**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-K/A**

** **

**(Amendment No. 2)**

** **

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**FORTHE FISCAL YEAR ENDED OCTOBER 29, 2005**

** **

**CommissionFile Number 000-24990**

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**WESTAFF, INC.**

**(Exact name of registrant as specified in its charter)**

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

 

**298NORTH WIGET LANE, WALNUT CREEK, CA 94598-2453**

**(Address of principal executive offices, including zipcode)**

** **

**(925)930-5300**

**(Registrant’s telephone number, including area code)**

** **

Securities registered pursuant toSection 12(b) of the Act:

**None**

 

Securities registered pursuant toSection 12(g) of the Act:

 

 

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

** **

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inFull 405 of the Securities Act. Yes o No ý

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Exchange Act. Yes o No ý

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý    No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. ý

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange.

 

Largeaccelerated filer o                                                                                  Acceleratedfiler o                                                                                          Non-acceleratedfiler ý

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No ý

 

Asof April 15, 2005, the aggregate market value of the registrant’s commonstock held by non-affiliates of the registrant was $32,850,107 based on theclosing sale price as reported on the Nasdaq National Market.

 

Asof January 26, 2006, the Registrant had outstanding 16,377,958 shares ofCommon Stock.

 

 

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**EXPLANATORYNOTE**

 

Westaff, Inc.(the “Company”) is filing this Amendment No. 2 to its Form 10-K forthe year ended October 29, 2005, that was originally filed onJanuary 27, 2006 (the “Original 10-K”), as amended by Amendment No. 1to the Annual Report, as filed on February 24, 2006 (“AmendmentNo. 1”),  to file Exhibits 31.1and 31.2 for the amendment to the annual report.  There are no changes to the disclosures in theOriginal 10-K, including the financial statements filed therein. There are alsono changes to the disclosures in Amendment No. 1, except that thisAmendment No. 2 files Exhibit 31.1 and 31.2 that was omitted fromAmendment No. 1.  In addition, theCompany and Stephen J Russo, our Senior Vice President, Field Operations,mutually agreed to end his employment with the Company effective March 7,2006.  This Amendment No. 2continues to speak as of the date of the Original 10-K, and we have not updatedthe disclosure contained herein to reflect any events that occurred at a laterdate. All information contained in this Amendment No. 2 is subject toupdating and supplementing as provided in our periodic reports filed with theSEC subsequent to the date of the filing of the Original 10-K.

 

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**PART III**

** **

**ITEM10.**   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

** **

**DIRECTORS**

** **

*Ronald D. Stevens,***age 62, Class I director, was appointed as a directorof the Company effective February 24, 2002. He began his business careerin 1967 with Arthur Andersen & Co. and became an audit partner in thatorganization in 1977. He left Arthur Andersen & Co. at the end of 1990and joined in opening Productivity Consulting Group, Inc. InApril 2002, he retired from Robertson-Ceco Corporation where he had beenits Executive Vice President and Chief Financial Officer sinceOctober 1996. He is a certified public accountant on inactive status.

 

*Jack D. Samuelson,* age 81,Class I director, has been a director of the Company sinceMarch 1995. Mr. Samuelson co-founded Samuelson Brothers in 1957 to engagein general construction and commercial real estate development.Mr. Samuelson has been its President and Chairman of the Board ofDirectors from incorporation to the present. Samuelson Brothers sold itsconstruction business in 1979 and since then has continued to developindustrial and commercial real estate. It is now known as Samuelson Partners.Mr. Samuelson is also a director of Nationwide HealthProperties, Inc., a New York Stock Exchange-listed real estate investmenttrust focused on healthcare-related properties.

 

*Patricia M. Newman,* age 54,Class II director, was appointed as our President and Chief ExecutiveOfficer effective March 16, 2005. Ms. Newman is a 25 year veteran ofthe staffing industry and was appointed as Chief Operating Officer of theCompany on November 1, 2004. Prior to that, she had been the Company’sU.K. Managing Director since December 1998. In November 2002, shetook on the added responsibility of overseeing the Company’s Denmark and NorwayOperations. Ms. Newman will continue to serve on the board of Westaff U.K.Limited.

 

*W. Robert Stover,* age 84,Class III director, founded the Company in 1948 and has been continuouslyinvolved in the management of the Company since that time. Since ourincorporation in 1954, Mr. Stover has held the position of Chairman of theBoard of Directors. From 1954 to 1985, Mr. Stover served as President, andfrom 1985 to the end of calendar year 1998, as Chief Executive Officer. Hestepped down as Chief Executive Officer effective January 1, 1999, andcontinued to serve as Chairman of the Board of Directors until May 3,2000, when he also assumed the position of interim President and ChiefExecutive Officer following the termination of a management-led buyouttransaction. Mr. Stover’s interim service as President and Chief ExecutiveOfficer ended upon the hiring of a successor in that office effectiveMay 1, 2001. He continues to serve as Chairman of the Board of Directors.

 

*Janet M. Brady,* age 52,Class III director, was appointed as a director of the Company effectiveSeptember 19, 2002. She was employed by The Clorox Company for almosttwenty-seven years having started as Brand Assistant in 1976. After aseries of promotions, including as Vice President-Corporate MarketingServices of that company, she was named Vice President-Human Resources in 1993where she served until her retirement in January 2003. She was a formerdirector of American Protective Services, Inc., a privately held guardservice company. She is a director on the Advisory Board of I.P.S.A., aprivately held investigative and protective services company.

 

**EXECUTIVE OFFICERS**

** **

*Patricia M. Newman,**age 54, was appointed as President and Chief ExecutiveOfficer of the Company effective March 16, 2005. Prior to that,*Ms. Newman held the position of ChiefOperating Officer of the Company from November 1, 2004, until theappointment as President and Chief Executive Officer. She joined the Company asUnited Kingdom Managing Director in December 1998. (In November 2002,she took on the added responsibility of overseeing the Company’s Denmark andNorway operations.) Prior to joining the Company, Ms. Newman was employedby Kelly Services in the UK from 1989 to 1998, most

 

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recentlyas Commercial Operations Director. From 1979 to 1989 she was employed byManpower in the UK.

 

*Dirk A. Sodestrom,**age 48,* joined the Company as Controller inFebruary 1991. In December 1992, he was elected to the additionalposition of Vice President. In June 1998, Mr. Sodestrom was named aSenior Vice President of the Company. Effective January 1, 2001,Mr. Sodestrom was appointed as Chief Financial Officer. Mr. Sodestromwas employed from 1980 to 1991 by Price Waterhouse LLP, most recently as aSenior Audit Manager. He is a certified public accountant on inactive status.

 

*StephenJ. Russo,* age 49, joined the Company as WesternZone Manager in July 2004. On July 25, 2005, he was elected to theposition of Senior Vice President, Field Operations and is the Company’s principaloperating officer. Prior to that, Mr. Russo was a partner at ECP Group inWalnut Creek, California, an organizational and individual developmentconsulting partnership from October 2001 to June 2004. Prior to ECPGroup, Mr. Russo was Senior Vice President, Chief Administrative Officerand Chief Operating Officer at Gary D. Nelson Associates from August 1998to June 2001.

 

*Christa C.Leonard,**age 48,*was hired as Vice President and Treasurer of the Company inNovember 2000. Ms. Leonard was previously employed by USI InsuranceServices Corp. as Vice President, Treasury and Tax, from 1996 to 2000. She hasapproximately nine years’ prior work experience in the public accounting field,most recently from 1995 to 1996 with Roberts Schultz & Co., and alsowith Wallace Meyer & Co. from 1992 to 1994, and KPMG PeatMarwick & Co. from 1987 to 1992. She is a certified public accountanton inactive status.

