 to 3.0% for fiscal
2001, reflecting a change in the relative mix of sales of services from company-owned, franchise and international business services.

Selling and Administrative Expenses (Including Depreciation and Amortization).Selling and administrative expenses decreased
$9.6 million, or 9.2%, for fiscal 2001 as compared to fiscal 2000. As a percentage of sales of services and license fees, selling and administrative expenses increased from 15.7% for fiscal
2000 to 16.6% for fiscal 2001. As noted above in "Sales of Services and License Fees", included in fiscal 2001 selling and administrative expenses is a $2.1 million gain on the sale of certain
licensed operations. Additionally, fiscal 2000 includes $1.9 million in pre-tax charges as a result of the Company's terminated recapitalization. Absent these two items selling and
administrative expenses, as a percentage of sales of services and license fees, were 17.0% and 15.4% for fiscal 2001 and fiscal 2000, respectively. The fiscal 2001 increase is primarily the result of
declining sales outpacing the extent of reductions in selling and administrative expenditures.

During
fiscal 2001, the Company implemented a number of cost containment initiatives, including the closure or consolidation of non-performing offices and staff reductions,
in an effort to reduce the impact of the sales decline on its profitability. Included in fiscal 2001 selling and administrative expenses are charges of approximately $0.5 million, primarily
relating to severance and other office-closure costs. As noted above in "Recent Developments" the Company is implementing a restructuring plan which will result in a first quarter fiscal 2002 charge
of approximately $1.9 million, primarily for

28

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costs associated with the abandonment of certain management information systems under development and severance, lease termination and other costs as a result of layoffs and office closures. The
Company continues to seek viable ways to reduce costs where possible; however, there can be no assurance that material cost savings which have been or will be, identified or implemented will be
adequate to improve operating income levels in future periods.

Loss on Impairment of Intangible Assets.Management of the Company assesses the recoverability of its long-lived
assets, including goodwill and other intangible 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. When such estimate of the future undiscounted cash flows is less than the carrying amount of the asset, a potential impairment exists. During fiscal 2001, a number of
businesses the Company acquired over the past several years were negatively impacted by the economic recession. Based on management's assessment of projected undiscounted future cash flows and
estimates of market value based on industry specific multiples, it was determined that the carrying amount of goodwill and other intangibles related to specific acquisitions had been permanently
impaired in the fourth quarter of fiscal 2001. As a result, the Company recorded a pre-tax charge of $19.1 million to write down these assets to estimated current net realizable
values.

In
July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" effective at
the beginning of the Company's fiscal year 2003. With the adoption of SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will no longer be amortized, but instead
will be evaluated for impairment by applying a fair-value-based test upon initial adoption of the Statement, and at least annually thereafter, with impaired assets written down to fair
value. Intangible assets with finite useful lives will continue to be amortized over their useful lives. The Company is assessing the impact of adopting SFAS 142, but has not yet determined the
effect, if any, on its financial position or results of operations. Although goodwill amortization will cease at that time, it is possible that an additional impairment charge could be recorded based
on the results of the fair-value approach under the new standard.

Arbitration Award.On March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior Court of the
State of California against the Company, all members of its Board of Directors and one of the executive officers. The complaint alleged, among other things, that the defendants fraudulently induced
the plaintiff to sell the assets of The Personnel Connection, Inc. The plaintiff sought to have the court grant a jury trial, and award the plaintiff compensatory and punitive damages and
attorneys' fees and other costs. The Company's petition for an order compelling arbitration was granted, the Superior Court lawsuit was stayed, discovery was completed, and on December 3, 2001
an arbitration hearing commenced. On January 9, 2002 the arbitration panel rendered an interim award in favor of the claimant for compensatory damages of $2.2 million, plus interest from
the date of the award, as well as reasonable attorneys' fees and other costs incurred in the proceeding, subject to an application process. On February 11, 2002, an Order Modifying Interim
Award was issued crediting the Company $0.8 million paid to the claimants in January 2000, under a price protection clause in the asset purchase agreement, thereby reducing the award for
compensatory damages to $1.4 million. As a result of the arbitration, the Company recorded an accrued liability and related pretax charge of $3.6 million in the fourth quarter of fiscal
2001 for the estimated cost of the award, plus other related expenses. This estimate is based on management's assumptions as to the ultimate outcome of future events and actual results could differ
from this estimate. However, in the opinion of management, possible additional charges (or gains) related to this matter are not expected to have a material effect on the Company's financial position
or results of operations.

Interest.Interest expense decreased $0.6 million, or 20.1%, for fiscal 2001 as compared to fiscal 2000 due to lower
debt levels under the Company's senior secured credit facilities. Interest income

29

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increased $0.4 million or 129.7% during the same period as a result of the short-term investment of excess cash from operations.

Provision for Income Taxes.For fiscal 2001, the Company had an income tax provision from continuing operations of
approximately $11.7 million on a pre-tax loss of $20.4 million. The income tax provision was primarily caused by recognition of $19.2 million of deferred tax asset
valuation allowances. These allowances were recorded against the tax assets arising from future deduction of federal, state and foreign taxable income because the Company has recently reassessed the
potential for their realization in future years. Whereas it is possible these deferred tax assets could still be realized in the future, the Company currently evaluates it as unlikely these will be
realizable. The Company has retained net deferred tax assets of $0.6 million from the net operating loss for fiscal 2001 because it believes it can realize these by carrying them back to taxes
paid in fiscal 1999. Additionally, the Company retains a
deferred tax asset of $0.8 million for fiscal 2000 taxable income, because it currently believes it will realize this as a result of future results of operations.

Absent
the valuation allowances recognized, the Company had an income tax benefit of $7.6 million, which represents an effective tax benefit rate of 37.2%. This income tax benefit
is primarily generated by the charge for the loss on intangible asset impairment and arbitration award noted above and partially reduced due to permanent differences. The effective income tax rate for
fiscal 2000 was 39.5%.

Fiscal 2000 compared to Fiscal 1999

Sales of Services and License Fees.Sales of services increased $12.4 million, or 1.9%, for fiscal 2000 as compared to
fiscal 1999. Average bill rates increased 2.9% in fiscal 2000 as compared to fiscal 1999, while billed hours declined slightly. Same store sales increased by 3.3% for fiscal 2000 as compared to fiscal
1999. Sales of services increased 1.3% for domestic business services and 5.3% for international business services. Fiscal 2000 domestic sales of services were adversely affected by competitive
pressures for the supply of temporary staff as a result of the low unemployment rates in the United States economy during fiscal 2000 as well as decreasing demand for temporary staffing services in
some sectors of the economy as indications of an economic slowdown became apparent. Declines in foreign currency exchange rates negatively impacted the international results as reported. Excluding the
effect of these rate fluctuations, fiscal 2000 international sales of services increased 13.0% as compared to fiscal 1999. Acquisitions did not have a significant effect on the increase in fiscal 2000
sales of services. During the fourth quarter of fiscal 2000, the Company purchased the operations of one of its licensees. Fiscal 1999 acquisitions were limited to buy backs and conversion of six of
the Company's franchise agents' operations to Company-owned offices.

License
fees decreased $199,000 or 6.1%, for fiscal 2000 as compared to fiscal 1999. During the fourth quarter of fiscal 2000, the Company purchased the operations of one of its
licensees, two licensees converted to the Company's franchise agent program, and two licensees essentially closed operations.

Cost of Services.Costs of services increased $13.7 million, or 2.7%, for fiscal 2000 as compared to fiscal 1999.
Gross margin declined from 21.2% in fiscal 1999 to 20.6% in fiscal 2000 primarily due to higher workers' compensation costs and lower license fees. Additionally, the Company expanded its
On-Location program accounts which generally carry lower margins than traditional service accounts, and experienced increased downward pressures on margins due to competition.

Workers'
compensation costs were 4.0% of payroll for fiscal 2000 and 3.0% for fiscal 1999. As a result of increases in the Company's actuarially estimated ultimate losses for all open
policy years, the
Company recorded an additional charge for workers' compensation costs of $2.1 million, or $0.08 per share, net of taxes, during the fourth quarter of fiscal 2000.

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Franchise Agents' Share of Gross Profit.Franchise agents' share of gross profit increased $822,000, or 4.8%, for fiscal 2000
as compared to fiscal 1999. As a percentage of sales of services and license fees, franchise agents' share of gross profit increased from 2.6% during fiscal 1999 to 2.7% for fiscal 2000.

Selling and Administrative Expenses (Including Depreciation and Amortization).Selling and administrative expenses increased
$8.2 million, or 8.6%, for fiscal 2000 as compared to fiscal 1999. As a percentage of sales of services and license fees, selling and administrative expenses increased from 14.7% for fiscal
1999 to 15.7% for fiscal 2000. Fiscal 2000 includes $1.9 million in pre-tax charges as a result of the Company's terminated recapitalization. Fiscal 2000 also reflects increased
costs for bad debts, increased communication costs in connection with the Company's wide area network, higher depreciation and outside services costs for on-going management information
system initiatives and increased foreign currency transaction losses due to the effect of declining exchange rates with the Company's international operations. Additionally, selling and administrative
expenses for fiscal 1999 were lower as a result of domestic gross receipt tax refunds and United Kingdom advance corporation tax refunds.

Interest Expense.Interest expense increased $640,000, or 25.4%, for fiscal 2000 as compared to fiscal 1999 as a result of
higher average borrowings for domestic business services.

Provision for Income Taxes.The provision for income taxes for fiscal 2000 decreased $4.4 million, or 48.3%, as
compared to fiscal 1999 reflecting the decrease in pre-tax income from continuing operations of $11.2 million. The effective income tax rate was 39.5% for both fiscal years.

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 financing and
bank lines of credit. The Company's principal use of cash is for financing of accounts receivable, particularly during periods of economic upswings and growth, and for management information systems
initiatives. Temporary personnel are generally paid on a weekly basis while payments from customers are generally received 30 to 60 days after billing. As a result of seasonal fluctuations,
accounts receivable balances are historically higher in the fourth fiscal quarter and are generally at their lowest during the first fiscal quarter. Accordingly, short-term borrowings used
to finance accounts receivable generally follow a similar seasonal pattern.

