<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549


                                    FORM 10-Q

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

                  For the quarterly period ended JULY 10, 1999

                         Commission file number 0-24990


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

           DELAWARE                                         94-1266151
   (State or other jurisdiction                           (I.R.S.employer
 of incorporation or organization)                     identification number)


                                 301 LENNON LANE
                       WALNUT CREEK, CALIFORNIA 94598-2453
                                 (925) 930-5300
               (Address, including zip code, and telephone number,
        including area code, of registrant's principal executive offices)



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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

          CLASS                                OUTSTANDING AT AUGUST 24, 1999
      -------------                            ------------------------------
Common Stock, $.01 par value                         15,870,327 shares

<PAGE>

                         WESTAFF, INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
<S>                                                                                                           <C>
PART I.  FINANCIAL INFORMATION

Item 1.       Financial Statements

                  Condensed Consolidated Balance Sheets -
                      July 10, 1999 and October 31, 1998                                                       3

                  Condensed Consolidated Statements of Operations -
                      12 and 36 weeks ended July 10, 1999 and July 11, 1998                                    4

                  Condensed Consolidated Statements of Cash Flows -
                      36 weeks ended July 10, 1999 and July 11, 1998                                           5

                  Notes to Condensed Consolidated Financial Statements                                         6

Item 2.       Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                                                   10

PART II. OTHER INFORMATION

Item 1.       Legal Proceedings                                                                               22

Item 2.       Changes in Securities                                                                           22

Item 3.       Defaults upon Senior Securities                                                                 22

Item 4.       Submission of Matters to a Vote of Security Holders                                             22

Item 5.       Other Information                                                                               22

Item 6.       Exhibits and Reports on Form 8-K                                                                22

Signatures                                                                                                    23
</TABLE>

<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WESTAFF, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                               JULY 10,            OCTOBER 31,
                                                                                                 1999                 1998
                                                                                         -------------------   ------------------
ASSETS                                                                                      (Unaudited)
<S>                                                                                      <C>                   <C>
Current assets:
     Cash and cash equivalents                                                           $            4,198    $           4,651
     Trade accounts receivable, less allowance for doubtful
        accounts of $1,069 and $786                                                                  82,727               87,552
     Due from licensees                                                                               4,338                3,235
     Deferred income taxes                                                                           12,528                6,725
     Net assets of discontinued operations                                                           14,735               23,753
     Other current assets                                                                             4,694                5,705
                                                                                         -------------------   ------------------
        Total current assets                                                                        123,220              131,621

Property, plant and equipment, net                                                                   22,827               21,320
Deferred income taxes                                                                                 5,075                3,981
Intangible assets, net                                                                               37,774               37,678
Other long-term assets                                                                                2,616                2,545
                                                                                         -------------------   ------------------
                                                                                         $          191,512    $         197,145
                                                                                         -------------------   ------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Short-term borrowings                                                               $           19,800    $          15,600
     Current portion of loans payable                                                                 3,100                3,851
     Current portion of note payable to related party                                                                        972
     Accounts payable and accrued expenses                                                           40,731               52,787
     Income taxes payable                                                                             2,432                  709
                                                                                         -------------------   ------------------
        Total current liabilities                                                                    66,063               73,919

Loans payable                                                                                        42,642               44,708
Other long-term liabilities                                                                          10,935               11,035
                                                                                         -------------------   ------------------
        Total liabilities                                                                           119,640              129,662
                                                                                         -------------------   ------------------

Commitments and contingencies

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 July 10, 1999 and October 31, 1998                                                    159                  159
     Additional paid-in-capital                                                                      37,382               37,341
     Retained earnings                                                                               36,480               32,679
     Cumulative currency translation                                                                   (794)                (774)
                                                                                         -------------------   ------------------
                                                                                                     73,227               69,405
     Less treasury stock at cost, 141 shares at July 10, 1999 and
        108 shares at October 31, 1998                                                                1,355                1,922
                                                                                         -------------------   ------------------
        Total stockholders' equity                                                                   71,872               67,483
                                                                                         -------------------   ------------------
                                                                                         $          191,512    $         197,145
                                                                                         -------------------   ------------------
</TABLE>

      See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>

WESTAFF, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                    12 WEEKS ENDED                    36 WEEKS ENDED
                                                            ------------------------------   ------------------------------