 

*Richard M. Sugerman,* age 53, washired as Vice President and Controller of the Company effectiveFebruary 22, 2005. Mr. Sugerman was previously employed byDSW & Associates, Inc. as Corporate Controller and Secretary,from September 2002 to February 2005. From January 2001 toSeptember 2002, Mr. Sugerman was Corporate Controller and Secretaryof Loquendo, Inc. Prior to that he was Vice President of Finance andAdministration at Stellarnet, Inc. from March 2000 toDecember 2000, and Executive Vice President, Finance Director at SnyderHealthcare Communications Worldwide from December 1998 to March 2000.Mr. Sugerman is a certified public accountant on inactive status.

 

*David P. Wilson, age 43,* was hired in December 1997, as Field Automation Manager, focusingon the field automation process. In June 1998, he was assigned theadditional task of managing the customer service and help desk functions of theCompany’s Information Services Department. Mr. Wilson was promoted to VicePresident, Information Services in January 2001. He has approximately 20 years’ work experience ininformation services, most recently with Triad Systems Corporation as Manager,Financial and Marketing Systems, from 1991 to 1997, and Franklin Covey,Application Design Specialist from 1985 to 1991.

 

Thereare no family relationships among our executive officers or directors.

 

*The Company has adopted a Code of Ethics thatapplies to all the Company’s principal executive, financial and accountingofficers. The Code of Ethics is posted on the Company website atwww.westaff.com. The Company intends to satisfy the requirements under Item5.05 of Form 8-K regarding disclosure of amendments to, or waivers from,provisions of its Code of Ethics that apply, by posting such information on theCompany’s website. Copies of the Code of Ethics will be provided, free ofcharge, upon written request directed to Investor Relations,Westaff, Inc., P.O. Box 9280, Walnut Creek, CA 94598.*

* *

**SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE**

** **

Section 16(a) ofthe Exchange Act requires the Company’s executive officers, directors andpersons who beneficially own more than 10% of the Common Stock to file initialreports of ownership and reports of changes in ownership with the Securitiesand Exchange Commission (“SEC”). Such persons are

 

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requiredby SEC regulations to furnish the Company with copies of allSection 16(a) forms filed by such persons.

 

Basedsolely on the Company’s review of such forms and amendments thereto furnishedto the Company and written representations from certain reporting persons, theCompany believes that all executive officers, directors and greater than 10%stockholders complied with all filing requirements applicable to them withrespect to transactions during fiscal 2005.

 

**ITEM11.**             EXECUTIVE COMPENSATION.

** **

Thefollowing table sets forth the compensation earned by: (i) the Company’sChief Executive Officer or the individual acting in a similar capacity duringfiscal 2005 and (ii) the four other highest-paid executive officers of theCompany who were serving at the end of fiscal 2005. The individuals included inthe table collectively will be referred to as the “Named Officers.”

 

**SUMMARYCOMPENSATION TABLE**

** **
| ** **                                     | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                 | ** ** | **Long-Term Compensation** | ** ** | ** **                       | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Annual  Compensation** | ** ** | **Securities  Underlying** | ** ** | **Restricted  Stock**           | ** ** | **All Other  Compensation** | ** ** |
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary($)**            | ** ** | **Bonus($)**               | ** ** | **Options(#)(1)**               | ** ** | **Award(s)($)**                  | ** ** | **($)(2)(3)(4)** | ** ** |
| Patricia M.  Newman                            |       | 2005       |       | 446,798                  |       | 90,000                     | (5)        | 200,000                         |       | 64,400                           | (6)        | 86,927 | (7) |
| President and Chief                            |       | 2004       | (8)        | —                   |       | —                     |       | —                          |       |                             |       | 21,648 |   |
| Executive Officer                              |       | 2003       | (9)        | —                   |       | —                     |       | —                          |       |                             |       | 17,740 |   |
| Dwight S.  Pedersen(10)                        |       | 2005       |       | 135,000                  |       | —                     |       | —                          |       |                             |       | 400,082 | (11) |
| President and Chief                            |       | 2004       |       | 340,824                  |       | —                     |       | —                          |       |                             |       | 226 |   |
| Executive Officer                              |       | 2003       |       | 372,824                  |       | —                     |       | —                          |       |                             |       | 2,714 |   |
| Dirk A. Sodestrom                              |       | 2005       |       | 253,577                  |       | —                     |       | —                          |       |                             |       | 215 |   |
| Senior Vice President                          |       | 2004       |       | 215,757                  |       | —                     |       | —                          |       |                             |       | 226 |   |
| and Chief Financial                            |       | 2003       |       | 229,603                  |       | —                     |       | —                          |       |                             |       | 587 |   |
| Officer                                        |       |       |       |                     |       |                       |       |                            |       |                             |       |   |   |
| Stephen J.  Russo(12)                          |       | 2005       |       | 190,797                  |       | 31,201                     | (13)       | —                          |       |                             |       | 152 |   |
| Senior Vice President,                         |       | 2004       |       | 53,342                   |       | —                     |       | 25,000                          |       |                             |       | 40 |   |
| Field Operations                               |       | 2003       |       | —                   |       | —                     |       | —                          |       |                             |       | — |   |
| David P. Wilson                                |       | 2005       |       | 157,094                  |       | —                     |       | —                          |       |                             |       | 182 |   |
| Vice President,                                |       | 2004       |       | 143,519                  |       | —                     |       | —                          |       |                             |       | 214 |   |
| Information Services                           |       | 2003       |       | 147,336                  |       | —                     |       | —                          |       |                             |       | 245 |   |
| Christa C.  Leonard                            |       | 2005       |       | 156,028                  |       | —                     |       | —                          |       |                             |       | 152 |   |
| Vice President and                             |       | 2004       |       | 141,508                  |       | —                     |       | —                          |       |                             |       | 210 |   |
| Treasurer                                      |       | 2003       |       | 140,095                  |       | 1,000                      | (14)       | —                          |       |                             |       | 235 |   |

 

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(1)             Long-termcompensation has not been included in the table because such information is notapplicable.

 

(2)             All othercompensation for executive officers other than Ms. Newman for fiscal 2004includes employer’s portion of basic life insurance premium (per month) in theamount of $19 for Messrs. Pedersen and Sodestrom, $10 for Mr. Russo,and $18 for Ms. Leonard and Mr. Wilson. Employer’s portion was 12cents per $1,000 of coverage and allowed coverage was one times base salary upto a maximum of $150,000. All other compensation for Ms. Newman for fiscal2004 includes employer contributions for her retirement plan.

 

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(3)             All othercompensation for executive officers other than Ms. Newman for fiscal 2003includes employer’s matching contributions under the Westaff Deferred SavingsPlan (“Deferred Plan”) for fiscal 2003, the sixth year in which contributionswere made. The matching contributions for fiscal 2003 were 10% of the first 10%of the participant’s contribution to the Deferred Plan, and were equal to zerofor Mr. Wilson, zero for Ms. Leonard, $2,461 for Mr. Pedersenand $355 for Mr. Sodestrom. Also includes employer’s portion of basic lifeinsurance premium (per month) in the amount of $21 for Messrs. Pedersenand Sodestrom and, $20 for Mr. Wilson and Ms. Leonard. Employer’sportion was 14 cents per $1,000 of coverage and allowed coverage was onetimes base salary up to a maximum of $150,000. All other compensation forMs. Newman for fiscal 2008 includes employer contributions for herretirement plan.