Net
cash provided by operating activities was $25.6 million, $16.7 million and $15.4 million for fiscal 2001, fiscal 2000 and fiscal 1999, respectively. In fiscal
2001, cash generated from operations increased in spite of a net loss because a number of the expenses, including the impairment loss of $19.1 million and the deferred tax valuation allowance
of $19.2 million were non-cash charges. Increased net cash flows were primarily provided by decreases in accounts receivable balances. As a result of the economic recession,
collection of outstanding receivables outpaced the growth of receivables generated by current sales. Somewhat offsetting the increase in fiscal 2001 net cash flows generated by accounts receivable
collections were reductions in the current year payroll, payroll tax and bank overdraft accruals. Additionally, prepaid income taxes were reduced as a result of approximately $1.9 million in
tax refunds received related to prior fiscal years. In the first quarter of fiscal 2002, the Company received additional income tax refunds of $0.9 million and is anticipating further
tax-related refunds of approximately $0.9 million during the remainder of fiscal 2002.

Cash
used for capital expenditures, which are primarily for management information systems initiatives, other software, computers and peripherals, and office furniture and equipment,
totaled $4.6 million, $4.4 million and $8.2 million for fiscal 2001, fiscal 2000 and fiscal 1999, respectively. During the first fiscal quarter of 2002, the Company ceased further
development on its Lawson

31

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Software integrated front-to-back office system (see Item 1. BusinessManagement Information Systems). Currently, the Company anticipates that fiscal 2002 cash
outflows for management information systems and other capital expenditures will be below fiscal 2001 levels.

During
fiscal 2001, no acquisition-related intangible assets were acquired. In fiscal 2000 and fiscal 1999, cash outflows for new acquisitions and for contingent payments under existing
acquisitions totaled $0.1 million and $1.7 million, respectively. The Company currently intends to focus on internal operations and has no plans to make significant acquisitions at this
time, but may continue to acquire certain of its franchise or licensed operations and convert these to company-owned. In the future, the Company may again pursue opportunities for growth through
strategic external acquisitions.

In
the second quarter of fiscal 2001, two licensees purchased the Company's interest in their licensed operations. Of the $2.1 million pre-tax gain from the sale of
these operations, at November 3, 2001 the Company had received $0.7 million in cash proceeds with the balance represented by notes receivable due in installments through the first
quarter of fiscal 2003.

At
November 3, 2001 the Company had $30.0 million outstanding principal under its 10-year senior secured notes, payable in equal annual installments beginning
in the third quarter of fiscal 2002. The Company was out of compliance with certain covenants of these senior notes at the end of fiscal 2001.

The
Company also maintains a five year revolving credit facility entered into on March 4, 1998. The maximum availability under this facility is $90.0 million, and it exists
to meet letter of credit requirements in connection with its workers' compensation program, as well as for working capital purposes. As of the date of this filing on Form 10-K,
there were no outstanding borrowings under the
facility. However, the Company had $11.8 million in outstanding letters of credit covered by the facility, needs to arrange for an increase of $5.5 million in the letters of credit by
March 15, 2002 and had no borrowings available to it under the existing facility.Further, the Company was out of compliance with certain
covenants of the facility at the end of fiscal 2001. The Company believes that its workers' compensation collateral requirements will be met through cash collateral or increased letters of credit;
however, the insurer may require the Company to satisfy such requirements through letters of credit only. If the Company were unable to satisfy the insurer's increased letter of credit requirements,
the insurer could cancel the workers' compensation insurance program. If the Company loses workers' compensation insurance program coverage or is forced to reduce the amount of coverage available,
there would be a material adverse effect on the Company's results of operations and financial condition which may adversely affect the trading price of its stock.

The
Company is currently negotiating with the bank syndicate holding the revolving credit facility to amend and restate the credit facility agreement thereby waiving default attributable
to the covenant violations that existed at November 3, 2001. Additionally, the senior noteholders have indicated they are awaiting the outcome of the credit facility negotiations and if those
are completed in a satisfactory manner, they have indicated they are willing to realign the covenants of the senior notes on a prospective basis and waive the covenant violations that existed at
November 3, 2001. As of the date of this filing on Form 10-K, the senior noteholders have not delivered a notice of default to the Company, as is their right due to the
covenant violations. However, because these covenant violations have not been cured, the Company has reclassified the entire $30.0 million of principal outstanding under the senior notes to a
current liability on its balance sheet as at the November 3, 2001.

As
noted above, the Company is currently in negotiations with its bank syndicate as well as its senior noteholders to amend and restate its existing agreements, and has received proposed
terms for the amended and restated agreements. While there can be no assurance that the Company will be successful in closing the amended and restated agreements or that the proposed terms will remain
as is, the Company anticipates that the amended and restated agreements will result in significant up-front fees as well as higher borrowing rates and letter of credit fees as compared to
the current agreement.

32

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In
addition to its outstanding senior notes and revolving credit facility, the Company has an outstanding financial guarantee bond in the amount of $11.8 million that secures a
portion of its workers' compensation premium and deductible obligations. This bond is renewable annually on November 1 and 90 days' advance written notice of non-renewal is required. The
bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond. Whereas no formal notice of non-renewal has been received, the bondholder has expressed its
desire to cancel this bond prior to November 1, 2002, if feasible. Discussions are underway for the purpose of reducing the bond to $9.0 million by April 30, 2002, which will
require the Company to either increase its outstanding letters of credit under the revolving credit facility or cash collateralize the net decrease of $2.8 million. Should
non-renewal of the bond occur as of November 1, 2002, the Company projects is will be required to either restructure its workers' compensation program to reduce its letter of credit
requirements, obtain additional letters of credit or financial guarantee bonds to replace the expiring financial guarantee bond, or seek alternative financing. There can be no assurance that the
Company will be successful in
restructuring its workers' compensation program, reducing letter of credit requirements, obtaining additional letters of credit or financial guarantee bonds or obtaining alternative financing.

During
fiscal 2001, fiscal 2000 and fiscal 1999, 95,000, 93,000 and 136,000 shares were reissued under the employee stock option and purchase plans with aggregate cash proceeds of
$0.2 million, $0.4 million and $0.8 million, respectively. In fiscal 2000 and fiscal 1999, the Company repurchased 150,000 and 100,000 shares of common stock on the open market
for aggregate cash consideration of $0.7 million and $0.7 million, respectively. Through January 29 of fiscal 2002, the Company repurchased an additional 5,200 shares at
$0.013 million. The Company currently does not anticipate any further repurchases of its common stock during fiscal 2002.

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
November 3, 2001 options to purchase an aggregate of 1,251,000 shares of common stock were outstanding under the Company's equity incentive plans. Concurrent with the January 14, 2002
resignation of the Company's former President and Chief Executive Officer, 700,000 of outstanding options were cancelled.

In
July 1998, the Company acquired substantially all of the assets of The Personnel Connection, Inc. Consideration for the acquisition consisted of cash and common stock,
with a contingent obligation to issue up to an additional 100,000 shares of common stock dependent on the fair market value of the Company's stock subsequent to the acquisition. In
January 2000, the Company paid the selling parties $0.8 million in lieu of issuing additional shares. In March 2000, the selling parties, Synergy Staffing, Inc. filed a
complaint in the Superior Court of the State of California against the Company, all members of its Board of Directors and one of the executive officers. The complaint alleged, among other things, that
the defendants fraudulently induced plaintiffs to sell the assets of The Personnel Connection, Inc. The plaintiff sought to have the court grant a jury trial, and award the plaintiff
compensatory and punitive damages and attorneys' fees and other costs. The Company's petition for an order compelling arbitration was granted, the Superior Court lawsuit was stayed, discovery was
completed, and on December 3, 2001 an arbitration hearing commenced. On January 9, 2002, the arbitration panel rendered an interim award in favor of the claimant for compensatory damages
of $2.2 million, plus interest from the date of the award, as well as reasonable attorneys' fees and other costs incurred in the proceeding, subject to an application process. On
February 11, 2002, an Order Modifying Interim Award was issued crediting the Company the $0.8 million previously paid, thereby reducing the award for compensatory damages to
$1.4 million. As a result of the arbitration, the Company recorded an accrued liability and related pretax charge of $3.6 million in the fourth quarter of fiscal 2001 for the estimated
cost of the award, plus other related expenses. As of

33

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February 13, 2002, the Company has paid the $1.4 million principal, plus interest. The Company anticipates that the remainder of the obligations under the award will be paid during
fiscal 2002.

On
June 20, 2000, the Company's Board of Directors declared a special cash dividend of $0.30 per share of common stock paid on July 18, 2000 to stockholders of record as of
July 5, 2000. The
distribution totaled $4.7 million. The Company currently does not anticipate declaring or paying any cash dividends on its common stock in the foreseeable future.

The
Company believes that if the debt agreements are modified, waivers of default are obtained and if additional financing is secured then these items plus cash reserves and cash flow
from operations will be sufficient to meet anticipated needs for working capital, capital expenditures and debt services obligations, at least through fiscal 2002. Additionally, it believes the
amendment to the credit facility currently under negotiation will be sufficient to meet its letter of credit obligations in connection with its workers' compensation program. However, there can be no
assurance that cash reserves and cash flows from operations will actually be sufficient, no assurance that the amendment to the credit facility will be satisfactorily completed and no assurance that
if the amendment is completed it will provide sufficient availability to cover the letter of credit requirements.

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.

On
July 14, 1999, following the completion of a screening process, the Company selected Arthur Andersen LLP as the Company's independent accountants. Arthur Andersen LLP accepted
the engagement on August 18, 1999. The Company's stockholders have ratified the appointment of Arthur Andersen LLP at each annual meeting since then.

For
the Company's fiscal year ended October 31, 1998, neither the Company nor anyone acting on its behalf consulted with Arthur Andersen LLP regarding application of accounting
principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and no written report or oral advice was
provided to the Company that the new accountants concluded was an important factor considered by the Company in reaching a decision as to accounting, auditing or financial reporting issues. The
Company had never consulted with Arthur Andersen LLP prior to its engagement concerning any disagreement or reportable event, as those terms are defined in Item 304(a) of Securities and Exchange
Commission Regulation S-K.

For
the Company's fiscal year ended October 28, 2000 and November 3, 2001, there were no disagreements with its accountants on accounting and financial disclosure.

34

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth certain information as of February 15, 2002 with respect to each person who is a director or executive officer of the
Company(1) and includes certain significant key employees.

|Name                          |  | Age |  | Position                                                      
|----------------------------- |  | --- |  | --------------------------------------------------------------
|W. Robert Stover(3)(5)        |  | 80  |  | Chairman of the Board of Directors                            
|Dwight S. Pedersen            |  | 57  |  | President and Chief Executive Officer and Director            
|Dirk A. Sodestrom             |  | 44  |  | Senior Vice President and Chief Financial Officer             
|Robin A. Herman               |  | 50  |  | Senior Vice President, General Counsel and Secretary          
|M. John Grossu                |  | 59  |  | Senior Vice PresidentZone Manager (California)               
|Joseph M. Petitti             |  | 49  |  | Senior Vice President, Director of Strategic Business Services
|William M. Herbster           |  | 49  |  | Senior Vice President, Product Development                    
|Christa C. Leonard            |  | 44  |  | Vice President and Treasurer                                  
|John P. Sanders               |  | 37  |  | Vice President and Controller                                 
|Joseph R. Coute               |  | 54  |  | Vice President and Director of Human Resources                
|David P. Wilson               |  | 39  |  | Vice President, Director of Information Services              
|Jack D. Samuelson(2)(3)(4)(5) |  | 76  |  | Director                                                      

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Directors and Executive Officers

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

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. He stepped down as Chief Executive Officer effective January 1, 1999 and continued to serve
as Chairman of the Board of Directors until May 3, 2000, when he assumed the

35

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position of interim President and Chief Executive Officer following the termination of the recapitalization agreement that was a management-led buyout transaction. Mr. Stover's
interim service as President and Chief Executive Officer ended upon the hiring of a successor in that office effective May 1, 2001. He continues to serve as Chairman of the Board of Directors.

Dwight S. Pedersen.Mr. Pedersen was appointed as President and Chief Executive Officer of the Company effective
January 14, 2002. He has been a director of the Company since May 1, 2001. He served on the Audit Committee of the Board of Directors from and after that date until he resigned from that
committee upon becoming an employee of the Company.Prior to joining the Company, he was the Executive Vice President of Pinkertons, Inc., where
he has been employed since January 1, 2000 following the acquisition of American Protective Services, Inc. He was employed by American Protective Services, Inc. for
twenty-six years, having started as its first Controller in 1974. After a series of promotions, including service as Vice President-Finance, Senior Vice President and Executive Vice
President of that company, he was named President and a director in 1988 and he became its Chief Executive Officer in 1992. His previous work history includes approximately four years with
Wolf & Co., an accounting firm. 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. Effective January 1, 2001,
Mr. Sodestrom was appointed as Chief Financial Officer. 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.

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.

M. John Grossu.Mr. Grossu joined the Company as Senior Vice PresidentZone Manager (California) in
May 1996. Effective February 1999, he was assigned additional responsibilities for international operations and his title was changed to Senior Vice President, Group Operations Europe
and Zone Manager (California). In June 2000, he was appointed Senior Vice President, Strategic Business Solutions. His responsibilities were refocused in November 2001 when his title
reverted to Senior Vice PresidentZone Manager (California) and he continues to be responsible for overseeing the Company's
international operations in Australia and New Zealand. Mr. Grossu's prior staffing industry experience includes approximately 25 years with Kelly Services, Inc.

Joseph M. Petitti.Mr. Petitti was hired in November 2001 as Senior Vice President, Director of Strategic
Business Services. Mr. Petitti was previously employed by Innoventry as Senior Vice President of Operations from 1999 to 2001. From 1997 to 1999, he was employed by Centurion Capital
Management, Inc. as President and Chief Operating Officer. He has twenty years' prior work experience in financial services, most recently from 1988 to 1997 with California Federal Bank where
he progressed from Regional Manager to Executive Vice President of Retail Banking. He held various marketing management positions with Wells Fargo Bank and Citibank prior to joining California Federal
Bank.

William M. Herbster.Mr. Herbster was hired in December 2001 as Senior Vice President, Product Development. He
has an extensive background in the temporary staffing industry, most recently in 2001 as Executive Vice President of Select Personnel Services. From 1994 to 2001, he was employed by
RemedyTemp, Inc. as Vice President, Sales and Marketing. From 1984 to 1994, he was employed by Manpower Inc. where his most recent title was U.S. Field Marketing Director. His other work

36

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experience includes approximately three years as Field Consultant with Runzheimer and Company, two years as Territory Manager with Economic Laboratory, and approximately three years as Zone Sales
Manager with Motorola Communications and Electronics Division.

Christa C. Leonard.Ms. Leonard was hired as Vice President and Treasurer of the Company in November 2000 to fill a
vacancy in the Office of Treasurer. Ms. Leonard was previously employed by USI Insurance Services Corp. as Vice President, Treasury and Tax, from 1996 to 2000. She has approximately nine years'
prior work experience in the public accounting field, most recently from 1995 to 1996 with Roberts Schultz & Co., and also with Wallace Meyer & Co. from 1992 to 1994 and KPMG Peat
Marwick & Co. from 1987 to 1992. She is a certified public accountant on inactive status.

John P. Sanders.Mr. Sanders was hired in February 2001 as Vice President and Controller to fill a vacancy in
the Office of Controller. He was previously employed by Planetweb, Inc. as Controller from 1999 to 2001. Mr. Sanders began his career in 1986 with Deloitte & Touche, LLP where he
was employed as Manager until 1993. His other previous work experience in financial management comes from working from 1997 to 1999 with Scan Health Plan as Director of Finance, from 1995 to 1997 with
Affiliated Computer Services, Inc. as Vice President, and from 1993 to 1995 with Price Waterhouse LLP as Senior Manager. He is a certified public accountant on inactive status.

Joseph R. Coute.Mr. Coute has been employed by the Company since January 1997 as Vice President and Director
of Human Resources. His previous employer was Bank of America for approximately 26 years, including 16 years in human resources and ten years in branch operations.

David P. Wilson.Mr. Wilson was hired in December 1997 as Field Automation Manager, focusing on the field
automation process. In June 1998, he was assigned the additional task of managing the customer service and help desk functions of the Company's Information Services Department.
Mr. Wilson was promoted to Vice President, Director of Information Services in January 2001.

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 May 22, 2002
(the "Proxy Statement"), is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information included in the Company's Proxy Statement under the captions "Directors' Compensation," "Executive Compensation," "Option Grants In Last Fiscal
Year," "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.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

See Note 6 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.

PART IV

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



Report of Independent Public Accountants

F-1Consolidated Balance SheetsAs of the Fiscal Year Ended November 3, 2001 and the Fiscal Year Ended October 28, 2000

F-2Consolidated Statements of OperationsFor the Three-Year Period Ended November 3, 2001

F-3Consolidated Statements of Stockholders' EquityFor the Three-Year Period Ended November 3, 2001

F-4Consolidated Statements of Cash FlowsFor the Three-Year Period Ended November 3, 2001

F-5Notes to Consolidated Financial Statements

F-7






|Exhibit
Number |  | Description                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------
|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.(7)      
|3.2            |  | The Company's Restated Bylaws.(1)                                                                          
|3.2.1          |  | Amendment of the Amended and Restated Bylaws, dated as of March 26, 1998.(7)                               
|3.2.2          |  | Amendment of the Amended and Restated Bylaws, effective September 24, 1998.(7)                             
|3.2.3          |  | Third Amendment of the Amended and Restated Bylaws, effective March 30, 1999.(10)                          
|4.1.1          |  | Form of New Specimen Certificate for the Company's Common Stock.(7)                                        
|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)                 
|10.3.4         |  | Employment Agreement with W. Robert Stover.(7)                                                             
|10.3.5         |  | Employment Contract between the Company and Dirk A. Sodestrom.(12)                                         

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|10.3.6   |  | Employment Agreement between the Company and Tom D. Seip.(13)                                                                                                                                                                                                                                               
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3.6.1 |  | Notice of Grant of Stock Option (Incentive) with Exhibit A, Stock Option Agreement.(13)                                                                                                                                                                                                                     
|10.3.6.2 |  | Notice of Grant of Stock Option (Non-Statutory) with Exhibit A, Stock Option Agreement.(13)                                                                                                                                                                                                                 
|10.3.6.3 |  | Notice of Grant of Stock Option (Non-Statutory) with Exhibit A, Stock Option Agreement.(13)                                                                                                                                                                                                                 
|10.7     |  | Westaff, Inc. 1996 Stock Option/Stock Issuance Plan, as amended and restated.                                                                                                                                                                                                                               
|10.7.6   |  | Form of Notice of Grant of Stock Option.                                                                                                                                                                                                                                                                    
|10.7.7   |  | Form of Stock Option Agreement.                                                                                                                                                                                                                                                                             
|10.7.8   |  | Form of Notice of Grant of Automatic Stock Option.                                                                                                                                                                                                                                                          
|10.7.9   |  | Form of Automatic Stock Option Agreement.                                                                                                                                                                                                                                                                   
|10.8.7   |  | Credit Agreement dated as of March 4, 1998.(4)                                                                                                                                                                                                                                                              
|10.8.8   |  | First Amendment to Credit Agreement dated as of May 15, 1998.(5)                                                                                                                                                                                                                                            
|10.8.9   |  | Note Purchase Agreement dated May 15, 1998.(5)                                                                                                                                                                                                                                                              
|10.8.10  |  | Second Amendment to Credit Agreement dated as of July 23, 1998.(6)                                                                                                                                                                                                                                          
|10.8.11  |  | First Amendment to Note Purchase Agreement dated as of November 16, 1998.(7)                                                                                                                                                                                                                                
|10.8.12  |  | Third Amendment to Credit Agreement dated as of January 22, 1999.(8)                                                                                                                                                                                                                                        
|10.8.13  |  | Second Amendment to Note Purchase Agreement and Transaction Documents.(9)                                                                                                                                                                                                                                   
|10.8.14  |  | Consent to Asset Sale and Release of Liens.(9)                                                                                                                                                                                                                                                              
|10.8.15  |  | Fourth Amendment to Credit Agreement dated as of December 15, 1999.(10)                                                                                                                                                                                                                                     
|10.8.16  |  | Fifth Amendment to Credit Agreement dated as of November 7, 2000.(12)                                                                                                                                                                                                                                       
|10.9.1   |  | Tax Indemnification Agreement by and among the Company and the current stockholders of the Company.(1)                                                                                                                                                                                                      
|10.10    |  | Form of Tax Indemnification Agreement by and among the Company and certain stockholders of the Company.(1)                                                                                                                                                                                                  
|10.11    |  | Westaff, Inc. Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                 
|10.11.1  |  | Stock Purchase Agreement for Employee Stock Purchase Plan.                                                                                                                                                                                                                                                  
|10.11.2  |  | Form of Enrollment/Change Form for Employee Stock Purchase Plan.                                                                                                                                                                                                                                            
|10.11.3  |  | International Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                 
|10.11.4  |  | Stock Purchase Agreement for International Employee Stock Purchase Plan.                                                                                                                                                                                                                                    
|10.11.5  |  | Form of Enrollment/Change Form for International Employee Stock Purchase Plan.                                                                                                                                                                                                                              
|10.12    |  | Exchange Agreement between the Company and W. Robert Stover.(1)                                                                                                                                                                                                                                             
|10.13    |  | Form of Employment Contract with certain Named Executive Officers.                                                                                                                                                                                                                                          
|10.16    |  | Mutual Termination and Release Agreement dated as of May 3, 2000 by and between Westaff Acquisition Corp., Westaff, Inc., The Stover Revocable Trust, The Stover 1999 Charitable Remainder Unitrust, The Stover
Foundation, Cornerstone Equity Investors IV, L.P. and Centre Capital Investors III, L.P.(11)
|21.1     |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                
|23.1     |  | Consent of Arthur Andersen LLP, independent public accountants.                                                                                                                                                                                                                                             
|24.1     |  | Power of Attorney (see page IV-3).                                                                                                                                                                                                                                                                          