 

(4)             All othercompensation for fiscal 2005 includes employer’s portion of basic life insurancepremium (per month) in the amount of $20 for Mr. Pedersen, $18 forMr. Sodestrom, $17 for Ms. Newman, $20 for Mr. Russo andMs. Leonard and $15 for Mr. Wilson. Employer’s portion was 14 centsper $1,000 of coverage and allowed coverage was one times base salary to amaximum of $150,000.

 

(5)             Bonus forfiscal 2005 based on a guaranteed minimum payment of $90,000 pursuant to herEmployment Agreement.

 

(6)             2005Long-Term Compensation includes 20,000 shares of restricted Common Stock with afair market value of $93,000 at October 29, 2005. Subject toMs. Newman’s meeting certain performance criteria, 5,000 shares will veston October 28, 2006 and 5,000 shares will vest on November 3, 2007.Of the remaining 10,000 shares, 5,000 will vest on April 7, 2008 and 5,000will vest on November 1, 2008. If performance criteria is not met oneither of the 2006 or 2007 vesting tranches, such shares will vest onNovember 1, 2008.

 

(7)             Includes$19,909 for a cash allowance to be used by Ms. Newman in her discretionfor a car allowance, health club membership, or other needs. Also, includes$32,730 for temporary housing, $17,679 for furniture rental, $8,366 for a carrental and a de minimus amount for traveling expenses incurred byMs. Newman’s husband.

 

(8)             Britishpounds sterling are translated into U.S. dollars at an average exchange rate of1.8040 for fiscal 2004.

 

(9)             Britishpounds sterling are translated into U.S. dollars at an average exchange rate of1.6110 for fiscal 2003.

 

(10)       Mr. Pedersen’sresignation was accepted by the Board of Directors and made effective onMarch 16, 2005.

 

(11)       IncludesMr. Pedersen’s cash severance payment of $400,000. In addition, pursuantto Mr. Pedersen’s severance agreement, we provided him with continuedCOBRA payments for one year after the severance date.

 

(12)       Mr. Rossowas elected to the position of Senior Vice President, Field Operations onJuly 25, 2005.

 

(13)       Bonus forfiscal 2005 was based on the incentive plan for zone managers.

 

(14)       Ms. Leonardreceived a one time bonus in January 2003 for a special project.

 

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**OptionGrants in Last Fiscal Year**

** **

Therewere two stock option grants made during fiscal 2005 under the Company’s 1996Stock Option/Stock Issuance Plan to the Named Officers. The table below setsforth information with respect to such option grants.

 
| ** **          | ** ** | ** **         | ** ** | **Individual**        | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                 | ** ** | ** ** | ** ** |
|---------------------|------------|--------------------|------------|-----------------------|------------|-----------------------------|------------|----------------|------------|----------------------------|------------|------------|------------|
| ** **          | ** ** | ** **         | ** ** | **Grants(1)**         | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **         | ** ** | **Percent Of**   | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **         | ** ** | **Total**             | ** ** | ** **                  | ** ** | ** **     | ** ** | **Potential Realizable**   | ** ** |
| ** **          | ** ** | **Number Of** | ** ** | **Options/SAs**       | ** ** | ** **                  | ** ** | ** **     | ** ** | **Value At Assumed**       | ** ** |
| ** **          | ** ** | **Securities**     | ** ** | **Granted To**   | ** ** | ** **                  | ** ** | ** **     | ** ** | **Annual Rates Of Stock**  | ** ** |
| ** **          | ** ** | **Underlying**     | ** ** | **Employees In** | ** ** | **Exercise Price**     | ** ** | ** **     | ** ** | **Price Appreciation For** | ** ** |
| ** **          | ** ** | **Options/SARs**   | ** ** | **Fiscal Year**  | ** ** | **Or Base Price** | ** ** | **Expiration** | ** ** | **Option Term**            | ** ** |
| **Name**            | ** ** | **Granted(#)**     | ** ** | **2005(%)**           | ** ** | **($/Sh)**                  | ** ** | **Date**       | ** ** | **5%($)**                  | ** ** | **10%($)** | ** ** |
| Patricia M.  Newman |       | 155,275            |       | 76                    | %          | 3.22                        |       | 04/07/15       |       | 314,438                    |       | 796,848    |       |
|                |       | 44,725             |       | 22                    | %          | 3.22                        |       | 04/07/15       |       | 90,570                     |       | 229,522    |       |

 

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(1)             Optionsgranted under the Company’s 1996 Stock Option/Stock Issuance Plan have amaximum ten-year term measured from the date of grant. Options vest ratablyfrom April 2006 through April 2010.

 

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**AggregatedOption Exercises in Last Fiscal Year and Fiscal Year End Values**

** **

OneNamed Officer who was acting as Chief Executive Officer exercised optionsduring fiscal 2005. No other Named Officer exercised an option during fiscal2005. The table below sets forth information with respect to the exercised andunexercised options held by the Named Officers as of October 29, 2005. 
| ** **          | ** ** | **Shares  Acquired on** | ** ** | **Value  Realized** | ** ** | **Number of Securities  Underlying Unexercised  Options at  Fiscal Year End(#)** | ** ** | **Value of Unexercised  In-the-Money Options At  Fiscal Year End($)(1)** | ** ** |
|---------------------|------------|------------------------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Exercise(#)**              | ** ** | **($)**             | ** ** | **Exercisable**                                                                                                | ** ** | **Unexercisable**                                                                                      | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Dwight S.  Pedersen |       | 253,000                      |       | 565,090             |       | —                                                                                                         |       | —                                                                                                 |       | — |   | — |   |
| Patricia M.  Newman |       | —                       |       | —              |       | 24,791                                                                                                         |       | 205,209                                                                                                |       | 32,937 |   | 293,814 |   |
| Dirk A.  Sodestrom  |       | —                       |       | —              |       | 85,333                                                                                                         |       | 10,417                                                                                                 |       | 72,875 |   | 15,626 |   |
| Stephen J. Russo    |       | —                       |       | —              |       | 7,812                                                                                                          |       | 17,188                                                                                                 |       | 14,608 |   | 32,142 |   |
| David P. Wilson     |       | —                       |       | —              |       | 19,500                                                                                                         |       | 2,500                                                                                                  |       | 35,125 |   | 3,750 |   |
| Christa C.  Leonard |       | —                       |       | —              |       | 21,875                                                                                                         |       | 3,125                                                                                                  |       | 48,013 |   | 4,688 |   |

 

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(1)             Calculatedby determining the difference between the fair market value of the securitiesunderlying the in-the-money options at October 28, 2005 (based on theclosing price of $4.65 for the Company’s Common Stock on NASDAQ forOctober 28, 2005, the last trading day immediately preceding the end offiscal 2005) and the exercise price of the options.

 

**DirectorCompensation**

** **

Non-employeemembers of the Board of Directors each received an annual fee of $15,000 forservice on the Board of Directors in fiscal 2005. They received an additionalfee of $1,000 for each meeting attended in person. In the event a Board meetingand a committee meeting was held on the same day, the total meeting fee was notmore than $1,000 per day. They also received a fee of $500 for each telephonicmeeting attended, if called by the Chairman of the Board of Directors or anemployee member of the Board of Directors. The Chairman of the CompensationCommittee and the Chairman of the Audit Committee received an additional fee of$1,500 per quarter.

 

Non-employeemembers of the Board of Directors also were reimbursed for their reasonableexpenses incurred in connection with attending Board of Directors meetings.

 

Weanticipate no increase in our directors’ compensation during fiscal 2006. Noadditional compensation was paid to any of the directors during fiscal 2005 fortheir committee service.