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We
have audited the accompanying balance sheets of Westaff, Inc. (a Delaware Corporation) and its subsidiaries as of November 3, 2001 and October 28, 2000, and the
related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 3, 2001. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We
conducted our audits in accordance with accounting standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westaff, Inc. and its subsidiaries as of
November 3, 2001 and October 28, 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 3, 2001 in conformity with
accounting principles generally accepted in the United States.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company was out of compliance with its debt covenants as of November 3, 2001 and was unable to finalize amended agreements or obtain waivers for the defaults. Also, as discussed in
Note 1, the Company has been notified by the issuer of its financial guarantee bond securing a portion of its workers' compensation obligations that the bond will not be renewed. These matters
raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our
audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II "Valuation and Qualifying Accounts and Reserves" is
presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the
basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

ARTHUR
ANDERSEN LLP

San
Francisco, California
December 19, 2001 (except with respect to the matter discussed
in Note 1 and Note 15, as to which the date is February 11, 2002)

F-1

---



Westaff, Inc.

Consolidated Balance Sheets  (Amounts in Thousands Except Per Share Amounts)

|                                                                         |                                                                                                                         | November 3,
2001           |         | October 28,
2000 |       
|------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ---------------- | ------
|ASSETS                                                                   |                                                                                                                         |                            |         |                  |       
|Current assets:                                                          |                                                                                                                         |                            |         |                  |       
|                                                                         | Cash and cash equivalents                                                                                               |                            | $       | 6,443            |       
|                                                                         | Trade accounts receivable, less allowance for doubtful
accounts of $1,260 and $1,634                                    |                            |         | 70,444           |       
|                                                                         | Due from licensees                                                                                                      |                            |         | 1,615            |       
|                                                                         | Deferred income taxes                                                                                                   |                            |         | 1,350            |       
|                                                                         | Net assets of discontinued operations                                                                                   |                            |         |                  |       
|                                                                         | Other current assets                                                                                                    |                            |         | 8,206            |       
|                                                                         |                                                                                                                         |                            |         |                  |       
|                                                                         |                                                                                                                         | Total current assets       |         |                  | 88,058
|Property, plant and equipment, net                                       |                                                                                                                         |                            | 20,259  |                  |       
|Deferred income taxes                                                    |                                                                                                                         |                            |         |                  |       
|Intangible assets, net of accumulated amortization of $11,005 and $9,209 |                                                                                                                         |                            | 13,181  |                  |       
|Other long-term assets                                                   |                                                                                                                         |                            | 1,677   |                  |       
|                                                                         |                                                                                                                         |                            |         |                  |       
|                                                                         |                                                                                                                         | $                          | 123,175 |                  | $     
|                                                                         |                                                                                                                         |                            |         |                  |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                     |                                                                                                                         |                            |         |                  |       
|Current liabilities:                                                     |                                                                                                                         |                            |         |                  |       
|                                                                         | Short-term borrowings                                                                                                   |                            |         |                  |       
|                                                                         | Current portion of loans payable                                                                                        |                            | $       | 30,000           |       
|                                                                         | Accounts payable and accrued expenses                                                                                   |                            |         | 40,749           |       
|                                                                         | Net liabilities of discontinued operations                                                                              |                            |         | 192              |       
|                                                                         | Income taxes payable                                                                                                    |                            |         | 555              |       
|                                                                         |                                                                                                                         |                            |         |                  |       
|                                                                         |                                                                                                                         | Total current liabilities  |         |                  | 71,496
|Loans payable                                                            |                                                                                                                         |                            |         |                  |       
|Other long-term liabilities                                              |                                                                                                                         |                            | 12,187  |                  |       
|                                                                         |                                                                                                                         |                            |         |                  |       
|                                                                         |                                                                                                                         | Total liabilities          |         |                  | 83,683
|                                                                         |                                                                                                                         |                            |         |                  |       
|Commitments and contingencies (Notes 1, 2, 13 and 15)                    |                                                                                                                         |                            |         |                  |       
|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 November 3, 2001 and October 28, 2000 |                            |         | 159              |       
|                                                                         | Additional paid-in-capital                                                                                              |                            |         | 36,582           |       
|                                                                         | Retained earnings                                                                                                       |                            |         | 6,209            |       
|                                                                         | Accumulated other comprehensive income                                                                                  |                            |         | (3,301           | )     
|                                                                         |                                                                                                                         |                            |         |                  |       
|                                                                         |                                                                                                                         |                            | 39,649  |                  |       
|                                                                         | Less treasury stock at cost, 34 shares at November 3, 2001 and 129 shares at October 28, 2000                           |                            |         | 157              |       
|                                                                         |                                                                                                                         |                            |         |                  |       
|                                                                         |                                                                                                                         | Total stockholders' equity |         |                  | 39,492
|                                                                         |                                                                                                                         |                            |         |                  |       
|                                                                         |                                                                                                                         | $                          | 123,175 |                  | $     
|                                                                         |                                                                                                                         |                            |         |                  |       

See
accompanying notes to consolidated financial statements.

F-2

---



Westaff, Inc.

Consolidated Statements of Operations  (Amounts in Thousands Except Per Share Amounts)

|                                                                 |                          | Fiscal year ended |        
|---------------------------------------------------------------- | ------------------------ | ----------------- | -------
|
|Sales of services                                                |                          | $                 | 566,145
|License fees                                                     |                          |                   | 1,303  
|                                                                 |                          |                   |        
|Total sales of services and license fees                         |                          |                   | 567,448
|Costs of services                                                |                          |                   | 452,105
|                                                                 |                          |                   |        
|Gross profit                                                     |                          |                   | 115,343
|Franchise agents' share of gross profit                          |                          |                   | 17,112 
|Selling and administrative expenses                              |                          |                   | 86,544 
|Depreciation and amortization                                    |                          |                   | 7,645  
|Loss on impairment of intangible assets                          |                          |                   | 19,121 
|Arbitration award                                                |                          |                   | 3,600  
|                                                                 |                          |                   |        
|Operating income (loss) from continuing operations               |                          |                   | (18,679
|Interest expense                                                 |                          |                   | 2,529  
|Interest income                                                  |                          |                   | (765   
|                                                                 |                          |                   |        
|Income (loss) from continuing operations before income taxes     |                          |                   | (20,443
|Income tax provision                                             |                          |                   | 11,658 
|                                                                 |                          |                   |        
|Income (loss) from continuing operations                         |                          |                   | (32,101
|Loss on disposal of discontinued operations, net of income taxes |                          |                   | (1,794 
|                                                                 |                          |                   |        
|Net income (loss)                                                |                          | $                 | (33,895
|                                                                 |                          |                   |        
|Basic and diluted earnings (loss) per share:                     |                          |                   |        
|                                                                 | Continuing operations:   |                   | $      
|                                                                 |                          |                   |        
|                                                                 | Discontinued operations: |                   | $      
|                                                                 |                          |                   |        
|                                                                 | Net income (loss):       |                   | $      
|                                                                 |                          |                   |        
|Weighted average shares outstandingbasic                        |                          |                   | 15,869 
|                                                                 |                          |                   |        
|Weighted average shares outstandingdiluted                      |                          |                   | 15,869 
|                                                                 |                          |                   |        

See
accompanying notes to consolidated financial statements.

F-3

---



Westaff, Inc.

Consolidated Statements of Stockholders' Equity  (Amounts in Thousands)

|                            |                                                               | Common stock                     |  |   |     |  |   | Accumulated
other
comprehensive
income |      | Treasury stock |        |        |        
|--------------------------- | ------------------------------------------------------------- | -------------------------------- |  | - | --- |  | - | -------------------------------------- | ---- | -------------- | ------ | ------ | -------
|
|
|Balance at October 31, 1998 |                                                               | 15,948                           |  | $ | 159 |  | $ | 37,341                                 |      | $              | 32,679 |        | $      
|                            | Comprehensive income:                                         |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            |                                                               | Net income                       |  |   |     |  |   |                                        |      |                |        |        | 7,396  
|                            |                                                               | Currency translation adjustments |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Total comprehensive income                                    |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Purchase of treasury stock                                    |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Stock issued under employees' stock purchase and option plans |                                  |  |   |     |  |   |                                        |      |                |        | (1,280 | )      
|                            | Other                                                         |                                  |  |   |     |  |   |                                        | 41   |                |        |        |        
|                            |                                                               |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|Balance at October 30, 1999 |                                                               | 15,948                           |  |   | 159 |  |   | 37,382                                 |      |                | 38,795 |        |        
|                            | Comprehensive income:                                         |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            |                                                               | Net income                       |  |   |     |  |   |                                        |      |                |        |        | 6,451  
|                            |                                                               | Currency translation adjustments |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Total comprehensive income                                    |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Cash dividends                                                |                                  |  |   |     |  |   |                                        |      |                |        | (4,732 | )      
|                            | Payment for stock acquisition contingency                     |                                  |  |   |     |  |   |                                        | (800 | )              |        |        |        
|                            | Purchase of treasury stock                                    |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Stock issued under employees' stock purchase and option plans |                                  |  |   |     |  |   |                                        |      |                |        | (171   | )      
|                            |                                                               |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|Balance at October 28, 2000 |                                                               | 15,948                           |  |   | 159 |  |   | 36,582                                 |      |                | 40,343 |        |        
|                            | Comprehensive income:                                         |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            |                                                               | Net loss                         |  |   |     |  |   |                                        |      |                |        |        | (33,895
|                            |                                                               | Currency translation adjustments |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Total comprehensive income                                    |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|                            | Stock issued under employees' stock purchase and option plans |                                  |  |   |     |  |   |                                        |      |                |        | (239   | )      
|                            |                                                               |                                  |  |   |     |  |   |                                        |      |                |        |        |        
|Balance at November 3, 2001 |                                                               | 15,948                           |  | $ | 159 |  | $ | 36,582                                 |      | $              | 6,209  |        | $      
|                            |                                                               |                                  |  |   |     |  |   |                                        |      |                |        |        |        

See accompanying notes to consolidated financial statements.

F-4

---



Westaff, Inc.

Consolidated Statements of Cash Flows  (Amounts in Thousands)

|                                               |                                                                            | Fiscal year ended                         |                                      
|---------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------
|
|Cash flows from operating activities           |                                                                            |                                           |                                      
|                                               | Net income (loss)                                                          |                                           | $                                    
|                                               | Adjustments to reconcile net income to net cash from operating activities: |                                           |                                      
|                                               |                                                                            | Loss from discontinued operations         |                                      
|                                               |                                                                            | Depreciation                              |                                      
|                                               |                                                                            | Amortization of intangible assets         |                                      
|                                               |                                                                            | Loss on impairment of intangible assets   |                                      
|                                               |                                                                            | Arbitration award                         |                                      
|                                               |                                                                            | Provision for losses on doubtful accounts |                                      
|                                               |                                                                            | Deferred income taxes                     |                                      
|                                               |                                                                            | Gain from sale of licensed operations     |                                      
|                                               |                                                                            | Loss (gain) on disposal of assets         |                                      
|                                               |                                                                            | Changes in assets and liabilities:        |                                      
|                                               |                                                                            |                                           | Trade accounts receivable            
|                                               |                                                                            |                                           | Due from licensees                   
|                                               |                                                                            |                                           | Other assets                         
|                                               |                                                                            |                                           | Accounts payable and accrued expenses
|                                               |                                                                            |                                           | Income taxes payable                 
|                                               |                                                                            |                                           | Other long-term liabilities          
|                                               |                                                                            |                                           |                                      
|Net cash provided by continuing operations     |                                                                            |                                           | 24,892                               
|Net cash provided by discontinued operations   |                                                                            |                                           | 702                                  
|                                               |                                                                            |                                           |                                      
|Net cash provided by operating activities      |                                                                            |                                           | 25,594                               
|                                               |                                                                            |                                           |                                      
|Cash flows from investing activities           |                                                                            |                                           |                                      
|                                               | Capital expenditures                                                       |                                           |                                      
|                                               | Net (increase) decrease in notes receivable                                |                                           |                                      
|                                               | Payments for intangibles and other investments                             |                                           |                                      
|                                               | Investing activities of discontinued operations                            |                                           |                                      
|                                               | Proceeds from sale of licensed operations                                  |                                           |                                      
|                                               | Sale of assets and investments                                             |                                           |                                      
|                                               |                                                                            |                                           |                                      
|Net cash used in investing activities          |                                                                            |                                           | (4,222                               
|                                               |                                                                            |                                           |                                      
|Cash flows from financing activities           |                                                                            |                                           |                                      
|                                               | Net repayments under line of credit agreement                              |                                           |                                      
|                                               | Repayments of note to related party                                        |                                           |                                      
|                                               | Principal payments on loans payable                                        |                                           |                                      
|                                               | Issuance of common stock                                                   |                                           |                                      
|                                               | Repurchase of common stock                                                 |                                           |                                      
|                                               | Payment for stock acquisition contingency                                  |                                           |                                      
|                                               | Distributions to stockholders                                              |                                           |                                      
|                                               |                                                                            |                                           |                                      
|Net cash used in financing activities          |                                                                            |                                           | (20,284                              
|                                               |                                                                            |                                           |                                      
|Effect of exchange rate on cash                |                                                                            |                                           | 147                                  
|                                               |                                                                            |                                           |                                      
|Net change in cash and cash equivalents        |                                                                            |                                           | 1,235                                
|Cash and cash equivalents at beginning of year |                                                                            |                                           | 5,208                                
|                                               |                                                                            |                                           |                                      
|Cash and cash equivalents at end of year       |                                                                            | $                                         | 6,443                                
|                                               |                                                                            |                                           |                                      

See accompanying notes to consolidated financial statements.

F-5

---



Westaff, Inc.

Consolidated Statements of Cash Flows
(Amounts in Thousands)

|                                                                     |                                                   | Fiscal year ended               
|-------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------
|
|Supplemental disclosures of cash flow information                    |                                                   |                                 
|                                                                     | Cash paid during the year for:                    |                                 
|                                                                     |                                                   | Interest                        
|                                                                     |                                                   | Net income taxes paid (refunded)
|Supplemental schedule of noncash investing and financing activities: |                                                   |                                 
|                                                                     | Notes receivable from sale of licensed operations |                                 

See accompanying notes to consolidated financial statements.

F-6

---



Westaff, Inc.        Notes to Consolidated Financial Statements        (Amounts in Thousands Except Per Share Amounts)

1.    Basis of Presentation



Westaff, Inc. (the Parent), a Delaware corporation, and its domestic and foreign subsidiaries (together, the Company), provide temporary staffing services
in the United States, the United Kingdom, Denmark, Australia, New Zealand, Norway and Mexico. The consolidated financial statements include the accounts of Westaff, Inc. and its domestic and
foreign subsidiaries. Material intercompany accounts and transactions have been eliminated.

The
accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of
business. The financial statements do not include any adjustments relating to the recoverability or classification of assets or liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company faces significant financing and business challenges during calendar year 2002 which raises doubts about the Company's ability to continue as a going concern.
As noted in Note 8, the Company has $30,000 outstanding principal under its 10-year senior secured notes, payable in equal annual installments beginning in the third quarter of
fiscal 2002. The Company was out of compliance with certain covenants of these senior notes as well as with certain covenants of its revolving credit facility as of November 3, 2001, the date
of these financial statements. The Company is currently
negotiating with the bank syndicate holding the revolving credit facility to amend and restate the credit facility agreement. If negotiations are successful, the Company would obtain a waiver for
default attributable to the covenant violations that existed at November 3, 2001. Although the Company had no amounts outstanding under the revolving credit facility at that date, it relies on
the facility for purposes of meeting letter of credit requirements in connection with its workers' compensation program and for working capital, if required. The Company has $11,842 in outstanding
letters of credit, needs to arrange for an increase of $5,500 in the letters of credit by March 15, 2002 and had no borrowings available to it under the existing facility. The senior
noteholders have indicated they are awaiting the outcome of the credit facility negotiations and, if those are completed in a satisfactory manner, they are willing to realign the covenants of the
senior notes on a prospective basis and waive the covenant violations that existed at November 3, 2001. As of February 11, 2002, the senior noteholders have not delivered a notice of
default to the Company, as is their right due to the covenant violations. However, because these covenant violations have not been cured, the Company has reclassified the entire $30,000 of principal
outstanding under the senior notes to a current liability on its balance sheet at November 3, 2001 since the notes are currently callable.

As
noted above, the Company is currently in negotiations with its bank syndicate as well as its senior noteholders to amend and restate its existing agreements, and has received proposed
terms for the amended and restated agreements. While there can be no assurance that the Company will be successful in closing the amended and restated agreements or that the proposed terms will remain
as expected, the Company anticipates that the amended and restated agreements will result in reduced availability and significant up-front fees as well as higher borrowing rates and letter
of credit fees as compared to the current agreement.

In
addition to its outstanding senior notes and revolving credit facility, the Company has an outstanding financial guarantee bond in the amount of $11,842 that secures a portion of its
workers compensation premium and deductible obligations. This bond is renewable annually on November 1st

F-7

---

and 90-day advance written notice of non-renewal is required. The bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond.
Whereas no formal notice of non-renewal has been received, the bondholder has expressed its desire to cancel this bond prior to November 1, 2002, if feasible. Discussions are
underway for the purpose of reducing the bond to $9,000 by April 15, 2002, which will require the Company to either increase its outstanding letters of credit under the revolving credit
facility or cash collateralize the net decrease of $2,842. Should non-renewal of the bond occur as of November 1, 2002, the Company projects it will be required to either
restructure its workers compensation program to reduce its letter of credit requirements, obtain additional letters of credit or financial guarantee bonds to replace the expiring financial guarantee
bond, or seek alternative financing.

The
Company is aggressively pursuing all available options to rectify these business and financing challenges, including pursuit of alternative financing. To date, the Company has
secured preliminary commitments for an additional $1,900 of subordinated debt financing and will likely aggressively investigate other financing alternatives, even if it is successful in amending and
restating its existing bank and senior notes agreements. In addition, the Company will also explore other financing and strategic options available to it, as well as aggressively control costs to
conserve liquidity. The Company believes that if the debt agreements are modified, waivers of default are obtained and if additional
financing is secured then these items plus cash reserves and cash flow from operations will be sufficient to meet anticipated needs for working capital, capital expenditures and debt service
obligations, at least through fiscal 2002. Further, the Company currently believes it will attempt to implement a revised workers' compensation program that will result in a less onerous financing
commitment than its current program. However, there can be no assurance that it will be successful with respect to any or all of these endeavors.



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 or liabilities of the discontinued operations in the Consolidated Financial Statements and notes thereto.

2.    Summary of Significant Accounting Policies



The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.



The Company's fiscal year is a 52 or 53 week period ending the Saturday nearest the end of October. Fiscal year 2001 includes 53 weeks and fiscal years 2000 and
1999 each include 52 weeks. For

F-8

---

interim reporting purposes, the first three fiscal quarters comprise 12 weeks each while the fourth fiscal quarter consists of 16 or 17 weeks.



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



The Company's financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations
of credit risk are mitigated 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 and provides for allowances for uncollectible accounts.



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 its licensees, the advances are reduced as remittances are received related to licensees' trade accounts receivable. Licensees have pledged trade receivables of
$1,511 and $4,579 at November 3, 2001 and October 28, 2000, respectively, as collateral for such advances. Sales generated by license offices were $18,019, $42,024 and $42,843 for fiscal
2001, 2000 and 1999, respectively. During fiscal 2001, two licensees purchased the Company's interest in their operations. Pre-tax income of $2,069 from the sale of these operations is
included in fiscal 2001 selling and administrative expenses. The Company continues to support its current licensees, but is no longer offering license agreements to new prospects.

F-9

---



Other current assets include a number of differing assets such as prepaid expenses and notes receivable from affiliates.



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. The Company capitalizes internal and external costs incurred in connection with developing or obtaining
internal use software in accordance with Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use".



Business acquisitions have been accounted for under the purchase method of accounting. The Company considers acquisitions completed 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.

During
fiscal years 2001, 2000 and 1999 the Company consummated acquisitions with total purchase prices of $8, $125 and $887 respectively. Tangible assets and specifically identifiable
intangible assets associated with these acquisitions amounted to $8 for fiscal 2001, $13 for fiscal 2000 and $118 for fiscal 1999. 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. Net
goodwill ($12,641 and $33,295 at November 3, 2001 and October 28, 2000, respectively) is amortized over 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. Such amounts were $12 and $1,018 in fiscal 2000 and 1999, respectively. There were no contingent earn-outs in fiscal
2001. Currently, the Company believes that future consideration as a result of such contingencies will not be material. Unaudited pro forma information regarding revenues and net income has not been
provided since the effect of these acquisitions was not material.