 

Inaddition, non-employee Board of Directors members are eligible to receiveperiodic option grants under the Automatic Option Grant Program in effect underour 1996 Stock Option/Stock Issuance Plan (the “Stock Option Plan”). Under theAutomatic Option Grant Program, each individual who subsequently joins theBoard of Directors as a non-employee director will receive at that time anoption grant, provided such individual has not previously been in our employ.In addition, at each annual stockholders’ meeting each individual who continuesto serve as a non-employee Board of Directors member presently is entitled toan option grant for 3,000 shares with an exercise price equal to the fairmarket value of the option shares on the grant date, provided such individualhas served as a Board of Directors member for at least six months.

 

Eachautomatic option grant will have a maximum term of ten years measured from thegrant date, subject to earlier termination following the optionee’s cessationof Board of Directors service. The option will become exercisable for all theoption shares upon the optionee’s completion of one year of Board of Directorsservice measured from the grant date. However, the option will becomeimmediately exercisable for all the option shares should the optionee ceaseBoard of Directors service by reason of death or disability or should theCompany be acquired by merger or asset sale or change of control during theperiod of the optionee’s service on the Board of Directors. The Stock OptionPlan will expire in 2006 in

 

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accordancewith its terms. The Company is currently considering a new plan, which will besubject to stockholder approval.

 

Pursuantto the terms of the Automatic Option Grant Program, Messrs. Samuelson andStevens, and Ms. Brady each received an option grant to purchase 3,000shares of Common Stock during fiscal 2005.

 

**EmploymentContracts, Termination of Employment Arrangements and Change in ControlAgreements**

** **

TheCompany entered into an employment agreement with W. Robert Stover effectiveJanuary 1, 1999. The agreement contains a compensation package forMr. Stover in his continuing role as Chairman of the Board of Directors,including a salary of $75,000. His compensation package includes payment of hisexecutive assistant’s annual salary, continued participation by Mr. Stoverand his executive assistant in present and future employee benefit plansincluding group health, life, supplemental life, long-term disability,accidental death and dismemberment insurance, a 401(k) savings plan and adeferred savings plan, and reimbursement for reasonable travel and otherbusiness expenses. Mr. Stover and his assistant also utilize offices atthe Company’s corporate headquarters at no cost to him. Mr. Stover is not eligiblefor a bonus or other incentive compensation under the agreement or otherwiseand he is not entitled to vacation pay. Except with respect toMr. Stover’s salary, the agreement is of indefinite duration and willcontinue until he chooses to retire or until his death; however, thecontractual obligations relating to compensation of his executive assistantwill terminate upon reassignment of the current assistant to other duties orupon termination of Mr. Stover’s employment, subject to negotiation of adifferent arrangement at the discretion of the Compensation Committee of theBoard of Directors.

 

OnApril 7, 2005, the Company, Westaff Support, Inc. and Patricia M.Newman executed an employment agreement effective as of March 16, 2005,the date on which Ms. Newman was appointed President and Chief ExecutiveOfficer of the Company (the “Employment Agreement”). Pursuant to the terms ofthe Employment Agreement, Ms. Newman will receive an annual base salary of$450,000. In addition to her base salary, Ms. Newman is eligible for anIncentive Bonus Compensation targeted at 40% of her base salary in an amount tobe determined at the sole discretion of the Compensation Committee of theBoard. The Employment Agreement establishes a maximum bonus level of sixtypercent (60%) of her Base Salary each fiscal year with no minimum bonus level.Ms. Newman’s Incentive Bonus Compensation is based on her satisfaction ofobjective factors and performance criteria established by the CompensationCommittee. She received a bonus for fiscal 2005 based on a guaranteed minimumpayment of $90,000 pursuant to her employment agreement. This is a one-timeevent.

 

UponMs. Newman’s execution of her employment agreement, Ms. Newman wasalso granted 20,000 shares of restricted common stock of the Company. Subjectto Ms. Newman’s meeting certain performance criteria, 5,000 shares willvest on October 28, 2006 and 5,000 shares will vest on November 3,2007. Of the remaining 10,000 shares, 5,000 will vest on April 7, 2008 and5,000 will vest on November 1, 2008. If the performance criteria specifiedin her employment agreement are not met on either of the 2006 or 2007 vestingtranches, such shares will vest on November 1, 2008.

 

Underher employment agreement, Ms. Newman was also granted stock options to purchasean aggregate of 200,000 shares of Common Stock at an exercise price of $3.22per share, the closing price of a share of Common Stock as of the date ofsigning the Employment Agreement. The options vest in five equal annualinstallments, with vesting of the first installment to occur upon the firstanniversary of the effective date, or April 7, 2006.

 

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TheRestricted Stock and the stock options become fully vested and exercisable ifMs. Newman is either terminated without cause or demoted within one yearafter the effective date of a “Change in Control,” a “Corporate Transaction,”or a “Hostile Takeover,” as defined in the Westaff, Inc. 1996 StockOption/Stock Issuance Plan.

 

Ms.Newman also receives an annual cash allowance of $30,000 per fiscal year,payable in each pay period in equal installments. These payments are intendedto be used as a car allowance, health club membership or other needs. Duringthe period of her hire date of March 16, 2005 through the end of calendaryear 2005, she received a car allowance of $1,500 per month and the reasonableand proper costs of temporary housing. Ms. Newman is entitled toreimbursement for a personal financial planner and/or tax consultant. Suchreimbursement will be in an aggregate amount not to exceed $20,000 in fiscalyear 2005 and $10,000 in fiscal year 2006. She is also entitled toreimbursement for moving and other expenses reasonably related to herrelocation from the United Kingdom to the US in an amount not to exceed$30,000. Her contract was amended on January 17, 2006 to extend herreimbursement of reasonable and proper costs of temporary housing throughcalendar year 2006.

 

TheCompany’s former President and Chief Executive Officer, Dwight S. Pedersen,resigned on March 16, 2005. Concurrently, Mr. Pedersen resigned fromthe Company’s Board of Directors. Mr. Pedersen received a lump sum paymentequal to one year’s annual base salary of $400,000, and continued COBRApayments for one year after the severance date. Thereafter, Mr. Pedersenreceived no other employee benefits or perquisites from the Company. The fulltext of Mr. Pedersen’s separation agreement is available as anexhibit to our Form 8-K filed on March 22, 2005.

 

TheCompany entered into an employment agreement with Mr. Pedersen for hisservice as President and Chief Executive Officer on January 14, 2002. Onthe recommendation of Mr. Pedersen, his employment agreement was amendedeffective June 30, 2003, to reduce his base annual salary from $400,000 to$320,000. Pursuant to the amendment, the Company had the right to terminate hisemployment for any reason, without cause, by providing him termination pay(“Termination Pay”) equivalent to six (6) months of his then current basesalary payable in the form of a single lump sum payment. If his employmentwas terminated without cause, he would also be paid his earned but unpaid basesalary, accrued vacation pay through the date of termination, and his earnedbut unpaid annual incentive, if any. Mr. Pedersen’s employment agreementwas amended effective June 30, 2004, to change his annual base salary to$400,000.

 

Additionally,Mr. Pedersen’s employment agreement included a grant of 550,000 optionshares with an exercise price at $2.35 per share, of which 250,000 optionshares were immediately vested as of January 14, 2002. The remaining300,000 option shares were to vest on January 13, 2007. OnJanuary 28, 2005, Mr. Pedersen exercised his 250,000 vested optionshares. As a result of his resignation, the remaining 300,000 option shareswere cancelled effective March 16, 2005.