In
July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. The Company does not expect the adoption of SFAS No. 141 to have a material effect on its financial position or results
of operations.



Management of the Company assesses the recoverability of its long-lived assets, including goodwill and other intangible 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. When such estimate of the future undiscounted cash
flows is less than the carrying amount of the asset,

F-10

---

a potential impairment exists. During fiscal 2001, a number of businesses the Company acquired over the past several years were negatively impacted by the economic recession. Based on management's
assessment of projected undiscounted future cash flows and estimates of market value based on industry specific multiples, it was determined that a portion of the carrying amount of goodwill and other
intangibles related to specific acquisitions had been permanently impaired in the fourth quarter of fiscal 2001. As a result, the Company recorded a pre-tax charge of $19,121 to write down
these assets to estimated current net realizable values.

In
July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" effective at
the beginning of Company's fiscal year 2003. With the adoption of SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will no longer be amortized, but instead will be
evaluated for impairment by applying a fair-value-based test upon initial adoption of the Statement, and at least annually thereafter, with impaired assets written down to fair value.
Intangible assets with finite useful lives will continue to be amortized over their useful lives. The Company is assessing the impact of adopting SFAS 142, but
has not yet determined the effect, if any, on its financial position or results of operations. Although goodwill amortization will cease at that time, it is possible that an additional impairment
charge could be recorded based on the results of the fair-value approach under the new standard.



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 2001, 2000 and 1999. 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. At least 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 $11,600 in other long-term liabilities at November 3, 2001 and October 28, 2000.



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. A valuation allowance is established when it is more likely than not that a deferred
tax asset is not realizable in the foreseeable future on a tax entity by entity basis. In estimating future tax consequences, the Company generally considers all expected future events other than
enactments of changes in the tax law or rates.



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).

F-11

---



The functional currency for each of the Company's foreign operations is the applicable local currency. 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. Aggregate
transaction losses included in determining income (loss) from continuing operations were $12, $527 and $31 for fiscal years 2001, 2000 and 1999, respectively.



The Company has reclassified certain amounts in the fiscal 1999 and fiscal 2000 financial statements in order to conform to the presentation adopted for fiscal
2001.

3.    Discontinued Operations

During fiscal 1999, the Company sold certain of its franchise agent and Company-owned medical offices and entered into a termination agreement with one of its
medical licensees. During the fourth quarter of fiscal 1999 the Company completed the sale of the remaining medical business to Intrepid U.S.A. Inc. (Intrepid) under an asset purchase
agreement. Under the terms of the sale, the Company retained the trade and Medicare accounts receivable balances as well as the due from licensee balances and received a note from Intrepid in the
amount of $1,000. In fiscal 1999, the Company recorded after-tax losses relating to discontinued operations of $6,611 or $0.42 per share. These losses primarily represented reserves for
trade and Medicare accounts receivable and due from licensee balances, and also included additional operating losses resulting from the extended period required to close the sale and a reduction in
the estimated proceeds from the sale.

During
fiscal 2000, the Company recorded additional after-tax losses relating to discontinued operations of $784 or $0.05 per share. This charge was primarily due to lower
than expected settlements of Medicare cost reports.

From
fiscal 1999 through fiscal 2001, the Company had received $1,735 in cash proceeds from the sale of its medical operations with an additional $1,000 due from Intrepid as the balance
of the purchase price under a guaranteed promissory note which was in default. In August 2000, Intrepid filed a demand for arbitration seeking compensatory and punitive damages alleging, among
other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. In fiscal
2001, the arbitrator awarded Intrepid $1,085 mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and
accounting fees of approximately $425. The Company was awarded the $1,000 due on the promissory note, plus interest. In addition, the arbitrator did not find fraud and denied Intrepid's claim for
punitive damages. The Company has paid the amounts awarded to the claimant in full, except for certain indemnity claims that are subject to future determination, the resolution of which is not
currently anticipated to be significant. The Company recorded an after-tax loss from discontinued operations of $1,794, or $0.11 per share, in fiscal 2001. The after-tax loss
included the arbitration loss and additional reserves for potential liabilities, Medicare and other contingencies, as well as reserves for medical operations' net operating loss carryforwards which
the Company believes will expire unused over the next three years.

F-12

---

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

|                       |                                                                  | Fiscal Year Ended |  
|---------------------- | ---------------------------------------------------------------- | ----------------- | -
|
|Income statement data: |                                                                  |                   |  
|                       | Estimated loss on disposal                                       |                   | $
|                       | Income tax benefit                                               |                   |  
|                       |                                                                  |                   |  
|                       | Loss on disposal of discontinued operations, net of income taxes |                   | $
|                       |                                                                  |                   |  
|Balance sheet data:    |                                                                  |                   |  
|                       | Current assets (primarily receivables)                           |                   | $
|                       | Other assets                                                     |                   |  
|                       | Current liabilities                                              |                   |  
|                       | Noncurrent liabilities                                           |                   |  
|                       |                                                                  |                   |  
|                       | Net assets (liabilities) of discontinued operations              |                   | $
|                       |                                                                  |                   |  

4.    Termination of Recapitalization Agreement

On May 3, 2000 the Company announced that a recapitalization agreement signed on March 7, 2000 was terminated by mutual consent of all parties. In
connection with the termination, Michael K. Phippen, then President and Chief Executive Officer, resigned and W. Robert Stover, Chairman of the Board of Directors, assumed the position of interim
President and Chief Executive Officer. As a result of the recapitalization termination, the Company incurred $1,904 in pre-tax charges during fiscal 2000.

5.    Earnings per share

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

|                                                                                                    |               | Fiscal Year Ended
|--------------------------------------------------------------------------------------------------- | ------------- | -----------------
|
|Income (loss) from continuing operations                                                            |               | $                
|                                                                                                    |               |                  
|Denominator for basic earnings per shareweighted average shares                                    |               |                  
|Effect of dilutive securities:                                                                      |               |                  
|                                                                                                    | Stock options |                  
|                                                                                                    |               |                  
|Denominator for diluted earnings per shareadjusted weighted average shares and assumed conversions |               |                  
|                                                                                                    |               |                  
|Basic earnings (loss) per share                                                                     |               | $                
|                                                                                                    |               |                  
|Diluted earnings (loss) per share                                                                   |               | $                
|                                                                                                    |               |                  
|Antidilutive weighted shares excluded from diluted earnings per share                               |               |                  
|                                                                                                    |               |                  

F-13

---

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. Additionally, fiscal 2001 antidilutive
weighted shares include outstanding options to purchase 59 shares of common stock which would have been dilutive had the Company not reported a loss from continuing operations.

6.    Transactions with Related Parties

Prior to fiscal 2000, the Company had 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 provided certain accounting, tax, legal, administrative and management services to WVI and charged a fee based upon the gross sales of WVI.
Management fees charged to WVI were $52 for fiscal 1999. The Company is no longer providing management services to WVI.

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 $4,413 through fiscal 1999.

7.    Property, Plant and Equipment

Property, plant and equipment consists of the following:

November 3,
2001

October 28,
2000Land

$
1,183

$
1,183Buildings


6,705


6,705Equipment, furniture and fixtures


47,702


44,59355,590


52,481Less accumulated depreciation and amortization


(35,331
)

(31,504
)$
20,259

$
20,977


8.    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. Direct advances under the revolving credit agreement are
limited by outstanding irrevocable letter of credit up to a maximum of $20,000 and are secured by substantially all of the Company's domestic assets. Total advances are also limited under formulas
based on total debt to total capitalization and on earning before interest, taxes, depreciation and amortization (EBITDA). At November 3, 2001, the Company was out of compliance with certain
covenants of this facility. The Company is currently negotiating with the bank syndicate holding the facility to amend and restate the credit facility agreement, thereby waiving default attributable
to the covenant violations that existed at November 3, 2001. Although the Company had

F-14

---

no amounts outstanding under the revolving credit facility at that date, it relies on the facility for purposes of meeting letter of credit requirements in connection with its workers' compensation
program and for working capital, if required. As of February 11, 2002, the Company had $11,842 in outstanding letters of credit, needs to arrange for an increase of $5,500 in the letters of
credit by March 15, 2002 and had no borrowings available to it under the existing facility.

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 third
quarter of fiscal 2002. These notes are secured by substantially all of the Company's domestic assets. Proceeds from the notes were used to repay outstanding borrowings of $22,600 under the existing
revolving credit agreement, with the remainder used for working capital and general corporate purposes. At November 3, 2001 the Company had $30,000 outstanding principal under these notes and
was out of compliance with certain covenants of these notes. The senior noteholders have indicated they are awaiting the outcome of the credit facility negotiations and if those are completed in a
satisfactory manner, they have indicated they are willing to realign the covenants of the senior notes on a prospective basis and waive the covenant violations that existed at November 3, 2001.
As of February 11, 2002, the senior noteholders have not delivered a notice of default to the Company, as is their right due to the covenant violations. However, because these covenant
violations have not been cured, the Company has reclassified the entire $30,000 of principal outstanding under the senior notes to a current liability on its balance sheet at November 3, 2001.

As
noted above, the Company is currently in negotiations with its bank syndicate as well as its senior noteholders to amend and restate its existing agreements, and has received proposed
terms for the amended and restated agreements. While there can be no assurance that the Company will be successful in closing the amended and restated agreements or that the proposed terms will remain
as is, the Company anticipates that the amended and restated agreements will result in significant up-front fees as well as higher borrowing rates and letter of credit fees as compared to
the current agreement.

In
addition to its outstanding senior notes and revolving credit facility, the Company has an outstanding financial guarantee bond in the amount of $11,842 that secures a portion of its
workers' compensation premium and deductible obligations. This bond is renewable annually on November 1st and 90-day advance written notice of non-renewal is required.
The bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond. Whereas no formal notice of non-renewal has been received, the bondholder has
expressed its desire to cancel this bond prior to November 1, 2002, if feasible. Discussions are underway for the purpose of reducing the bond to $9,000 by April 30, 2002, which will
require the Company to either increase its outstanding letters of credit under the revolving credit facility or cash collateralize the net decrease of $2,842. Should non-renewal of the
bond occur as of November 1, 2002, the Company projects it will be required to either restructure its workers' compensation program to reduce its letter of credit requirements, obtain
additional letters of credit or financial guarantee bonds to replace the expiring financial guarantee bond, or seek alternative financing.

Short-term
borrowings outstanding at October 28, 2000 under the revolving credit agreement were $10,000 with a weighted average interest rate of 7.5%. There were no
outstanding borrowings under this credit facility at November 3, 2001.

F-15

---

Loans
payable consist of the following:

November 3,
2001

October 28,
2000Variable rate term loan issued under a senior secured credit facility, collateralized by the assets of the Company, interest 7.5% at October 28, 2000




$
10,500Senior secured notes payable, collateralized by the assets of the Company with semi-annual interest payments at 6.8% per annum

$
30,000


30,00030,000


40,500Less current portion


(30,000
)

(3,250
)$


$
37,250


The
fair value of the loans payable approximates the carrying value as of November 3, 2001 based on current rates available to the Company for debt with similar terms. Stated
maturities of loans payable for each of the next five fiscal years are as follows: 2002$4,286; 2003$4,286; 2004$4,286; 2005$4,286;
2006$4,286; and thereafter; $8,570.

9.    Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

November 3,
2001

October 28,
2000Accrued payroll and payroll taxes

$
12,324

$
18,010Accrued insurance/workers' compensation


11,000


11,360Other


4,909


5,434Arbitration award


3,600Taxes other than income taxes


3,642


2,272Accounts payable


3,589


3,434Checks outstanding in excess of bank balances


1,685


6,194$
40,749

$
46,704


10.  Income Taxes

The domestic and foreign components of income (loss) from continuing operations before income taxes are as follows:

|                                                             |  | Fiscal year ended
|------------------------------------------------------------ |  | -----------------
|
|Domestic                                                     |  | $                
|Foreign                                                      |  |                  
|                                                             |  |                  
|Income (loss) from continuing operations before income taxes |  | $                
|                                                             |  |                  

F-16

---

The
provision for income taxes from continuing operations consists of the following:

|          |                 | Fiscal year ended |       
|--------- | --------------- | ----------------- | ------
|
|Current:  |                 |                   |       
|          | State and local |                   | $     
|          | Federal         |                   |       
|          | Foreign         |                   |       
|          |                 |                   |       
|          |                 |                   | 1,760 
|          |                 |                   |       
|Deferred: |                 |                   |       
|          | State and local |                   |       
|          | Federal         |                   |       
|          | Foreign         |                   |       
|          |                 |                   |       
|          |                 |                   | 9,898 
|          |                 |                   |       
|          |                 | $                 | 11,658
|          |                 |                   |       

A
reconciliation of income taxes provided at the statutory federal rate (35% in fiscal 2001, fiscal 2000 and fiscal 1999) and income taxes reported in the Consolidated Statements of
Operations follows:

|                                                                  |  | Fiscal year ended |       
|----------------------------------------------------------------- |  | ----------------- | ------
|
|Income tax provision (benefit) computed at federal statutory rate |  | $                 | (7,155
|State taxes (net of federal benefit)                              |  |                   | (1,045
|Valuation allowance                                               |  |                   | 19,249
|Permanent differences                                             |  |                   | 183   
|Other                                                             |  |                   | 426   
|                                                                  |  |                   |       
|Income tax provision                                              |  | $                 | 11,658
|                                                                  |  |                   |       

At
November 3, 2001 substantially all of the Company's net deferred tax assets were offset with a valuation allowance. The allowance was recorded against $19,249 of the Company's
deferred tax assets due to the matters discussed in Note 1. The Company has retained net deferred tax assets of $600 from fiscal 2001's net operating loss because it believes these can be
realized by carrybacks to fiscal 1999 taxes paid. Additionally, the Company has retained a deferred tax asset of $750 resulting from taxes paid in fiscal 2000 which management believes will be
realized in 2002.

F-17

---

The
approximate tax effect of temporary differences and carryforwards that give rise to deferred tax balances are as follows (includes the tax effect of temporary differences from
discontinued operations):

Fiscal year endedNovember 3,
2001

October 28,
2000Workers' compensation

$
9,590

$
9,866Accruals relating to discontinued operations


253


178Other liabilities and accruals


2,298


1,455State and foreign net operating loss carryforwards


2,182


1,782Depreciation and amortization


6,276Gross deferred tax assets


20,599


13,281Valuation allowance


(19,249
)1,350


13,281Depreciation and amortization





1,127Other





593Gross deferred tax liabilities





1,720Net deferred tax assets

$
1,350

$
11,561


At
November 3, 2001, the Parent had cumulative undistributed earnings from foreign subsidiaries of approximately $3,026. Income taxes have not been provided on the undistributed
earnings because they have been permanently reinvested in the foreign subsidiaries. These earnings could become subject to additional tax if they were remitted as dividends, or if foreign earnings
were lent to the Company or if the foreign subsidiaries were sold at a gain. However, to the extent that these earnings were previously taxed in foreign jurisdictions, the Company anticipates the
resulting tax amount would qualify for a domestic tax credit.

11.  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 eligible annual compensation, with the Company matching 25% of participant contributions up to the first 10% for fiscal
years 2001, 2000 and 1999. Contributions for continuing operations were $432, $333 and $297 for these fiscal years, respectively.

12.  Stockholders' Equity

On June 20, 2000 the Company's Board of Directors declared a special cash dividend of $0.30 per share of common stock payable to shareholders of record as
of July 5, 2000. The distribution, totaling $4,732, was paid on July 18, 2000.

In
July 1998 the Company acquired substantially all of the assets of The Personnel Connection, Inc. Consideration for the acquisition consisted of cash and common stock,
with a contingent obligation to issue up to an additional 100 shares of common stock dependent on the fair

F-18

---

market value of the Company's stock subsequent to the acquisition. On January 27, 2000 the Company paid the selling parties $800 in lieu of issuing additional shares, with an offsetting
reduction in additional paid-in-capital.



From time to time, the Company repurchases shares of its common stock on the open market. The repurchased shares may be used for reissuance under the Company's
stock option and employee stock purchase plans. During fiscal 2001, the Company reissued 95 shares with aggregate cash proceeds of $216. 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, determined on a
first-in first-out basis, is charged to additional paid-in-capital to the extent of previous net "gains", and then to retained earnings.



The 1989/1990 Stock Option Plan provided 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 to purchase
10 shares were outstanding at October 28, 2000. Based on plan provisions, as of November 4, 2000 all options outstanding under this plan have been cancelled. 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. 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.

At
the May 23, 2001 annual stockholders' meeting, a majority of the Company's stockholders approved an amendment and restatement of the Company's 1996 Stock Option/Stock Issuance
Plan. The amended and restated plan increases the number of shares reserved for issuance under the plan by 1,000 shares to 2,551 and increases the maximum number of shares, stock appreciation rights
and direct stock issuances which may be granted to an individual in any calendar year from 500 to 1,000 shares.

F-19

---

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, as the
options were issued at fair market value. 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 value method under APB 25. The following table represents pro
forma net income (loss) and pro forma earnings (loss) per share had compensation cost been determined under SFAS 123:

|                                      |  | Fiscal year ended
|------------------------------------- |  | -----------------
|
|Net income (loss) as reported         |  | $                
|Pro forma net income (loss)           |  | $                
|Earnings (loss) per share as reported |  | $                
|Pro forma earnings (loss) per share   |  | $                

Because
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 2001, 2000 and 1999, respectively: zero dividend yield, expected volatility of 165.0%, 76.0% and 74.0%, expected lives of 6 years; and
risk-free interest rates of 5.1%, 6.1% and 5.4%.

F-20

---

The
following summarizes the stock option transactions under the two plans:

|                                                                |                                   | November 3, 2001 |       | October 28, 2000 |      | October 30, 1999
|--------------------------------------------------------------- | --------------------------------- | ---------------- | ----- | ---------------- | ---- | ----------------
|
|Options outstanding, beginning of year                          |                                   | 367              |       | $                | 8.74 |                 
|                                                                | Granted at market value           |                  | 1,039 |                  |      | 2.06            
|                                                                | Granted in excess of market value |                  |       |                  |      |                 
|                                                                | Exercised                         |                  |       |                  |      |                 
|                                                                | Cancelled                         |                  | (155  | )                |      | 9.21            
|                                                                |                                   |                  |       |                  |      |                 
|Options outstanding, end of year                                |                                   | 1,251            |       | $                | 3.13 |                 
|                                                                |                                   |                  |       |                  |      |                 
|Options exercisable, end of year                                |                                   | 468              |       | $                | 4.48 |                 
|                                                                |                                   |                  |       |                  |      |                 
|Options available for grant, end of year                        |                                   | 1,173            |       |                  |      |                 
|                                                                |                                   |                  |       |                  |      |                 
|Weighted average fair value of options granted during the year: |                                   |                  |       |                  |      |                 
|                                                                | At market value                   |                  |       |                  | $    | 1.99            
|                                                                |                                   |                  |       |                  |      |                 
|                                                                | In excess of market value         |                  |       |                  |      |                 
|                                                                |                                   |                  |       |                  |      |                 

The
following table summarizes information about stock options outstanding at November 3, 2001:

|             |  | Options Outstanding |  | Options Exercisable
|------------ |  | ------------------- |  | -------------------
|
|$1.63  3.75 |  | 1,054               |  | 9.47               
|$3.94  6.00 |  | 26                  |  | 8.43               
|$6.08  9.50 |  | 131                 |  | 4.72               
|$9.5816.17  |  | 40                  |  | 6.06               
|             |  |                     |  |                    
|$1.6316.17  |  | 1,251               |  | 8.85               
|             |  |                     |  |                    

Concurrent
with the January 14, 2002 resignation of the Company's former President and Chief Executive Officer (see Note 16), 700 of the outstanding options were cancelled.



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 November 3, 2001 shares issued under the plan totaled 455. The effect of this plan
on the pro forma disclosures under SFAS 123 has not been included as the impact on net income (loss) and earnings (loss) per share is not material.

F-21

---

13.  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 $5,203 in fiscal 2001, $5,035 in fiscal 2000 and $4,880 in fiscal 1999. Rental expense for foreign subsidiaries was $1,392 in fiscal 2001, $1,416 in fiscal 2000 and $1,222 in
fiscal 1999. The Company also receives rental income from 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 November 3, 2001 are as follows:

Fiscal year2002



$
4,6952003




3,0062004




1,6572005




6922006




201Thereafter




248Total minimum lease payments



$
10,499


14.  Operating Segments

The Company has two reportable segments: domestic business services and international business 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 14 geographically diverse company
regions under the direction of regional/zone 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 domestic operating segments meet the aggregation criteria specified under SFAS 131 for reporting purposes. International business services comprise
company-owned offices providing clerical and light industrial temporary staffing services in Australia, the United Kingdom, Norway, Denmark, New Zealand and Mexico. The Company employs several
managing directors who oversee all operations in a country or several countries. 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 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. Domestic assets relating to the generation of the royalties, 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.