 

TheCompany entered into an employment agreement with Dirk A. Sodestrom as ChiefFinancial Officer effective January 1, 2001, with an annual salary of$235,000 that contained a requirement for six-months’ advance notice oftermination. The agreement was amended effective June 30, 2003, to deletethe requirement of six-months advance notice of termination and to reduce hisannual salary to $200,000 per year. In exchange for his salary reduction, hewill be eligible to receive transition compensation in the form of asingle lump sum cash payment equivalent to sixty-five (65) weeks of histhen current base salary less appropriate withholdings if his employment isterminated except for cause or performance-related issues, and he has not beenoffered a position similar in responsibility, skill requirements and workschedule as his current position, and a position for which the salaryoffered would require no more than a 10% reduction in his then current pay, anda position that does not require him to travel more than 30 miles from hiscurrent primary place of work. He is eligible to receive transitioncompensation provided that he is an active regular employee or on an approvedleave of absence of no more than six (6) months in thetwelve (12) month-period prior to the time of position elimination orrestructuring, he has not voluntarily

 

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terminatedhis employment prior to the elimination of his position, and he has not beendismissed for cause or performance-related issues. Mr. Sodestrom’semployment contract was amended effective June 30, 2004 to change hisannual salary to $245,000, his annual salary prior to the reduction in pay inJune 2003.

 

TheCompany entered into an employment agreement with Stephen J. Russo as WesternZone Manager on July 1, 2004 with an annual salary of $180,000 thatcontained a requirement of two weeks’ advance notice of termination, or pay inlieu of notice. The agreement was amended on August 6, 2004 to includeMr. Russo’s eligibility for transition compensation for up to one yearfollowing a change in control, or in the event of his job elimination, and hehas not been offered a comparable position which is a position similar inresponsibility, skill requirements and work schedule as his currentposition, a position for which the salary offered would require no more than10% reduction in his then current pay. He would be eligible to receivetransition compensation in the form of a single lump sum paymentequivalent to twenty-six (26) weeks of his then current base salary lessappropriate withholdings, provided that he is an active regular employee at thetime of the elimination of his job and he has not voluntarily terminated hisemployment prior to the elimination of this job. Effective September 19,2004, Mr. Russo’s employment agreement was further amended to expand thedefinition of “Change in Control” to include any transactions within themeaning of Rule 13d-3 of the Securities Exchange Act of 1934.Mr. Russo’s employment agreement was further amended effectiveAugust 17, 2005 to expand the definition of “Elimination of job” toinclude the statement “and you have not been offered a position that wouldrequire you to travel 30 miles or less from your current primary place ofwork.”

 

TheCompany entered into an employment agreement with Christa C. Leonard as VicePresident and Treasurer on November 20, 2000, with an annual salary of$125,000 that contained a requirement of two weeks’ advance notice oftermination, or pay in lieu of notice. The agreement was amended onJanuary 29, 2001, to replace the two weeks’ advance notice of terminationwith three month’s advance notice of termination. In exchange for a 10% salaryreduction effective June 30, 2003, Ms. Leonard became eligible toreceive transition compensation for up to one year following a change incontrol, or in the event of her job elimination, and she has not been offered acomparable position which is a position similar in responsibility, skillrequirements and work schedule as her current position, a position forwhich the salary offered would require no more than 10% reduction in the herthen current pay and a position that would not require her to travel more than30 miles from her current primary place of work. She is eligible to receivetransition compensation in the form of a single lump sum cash paymentequivalent to twenty-six (26) weeks of her then current pay lessappropriate withholdings, provided that she is an active regular employee or onan approved leave of absence of no more than six (6) months in thetwelve (12) month-period prior to the time of position elimination orrestructuring, she has not voluntarily terminated her employment prior to theelimination of her position, and she has not been dismissed for cause orperformance-related issues. Effective June 30, 2004, her annual salary waschanged to $150,000, which was her salary prior to the reduction in pay inJune 2003.

 

Allof the Company’s employment agreements permit termination at will, and theCompany may terminate the employment of any of the Named Officers at anytime at the discretion of the Board of Directors. The Plan Administrator of the1996 Stock Option Plan/Stock Issuance has authority to provide for theaccelerated vesting of the shares of Common Stock subject to outstandingoptions held by the Chief Executive Officer and the Company’s other executiveofficers, whether granted under that Plan or any predecessor plan, in the eventtheir employment were to be terminated within a designated period (whetherinvoluntarily or through a forced resignation) following: (i) anacquisition of the Company by merger or asset sale; (ii) a change incontrol, as defined in the Plan, or (iii) a hostile takeover of theCompany effected through a successful tender offer for more than 50% of theCompany’s outstanding Common Stock or through a change in the majority of themembers of the Board of Directors as a result of one or more contested electionsfor Board of Directors membership over a period of 36 consecutive months.

 

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**CompensationCommittee Interlocks and Insider Participation**

** **

TheBoard of Directors established a Compensation Committee in March 1995. TheCompensation Committee currently consists of Ms. Brady, andMessrs. Stevens and Stover. Except for Mr. Stover, no member of theCompensation Committee was at any time during fiscal 2005, or at any othertime, an officer or employee of the Company. Mr. Stover did notparticipate in any committee decision making with respect to his salary infiscal 2005.

 

Noexecutive officer of the Company served on the Board of Directors orCompensation Committee of any entity that has one or more executive officersserving as a member of the Company’s Board of Directors or CompensationCommittee.

 

Fora description of transactions between the Company and Mr. Stover, a memberof the Compensation Committee, see Certain Relationships and RelatedTransactions.

 

**COMPENSATIONCOMMITTEE OF THE BOARD OF DIRECTORSEXECUTIVE COMPENSATION REPORT**

** **

*Notwithstanding anything to the contrary setforth in any of our previous filings under the Securities Act of 1933, asamended (the “Securities Act”), or the Securities Exchange Act of 1934, asamended (the “Exchange Act”), that might incorporate future filings, in wholeor in part, the following report shall not be deemed to be “solicitingmaterial” or to be “filed” with the Securities and Exchange Commission, norshall such report be incorporated by reference into any such filings, nor bedeemed to be incorporated by reference into any future filings under theSecurities Act or the Exchange Act.*

* *

TheCompensation Committee currently consists of three directors, Janet M. Brady,Ronald D. Stevens and W. Robert Stover. Ms. Brady is its current Chairman.It is the duty of the Compensation Committee to review and establish thecompensation of executive officers of the Company, including base salary,participation in profit sharing, bonus and other cash incentive plans, subjectto ratification by the Board of Directors. During fiscal 2005, the CompensationCommittee also had the authority to administer the Company’s 1996 StockOption/Stock Issuance Plan (the “Plan”) under which grants may be made tosuch officers. With respect to administration of the Plan, the CompensationCommittee has a Primary Committee and a Secondary Committee.

 

ThePrimary Committee consists of two or more non-employee members of the Board ofDirectors who have authority to administer the Discretionary Option Grant, theAutomatic Option Grant and Stock Issuance Programs with respect toSection 16 insiders. Section 16 insiders are officers or directors ofthe Company subject to the short-swing profit recapture provisions ofSection 16 of the Exchange Act. The Primary Committee is constituted insuch a manner as to satisfy all applicable laws and to permit such grants andrelated transactions under the Plan to be exempt fromSection 16(b) of the Exchange Act in accordance with Rule 16b-3.In fiscal 2005, the Primary Committee members were Janet M. Brady andRonald D. Stevens.

 

TheSecondary Committee consists of two or more members of the Board of Directorswho administer the Discretionary Option Grant and Stock Issuance Programs withrespect to eligible persons other than Section 16 insiders. In fiscal2005, the Secondary Committee members were Janet M. Brady, Ronald D. Stevensand W. Robert Stover.

 

Membersof the Primary Committee or any Secondary Committee serve for such period oftime as the Board of Directors may determine and may be removed bythe Board of Directors at any time. The Board of Directors may also at anytime terminate the functions of the Primary Committee and any Secondary Committeeand reassume all powers and authority previously delegated to such committee.

 

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**GeneralCompensation Policy**

** **

Thefundamental policy of the Compensation Committee is to offer the Company’sexecutive officers competitive compensation opportunities based upon theirpersonal performance and their contribution to the financial success of theCompany. Generally, each executive officer’s compensation package comprisesthree elements: (i) base salary which is designed primarily to becompetitive with base salary levels in effect both at companies within thetemporary staffing industry that are of comparable size to the Company and atcompanies outside of such industry with which the Company competes forexecutive talent; (ii) annual bonuses payable in cash and tied to theCompany’s attainment of financial milestones based on criteria established bythe Compensation Committee; and (iii) long-term stock-based incentiveawards which strengthen the mutuality of interests between the executiveofficers and the Company’s stockholders. As an employee’s level ofresponsibility and accountability within the Company increases over time, agreater portion of his or her total compensation is intended to be dependentupon the Company’s performance and stock price appreciation rather than uponbase salary.

 

*Factors.**  *The principal factor considered by theCompensation Committee in establishing the components of each executiveofficer’s compensation package for fiscal 2005 is external salary data of bothtemporary staffing service companies and other companies within a similargeographical area and with small to medium market capitalization.

 

*Base Salary.**  *The base salary for each executiveofficer is determined on the basis of internal comparability and on externalsalary data of temporary staffing service companies and other companies withina similar geographic area and with small to medium market capitalization.Salaries are reviewed on an annual basis, and discretionary adjustments to eachexecutive officer’s base salary are based upon individual performance and salaryincreases paid by the Company’s competitors and other companies of similar sizeand scope. The Primary Committee of the Compensation Committee sets the basesalaries of the Chairman of the Board of Directors and makes a recommendationto the Board regarding the base salary of the President and Chief ExecutiveOfficer, and the committee reviews the salaries of the other corporate officerswho are members of the senior management team and makes recommendations to theBoard.

 

*Annual IncentiveCompensation.**  *There was adiscretionary executive bonus plan for fiscal 2005 designed to providefinancial rewards to the participants based on company performance for fiscal2005. No bonuses were awarded under the plan since the Company did not meet itsminimum financial goals other than a minimum guaranteed bonus paid toMs. Newman as part of her contractual agreement.

 

*Long-Term IncentiveCompensation.**  *Optiongrants are intended to align the interests of each executive officer with thoseof the Company’s stockholders and to provide each individual with an incentiveto manage the Company from the perspective of an owner with an equity stake inthe business. The Compensation Committee has the discretion to set the optionexercise price (not less than 100% of the fair market value of the stock on thegrant date for an Incentive Option and not less than 85% of such fair marketvalue for a Non-Statutory Option) and the vesting schedule for optiongrants. The Compensation Committee determines the amount of the option grantaccording to each executive’s position within the Company and sets a level itconsiders appropriate to create a meaningful opportunity for stock ownership.In addition, the Compensation Committee takes into account an individual’slevel of responsibility and opportunity to influence the Company’s financialresults, comparable awards made to individuals in similar positions within theindustry, and the number of unvested options held by each individual at thetime of the new grant. The relative weight given to each of these factorsvaries among individuals and is at the Compensation Committee’s discretion.

 

Eachoption grant allows the officer to acquire shares of the Company’s Common Stockat a fixed price per share (typically the closing market price on the date ofgrant) over a specified period of time (up to ten years). The options generallyvest in installments over a four-year period, contingent upon the

 

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executiveofficer’s continued employment with the Company. The options generally becomeexercisable with respect to 25% of the option shares upon the optionee’scompletion of one year of service measured from the vesting commencement dateand the balance in 36 successive monthly installments upon the optionee’scompletion of each month of service over the 36-month period measured from thefirst anniversary of the vesting commencement date. Accordingly, the optionwill provide a return to the executive officer only if the executive officerremains employed by the Company for one or more years during which the optionvests, and then only if the market price of the underlying shares appreciatesover the option term.

 

*Tax Limitation.**  *As a result of federal tax legislationenacted in 1993, a publicly-held company such as Westaff, Inc. will not beallowed a federal income tax deduction for compensation paid to the executiveofficers named in the Summary Compensation Table to the extent thatcompensation exceeds $1,000,000 per officer unless it qualifies for anexemption. The compensation paid to the Company’s executive officers for fiscal2005 did not exceed the $1,000,000 limit per officer, nor is the compensationto be paid to the Company’s executive officers for fiscal 2006 expected toreach that level. Nevertheless, if the compensation payable to any of theCompany executive officers were to reach the $1,000,000 limitation in fiscal2006 or future fiscal years, the Company will continue to enjoy an exemptionbecause the Plan was amended and restated with shareholder approval as of the2000 Annual Meeting of Stockholders held on June 20, 2000, with respect tooption grants, stock appreciation rights or direct stock issuances that areintended to qualify as performance-based compensation to any covered employeeunder Section 162(m)(3) of the Internal Revenue Code of 1986, asamended. Unless otherwise required by law, the Compensation Committee thereforewill not be required to limit or restructure the elements of compensationpayable to the Company’s executive officers in the foreseeable future.

 

**Compensationof the Chief Executive Officer**

** **

MsNewman’s employment agreement established her initial annual base salary of$450,000 as President and Chief Executive Officer commencing on March 16,2005, based in part on external salary data of temporary staffing servicecompanies within a similar geographical area and with small to medium capitalization.She was granted an aggregate of 200,000 option shares and awarded 20,000restricted stock shares as part of her original compensation package. Inaddition to her base salary, Ms. Newman is eligible for an Incentive BonusCompensation targeted at 40% of her base salary in an amount to be determinedat the sole discretion of the Compensation Committee of the Board. Heragreement establishes a maximum bonus level of sixty percent (60%) of her BaseSalary each fiscal year with no minimum bonus level. Ms. Newman’s IncentiveBonus Compensation is based on her satisfaction of objective factors andperformance criteria established by the Compensation Committee. She received aone-time bonus for fiscal 2005 based on a guaranteed minimum payment of $90,000which was negotiated in her Employment Agreement. Her actual compensation forfiscal 2005 was not based on company performance since the Company did not meetits minimum financial goals.

 

TheCompensation Committee reviews Ms. Newman’s base salary at least once eachyear to make appropriate adjustments as they determine in their discretion.

 
|     |     | COMPENSATION  COMMITTEE               |
|----------|----------|---------------------------------------|
|     |     |                                  |
|     |     | Janet  M. Brady,                      |
| * * | * * | *Chairman  of Compensation Committee* |
| * * | * * | * *                              |
|     |     | Ronald  D. Stevens,                   |
| * * | * * | *Member  of Compensation Committee*   |
| * * | * * | * *                              |
|     |     | W.  Robert Stover,                    |
| * * | * * | *Member  of Compensation Committee*   |

 

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**COMPARISONOF STOCKHOLDER RETURN**

** **

Thegraph depicted below reflects a comparison of the cumulative total return(change in stock price plus reinvestment dividends) of the Company’s CommonStock with the cumulative total returns of the Standard and Poor’s 500 Indexand peer issuers in the temporary staffing industry (the “Peer Group Index”).The selected peer group is composed of companies which are common competitorsof a similar or greater market capitalization. The graph covers the period fromOctober 28, 2000, through the last trading day of fiscal 2005.

 

Thegraph assumes that $100 was invested on October 28, 2000, in the Company’sCommon Stock and in each index and that all dividends were reinvested.