F-22

---

The
following summarizes reporting segment data for fiscal years 2001, 2000 and 1999:

|                                           |  | Fiscal Year Ended November 3, 2001 |        
|------------------------------------------ |  | ---------------------------------- | -------
|
|Total sales of services and license fees   |  | $                                  | 481,791
|                                           |  |                                    |        
|Operating loss from continuing operations  |  | $                                  | (18,485
|                                           |  |                                    |        
|Depreciation and amortization              |  | $                                  | 6,741  
|                                           |  |                                    |        
|Expenditures for purchases of fixed assets |  | $                                  | 3,802  
|Payments for intangibles and other         |  |                                    |       
|                                           |  |                                    |        
|Total expenditures for long lived assets   |  | $                                  | 3,802  
|                                           |  |                                    |        
|Total long lived assets                    |  | $                                  | 29,974 
|                                           |  |                                    |        
|Total assets                               |  | $                                  | 103,779
|                                           |  |                                    |        

|                                            |  | Fiscal Year Ended October 28, 2000
|------------------------------------------- |  | ----------------------------------
|
|Total sales of services and license fees    |  | $                                 
|                                            |  |                                   
|Operating income from continuing operations |  | $                                 
|                                            |  |                                   
|Depreciation and amortization               |  | $                                 
|                                            |  |                                   
|Expenditures for purchases of fixed assets  |  | $                                 
|Payments for intangibles and other          |  |                                   
|                                            |  |                                   
|Total expenditures for long lived assets    |  | $                                 
|                                            |  |                                   
|Total long lived assets                     |  | $                                 
|                                            |  |                                   
|Total assets                                |  | $                                 
|                                            |  |                                   

|                                            |  | Fiscal Year Ended October 30, 1999
|------------------------------------------- |  | ----------------------------------
|
|Total sales of services and license fees    |  | $                                 
|                                            |  |                                   
|Operating income from continuing operations |  | $                                 
|                                            |  |                                   
|Depreciation and amortization               |  | $                                 
|                                            |  |                                   
|Expenditures for purchases of fixed assets  |  | $                                 
|Payments for intangibles and other          |  |                                   
|                                            |  |                                   
|Total expenditures for long lived assets    |  | $                                 
|                                            |  |                                   

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F-23

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15.  Commitments and Contingencies

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, general liability, property damage, professional malpractice, errors and omissions, fiduciary liability and fidelity losses.

On
March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior Court of the State of California against the Company, all members of its Board of Directors and
one of the executive officers. The complaint alleged, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. The
plaintiff sought to have the court grant a jury trial, and award the plaintiff compensatory and punitive damages and attorneys' fees and other costs. The Company's petition for an order compelling
arbitration was granted, the Superior Court lawsuit was stayed, discovery was completed, and on December 3, 2001 an arbitration hearing commenced. On January 9, 2002 the arbitration
panel rendered an interim award in favor of the claimant for compensatory damages of $2,224, plus interest from the date of the award, as well as reasonable attorneys' fees and other costs incurred in
the proceeding, subject to an application process. On February 11, 2002, an Order Modifying Interim Award was issued crediting the Company $800 paid to the claimants in January 2000
under a price protection clause in the asset purchase agreement (see
Note 12), thereby reducing the award for compensatory damages to $1,424. As a result of the arbitration, the Company recorded an accrued liability and related pretax charge of $3,600 in the
fourth quarter of fiscal 2001 for the estimated cost of the award, plus other related expenses. This estimate is based on management's assumptions as to the ultimate outcome of future events and
actual results could differ from this estimate. However, in the opinion of management, possible additional charges (or gains) related to this matter are not expected to have a material effect on the
Company's financial position or results of operations.

From
time to time the Company has been threatened with, or named as a defendant in, lawsuits, including countersuits brought by former franchise agents or licensees, and administrative
claims and lawsuits brought by employees or former employees. Management does not believe these cases will have a material adverse impact on the Company, except as described above.

16.  Subsequent Events

On January 14, 2002, the Company announced a change in leadership. Effective as of that date, Tom D. Seip, appointed President and Chief Executive Officer
of the Company on May 1, 2001, resigned and was replaced by Dwight S. Pedersen. Mr. Pedersen had been serving as a member of the Company's Board of Directors since May 2001.

Concurrent
with the change in management, the Company implemented a restructuring plan designed to improve the Company's profitability. This restructuring plan will result in a first
quarter fiscal 2002 pretax charge to operations of $1,896. The restructuring charge will include costs associated with the abandonment of certain management information systems which were under
development as well as severance, lease termination and other costs as a result of layoffs and office closures.

F-24

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17.  Quarterly Financial Information (Unaudited)

The following is a summary of the unaudited quarterly financial information for the fiscal years ended November 3, 2001 and October 28, 2000. The
fourth quarter of fiscal years 2001 and 2000 consist of 17 and 16 weeks, respectively, while all other quarters consist of 12 weeks.

|                                                 |                                          | First
Quarter |         | Second
Quarter |   | Third
Quarter |       | Fourth
Quarter |        
|------------------------------------------------ | ---------------------------------------- | ------------- | ------- | -------------- | - | ------------- | ----- | -------------- | -------
|Fiscal year ended November 3, 2001               |                                          |               |         |                |   |               |       |                |        
|Sales of services and license fees               |                                          | $             | 135,555 |                | $ | 126,325       |       | $              | 123,314
|Gross profit                                     |                                          |               | 27,420  |                |   | 26,063        |       |                | 25,327 
|Income (loss) from continuing operations         |                                          |               | 584     |                |   | 515           |       |                | 184    
|Loss from discontinued operations                |                                          |               |         |                |   | (1,794        | )     |                |        
|                                                 |                                          |               |         |                |   |               |       |                |        
|Net income (loss)                                |                                          | $             | 584     |                | $ | (1,279        | )     | $              | 184    
|                                                 |                                          |               |         |                |   |               |       |                |        
|Basic and diluted income (loss) per common share |                                          |               |         |                |   |               |       |                |        
|                                                 | Income (loss) from continuing operations |               | $       | 0.04           |   | $             | 0.03  |                | $      
|                                                 |                                          |               |         |                |   |               |       |                |        
|                                                 | Loss from discontinued operations        |               | $       |               |   | $             | (0.11 | )              | $      
|                                                 |                                          |               |         |                |   |               |       |                |        
|                                                 | Net income (loss)                        |               | $       | 0.04           |   | $             | (0.08 | )              | $      
|                                                 |                                          |               |         |                |   |               |       |                |        
|Fiscal year ended October 28, 2000               |                                          |               |         |                |   |               |       |                |        
|Sales of services and license fees               |                                          | $             | 147,463 |                | $ | 149,357       |       | $              | 149,879
|Gross profit                                     |                                          |               | 30,437  |                |   | 31,817        |       |                | 30,953 
|Income from continuing operations                |                                          |               | 2,057   |                |   | 1,757         |       |                | 296    
|Loss from discontinued operations                |                                          |               |         |                |   |               |       |                |        
|                                                 |                                          |               |         |                |   |               |       |                |        
|Net income                                       |                                          | $             | 2,057   |                | $ | 1,757         |       | $              | 296    
|                                                 |                                          |               |         |                |   |               |       |                |        
|Basic and diluted income (loss) per common share |                                          |               |         |                |   |               |       |                |        
|                                                 | Income from continuing operations        |               | $       | 0.13           |   | $             | 0.11  |                | $      
|                                                 |                                          |               |         |                |   |               |       |                |        
|                                                 | Loss from discontinued operations        |               | $       |               |   | $             |      |                | $      
|                                                 |                                          |               |         |                |   |               |       |                |        
|                                                 | Net income                               |               | $       | 0.13           |   | $             | 0.11  |                | $      
|                                                 |                                          |               |         |                |   |               |       |                |        

F-25

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VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

SCHEDULE II  (Amounts in Thousands)

|                                   |                                                         | Additions |   |       |  |  
|---------------------------------- | ------------------------------------------------------- | --------- | - | ----- |  | -
|
|Fiscal Year Ended October 30, 1999 |                                                         |           |   |       |  |  
|                                   | Allowance for doubtful accounts                         |           | $ | 786   |  | $
|                                   | Reserve on notes receivable                             |           |   | 254   |  |  
|                                   | Allowance for doubtful accountsdiscontinued operations |           |   | 1,888 |  |  
|                                   | Disposal of discontinued operations                     |           |   | 6,000 |  |  
|Fiscal Year Ended October 28, 2000 |                                                         |           |   |       |  |  
|                                   | Allowance for doubtful accounts                         |           | $ | 1,654 |  | $
|                                   | Reserve on notes receivable                             |           |   | 174   |  |  
|                                   | Allowance for doubtful accountsdiscontinued operations |           |   | 7,601 |  |  
|                                   | Disposal of discontinued operations                     |           |   | 877   |  |  
|Fiscal Year Ended November 3, 2001 |                                                         |           |   |       |  |  
|                                   | Allowance for doubtful accounts                         |           | $ | 1,634 |  | $
|                                   | Reserve on notes receivable                             |           |   | 324   |  |  
|                                   | Allowance for doubtful accountsdiscontinued operations |           |   | 107   |  |  
|                                   | Disposal of discontinued operations                     |           |   | 471   |  |  
|                                   | Valuation allowance on deferred tax assets              |           |   | 0     |  |  

IV-1

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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:          
| |  |              

IV-2

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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 Dwight S. Pedersen and Dirk A. Sodestrom the lawful
attorney-in-fact, each with full power of substitution, for him 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
attorney-in-fact or his 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.

|SIGNATURE                               |  | TITLE                                                                            |  | DATE             
|--------------------------------------- |  | -------------------------------------------------------------------------------- |  | -----------------
|                                        |  |                                                                                  |  |                  
|/s/W. ROBERT STOVERW. Robert Stover     |  | Chairman of the Board                                                            |  | February 19, 2002
|/s/DWIGHT S. PEDERSENDwight S. Pedersen |  | President and Chief Executive Officer and Director (Principal Executive Officer) |  | February 19, 2002
|/s/DIRK A. SODESTROMDirk A. Sodestrom   |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer)  |  | February 19, 2002
|/s/JOHN P. SANDERSJohn P. Sanders       |  | Vice President and Controller (Principal Accounting Officer)                     |  | February 19, 2002
|/s/JACK D. SAMUELSONJack D. Samuelson   |  | Director                                                                         |  | February 19, 2002

IV-3

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