 

**ComparisonOf Cumulative Total Return AmongWestaff, S&P 500 Index And Peer Group Index**

** **

**CumulativeReturn**

** **

** **
| ** **  | ** ** | **10/28/00** | ** ** | **11/03/01** | ** ** | **11/02/02** | ** ** | **11/01/03** | ** ** | **10/30/04** | ** ** | **10/29/2005** | ** ** |
|-------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|----------------|------------|
| S&P 500 |       | 100.00       |       | 79.77        |       | 66.10        |       | 77.09        |       | 82.92        |       | 87.93          |       |
| Peer Group  |       | 100.00       |       | 72.95        |       | 85.06        |       | 108.51       |       | 106.46       |       | 119.80         |       |
| Westaff     |       | 100.00       |       | 53.82        |       | 58.47        |       | 67.20        |       | 91.05        |       | 135.27         |       |

 

TheCompany’s Common Stock was first traded publicly on April 30, 1996. Thegraph depicts cumulative returns calculated on an annual basis on $100 investedin Westaff stock, the S&P 500 Index and the Peer Group Index comparingKelly Services Inc., Spherion Corporation (formerly InterimServices, Inc.), Manpower Inc. and RemedyTemp, Inc.

 

Stockholderreturns over the indicated period should not be considered indicative of futurestockholder returns.

 

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**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.**

** **

Thefollowing table sets forth certain information regarding the beneficialownership of our Common Stock for (i) all persons who are known to us tobe beneficial owners of five percent or more of the outstanding shares of ourCommon Stock, (ii) each of our current directors and nominees,(iii) our current Chief Executive Officer and the four other executiveofficers named in the Summary Compensation Table below, and (iv) all ofour current executive officers and directors as a group. Unless otherwiseindicated, each of the stockholders has sole voting and investment power withrespect to the shares beneficially owned, subject to community property laws,where applicable. Unless otherwise noted, the address of each person identifiedbelow is c/o Westaff, Inc., 298 N. Wiget Lane, Walnut Creek, California94598. The share information set forth in the table below is as ofJanuary 31, 2006.

 
| **Name**                                                                      | ** ** | **Number of  Shares(#)(1)** | ** ** | **Percent(%)(2)** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|
| Ironwood Capital  Management LLC(3)                                           |       | 891,766                          |       | 5.44              | %          |
| 21 Custom House  Street Suite 240 Boston, MA 02019                       |       |                             |       |              |       |
| W. Robert  Stover(4)                                                          |       | 6,624,821                        |       | 40.45             | %          |
| Jack D.  Samuelson(5)                                                         |       | 47,250                           |       | *                 |       |
| Ronald D.  Stevens(6)                                                         |       | 9,000                            |       | *                 |       |
| Janet M.  Brady(7)                                                            |       | 9,000                            |       | *                 |       |
| Patricia M.  Newman(8)                                                        |       | 33,103                           |       | *                 |       |
| Dirk A.  Sodestrom(9)                                                         |       | 114,602                          |       | *                 |       |
| Stephen J.  Russo(10)                                                         |       | 10,937                           |       | *                 |       |
| David P.  Wilson(11)                                                          |       | 24,813                           |       | *                 |       |
| Christa C.  Leonard(12)                                                       |       | 23,437                           |       | *                 |       |
| All current  executive officers and directors as a group (9 persons)(13) |       | 6,938,939                        |       | 42.32             | %          |

 

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*Lessthan one percent

 

(1)             To theCompany’s knowledge, except as indicated in the footnotes to this table andsubject to applicable community property laws, each of the persons named inthis table has sole voting and investment power with respect to all shares ofCommon Stock indicated opposite such person’s name.

 

(2)             Based on 16,395,568shares of Common Stock outstanding at January 31, 2006. Shares of CommonStock subject to options, warrants and convertible notes and other purchaserights currently exercisable or convertible, or exercisable or convertiblewithin 60 days of January 31, 2006, are deemed outstanding forcomputing the percentage of the person or entity holding such securities butare not deemed outstanding for computing the percentage of any other person orentity.

 

(3)             Securityownership information for the beneficial ownership is taken from theForm 13F filed with the SEC on February 7, 2006.

 

(4)             Includes2,607,018 shares of Common Stock held by W. Robert Stover and Joan C. Stover asCo-Trustees of the Stover Revocable Trust dated 11/16/88, as amended, thebeneficial ownership of which may be attributable to each ofMr. Stover and Mrs. Stover. Includes 3,783,164 shares of Common Stockcontributed to the Stover 1999 Charitable Remainder Unitrust dated 4/21/99 ofwhich Mr. Stover is Co-Trustee. Includes 234,637 shares of Common Stockowned by the Stover Foundation, a California nonprofit religious corporation(the “Foundation”).

 

(5)             Includesunexercised options to purchase 26,250 shares of Common Stock beneficiallyowned by Mr. Samuelson under the 1996 Stock Option/Stock Issuance Plan.

 

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(6)             Includesunexercised options to purchase 9,000 shares of Common Stock beneficially ownedby Mr. Stevens under the 1996 Stock Option/Stock Issuance Plan.

 

(7)             Includesunexercised options to purchase 9,000 shares of Common Stock beneficially ownedby Ms. Brady under the 1996 Stock Option/Stock Issuance Plan.

 

(8)             Includesunexercised options to purchase 27,395 shares of Common Stock beneficiallyowned by Ms. Newman under the 1996 Stock Option/Stock Issuance Plan.

 

(9)             Includesunexercised options to purchase 90,541 shares of Common Stock beneficiallyowned by Mr. Sodestrom under the 1996 Stock Option/Stock Issuance Plan.

 

(10)       Includesunexercised options to purchase 10,937 shares of Common Stock beneficiallyowned by Mr. Russo under the 1996 Stock Option/Stock Issuance Plan.

 

(11)       Includesunexercised options to purchase 20,750 shares of Common Stock beneficiallyowned by Mr. Wilson under the 1996 Stock Option/Stock Issuance Plan.

 

(12)       Includesunexercised options to purchase 23,437 shares of Common Stock beneficiallyowned by Ms. Leonard under the 1996 Stock Option/Stock Issuance Plan.

 

(13)       Includesunexercised options to purchase 217,310 shares of Common Stock under the 1996Stock Option/Stock Issuance Plan.

 

**ITEM13.**   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

** **

TheCompany’s wholly-owned subsidiary known as Westaff (USA), Inc., aCalifornia corporation (“Westaff (USA)”) executed an unsecured subordinatedpromissory note dated April 1, 2002, payable to W. Robert Stover, itsprincipal stockholder and Chairman of the Board of Directors, in the amount of$2,000,000. The initial term of the note was one year, with an interest rate of12% per annum, payable monthly on the last business day of each calendar month.On May 17, 2002, the note was amended and restated to extend the maturitydate to August 18, 2007. Additionally, the interest rate and paymentschedule were amended to a rate equal to the US Index Rate as calculatedunder the Company’s Multicurrency Credit Agreement with General ElectricCapital Corporation (“Credit Agreement”), plus seven percent, compoundedmonthly and payable 60 calendar days after the end of each of the Company’sfiscal quarters. The interest rate in effect on October 29, 2005, was 13.75%.Payment of interest is contingent on the Company meeting minimum availabilityrequirements under its credit facilities. Additionally, payments of principalor interest are prohibited in the event of any default under the creditfacilities. The interest paid in fiscal 2005 was $246,421.

 

Anyfuture transactions between the Company and its officers, directors, andaffiliates will be on terms no less favorable to the Company than can beobtained from unaffiliated third parties. Such transactions with such personswill be subject to approval by the Company’s Audit Committee.

 

**ITEM14.**   PRINCIPAL ACCOUNTANT FEES AND SERVICES.

** **

*Audit Committee.*   TheAudit Committee’s duties include reviewing internal financial information,reviewing our internal controls, reviewing our internal audit plans andprograms, reviewing with our independent accountants the results of all auditsupon their completion, overseeing the quarterly unaudited reporting process andtaking such other action as may be necessary to assure the adequacy andintegrity of all financial information distributed by us. The Audit Committeeis also directly responsible for the appointment, compensation, retention andoversight of the work of the Company’s independent auditors, including theresolution of disagreements between management and the auditors regardingfinancial reporting. Additionally, the Audit Committee must review and approveall related party transactions that are required to be disclosed pursuant toItem 404 of Regulation S-K.

 

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Thecurrent members of the Audit Committee are Messrs. Stevens and Samuelson,and Ms. Brady, and Mr. Stevens is the Chairman. The Audit Committeeis required to have at least three members, all of whom must be “independentdirectors” as defined in the NASDAQ listing standards. The Board of Directorshas determined that it has an “audit committee financial expert,” as defined inItem 401(h)(2) of Regulation S-K serving on the Audit Committee,Ronald D. Stevens, and that Mr. Stevens and each of the other AuditCommittee members is an “independent director” as defined inRule 4200(a)(15) of the NASDAQ listing standards. The Board has adopted awritten charter for the Audit Committee, which was amended and restated afterthe end of fiscal 2003. A copy of the amended and restated Audit Committee charteris available on the Company’s website at http://www.westaff.com.

 

**INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

TheBoard of Directors selected Deloitte & Touche LLP as its independentregistered public accounting firm effective as of May 31, 2002. The AuditCommittee of the Board of Directors has appointed Deloitte & ToucheLLP as the Company’s independent registered public accounting firm to audit theconsolidated financial statements of the Company for fiscal 2006. Regardless ofthis appointment, the Audit Committee may direct the appointment of adifferent independent auditor at any time during the year if the AuditCommittee determines, in its discretion, that such a change would be in ourbest interests. It is anticipated that a representative of Deloitte &Touche LLP will be present at the Annual Meeting to respond to appropriatequestions or to make other statements such representative deems appropriate.

 

**FeesPaid to Independent Registered Public Accounting Firm**

** **

**AuditFees**

** **

Aggregatefees paid to Deloitte & Touche LLP, the member firms of DeloitteTouche Tohmatsu, and their respective affiliates (collectively the “DeloitteEntities”) for the audit of the annual consolidated financial statementsincluded in the Company’s Annual Report on Form 10-K and for the reviewsof the consolidated financial statements included in the Company’s Forms 10-Qfor the quarters included in the fiscal years ended October 29, 2005 andOctober 30, 2004, were $436,000 and $398,000, respectively.

 

**Audit-relatedFees**

** **

Aggregatefees paid to the Deloitte Entities for audit related services for the fiscalyears ended October 29, 2005 and October 30, 2004 were $14,000 and$12,000, respectively, principally for services rendered in connection withfranchise offering circulars.

 

**TaxFees**

** **

Aggregatefees paid to the Deloitte Entities associated with tax compliance and taxconsultation were $36,000 and $52,000, respectively, for the years endedOctober 29, 2005, and October 30, 2004.

 

**AllOther Fees**

** **

Feespaid to the Deloitte Entities for other services for the fiscal year endedOctober 29, 2005, were $3,700 for services rendered with respect to thesale of the Company’s Norway and Denmark operations. Fees paid for otherservices for the fiscal year ended October 30, 2004 were $10,000 for aseminar on compliance with Section 404 of the Sarbanes-Oxley Act of 2002,$11,000 for services rendered with respect to value-added taxes for Westaff(U.K.) Limited and $5,000 for services rendered in connection with theemployment cessation of the Company’s managing director in Denmark.

 

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**AuditCommittee Pre-Approval Policies and Procedures**

** **

Inaccordance with the Securities and Exchange Commission’s rules requiringthat the Audit Committee pre-approve all audit and non-audit services providedby the Company’s independent auditor, the Audit Committee has adopted a formalpolicy on auditor independence requiring the approval by the Audit Committee ofall professional services rendered by the Company’s independent registeredpublic accounting firm prior to the commencement of the specified services. The Audit Committee may delegate to one ormore committee members the authority to grant pre-approvals. The decision ofany committee member to whom authority is delegated shall be presented to thecommittee at each of its scheduled committee meetings.

 

TheAudit Committee approved all services performed by the Deloitte Entities infiscal 2005 in accordance with the Company’s formal policy on auditor independence.

 

**ITEM15.**   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

** **

(a)             The following documents have been filed as a part of this AmendmentNo. 2.

 
| 31.1   |   | Certification of  the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|--------|--------|----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                           |
| 31.2   |   | Certification of  the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Amendment on Form 10-K/Ato be signed on behalf of the undersigned, thereunto duly authorized.

 
|     |     | WESTAFF, Inc. |
|----------|----------|--------------------|
|     |     |               |
|     |     | By:                |   | /s/ Patricia M. Newman |   |
|     |     |               |   | Patricia M. Newman |
| * * | * * | * *           | * * | *President and Chief Executive Officer* |
|     |     |               |   | Date: March 7, 2006 |

 

**POWEROF ATTORNEY**

** **

KNOWALL PERSONS BY THESE PRESENTS:

 

Thatthe undersigned officers and directors of Westaff, Inc., a Delawarecorporation, do hereby constitute and appoint Patricia M. Newman 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 onForm 10-K and to file the same, with exhibits thereto and other documentsin connection therewith, with the Securities and Exchange Commission, herebyratifying and confirming all that each of said attorney-in-fact or hissubstitute or substitutes may do or cause to be done by virtue hereof.

 

INWITNESS WHEREOF, each of the undersigned has executed this Power of Attorney asof the date indicated.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 

| **Signature**          | ** ** | **Title**                                         | ** ** | **Date**           | ** ** |
|------------------------|------------|---------------------------------------------------|------------|--------------------|------------|
| ** **             | ** ** | ** **                                        | ** ** | ** **         | ** ** |
| /s/ W. ROBERT STOVER   |       | Chairman of the Board                             |       | March 7, 2006 |       |
| W. Robert Stover       |       |                                              |       |               |       |
|                   |       |                                              |       |               |       |
| /s/ Patricia M. Newman |       | President and Chief Executive Officer and         |       | March 7, 2006 |       |
| Patricia M. Newman     |       | Director (Principal Executive Officer)            |       |               |       |
|                   |       |                                              |       |               |       |
| /s/ Dirk A. Sodestrom  |       | Senior Vice President and Chief Financial Officer |       | March 7, 2006 |       |
| Dirk A. Sodestrom      |       | (Principal Financial Officer)                     |       |               |       |
|                   |       |                                              |       |               |       |
| /s/ Jack D. Samuelson  |       | Director                                          |       | March 7, 2006 |       |
| Jack D. Samuelson      |       |                                              |       |               |       |
|                   |       |                                              |       |               |       |
| /s/ Ronald D. Stevens  |       | Director                                          |       | March 7, 2006 |       |
| Ronald D. Stevens      |       |                                              |       |               |       |
|                   |       |                                              |       |               |       |
| /s/ JANET M. BRADY     |       | Director                                          |       | March 7, 2006 |       |
| Janet M. Brady         |       |                                              |       |               |       |

 

| *By:   |     | /s/ Dirk A. Sodestrom |     |     |
|--------|----------|-----------------------|----------|----------|
|   |     | Dirk A. Sodestrom     |     |     |
|   | * * | Attorney-in-Fact      | * * | * * |

 

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