                                                                JULY 10,        JULY 11,          JULY 10,         JULY 11,
                                                                 1999             1998              1999             1998
                                                            --------------  --------------   ---------------  --------------
<S>                                                         <C>             <C>              <C>              <C>
Sales of services                                           $     149,254   $     133,651    $      427,588   $     388,642
License fees                                                          790             558             2,187           1,153
                                                            --------------  --------------   ---------------  --------------

Total sales of services and license fees                          150,044         134,209           429,775         389,795

Costs of services                                                 117,853         105,569           338,683         308,187
                                                            --------------  --------------   ---------------  --------------

Gross profit                                                       32,191          28,640            91,092          81,608

Franchise agents' share of gross profit                             4,045           3,657            11,045          11,255
Selling and administrative expenses                                20,123          17,861            58,767          52,425
Depreciation and amortization                                       1,849           1,607             5,539           4,416
                                                            --------------  --------------   ---------------  --------------

Operating income from continuing operations                         6,174           5,515            15,741          13,512

Interest expense                                                      502             289             1,570             892
Interest income                                                       (64)            (98)             (242)           (261)
                                                            --------------  --------------   ---------------  --------------

Income from continuing operations before income taxes               5,736           5,324            14,413          12,881
Provision for income taxes                                          2,222           2,130             5,693           5,152
                                                            --------------  --------------   ---------------  --------------

Income from continuing operations                                   3,514           3,194             8,720           7,729
                                                            --------------  --------------   ---------------  --------------

Discontinued operations:
Loss from discontinued operations, net of income taxes                               (606)                             (205)
Estimated loss on disposal, net of income taxes                    (2,820)                           (4,135)
                                                            --------------  --------------   ---------------  --------------
Total discontinued operations, net of income taxes                 (2,820)           (606)           (4,135)           (205)
                                                            --------------  --------------   ---------------  --------------

Net income                                                  $         694   $       2,588    $        4,585   $       7,524
                                                            --------------  --------------   ---------------  --------------
Earnings (loss) per share:

     Continuing operations:
        Basic                                               $        0.22   $        0.21    $         0.55   $        0.50
                                                            --------------  --------------   ---------------  --------------
        Diluted                                             $        0.22   $        0.20    $         0.55   $        0.49
                                                            --------------  --------------   ---------------  --------------
     Discontinued operations:
        Basic                                               $       (0.18)  $       (0.04)   $        (0.26)  $       (0.01)
                                                            --------------  --------------   ---------------  --------------
        Diluted                                             $       (0.18)  $       (0.04)   $        (0.26)  $       (0.01)
                                                            --------------  --------------   ---------------  --------------
     Net income:
        Basic                                               $        0.04   $        0.17    $         0.29   $        0.49
                                                            --------------  --------------   ---------------  --------------
        Diluted                                             $        0.04   $        0.16    $         0.29   $        0.48
                                                            --------------  --------------   ---------------  --------------

Weighted average shares outstanding - basic                        15,843          15,498            15,863         15,454
                                                            --------------  --------------   ---------------  --------------
Weighted average shares outstanding - diluted                      15,844          15,793            15,864         15,688
                                                            --------------  --------------   ---------------  --------------
</TABLE>

      See accompanying notes to condensed consolidated financial statements.

                                      4
<PAGE>
WESTAFF, INC.

CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                              36 WEEKS ENDED
                                                                   ------------------------------------
                                                                       JULY 10,            JULY 11,
                                                                         1999                1998
                                                                   -----------------   ----------------
<C>                                                                <S>                 <S>

CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                     $          4,585    $         7,524
    Adjustments to reconcile net income to net cash
     from operating activities:
      Depreciation                                                            3,832              3,700
      Amortization of intangible assets                                       1,707              1,310
      Provision for losses on doubtful accounts                               1,446                564
      Deferred income taxes                                                  (6,887)            (3,417)
      Other non-cash charges                                                                       153
      Changes in assets and liabilities:
        Trade accounts receivable                                             3,226             (2,934)
        Due from licensees                                                   (1,104)            (1,320)
        Other assets                                                            755               (649)
        Accounts payable and accrued expenses                               (11,792)             1,291
        Income taxes payable                                                  1,785             (1,198)
        Other long-term liabilities                                             (98)                18
                                                                   -----------------

Net cash used in continuing operations                                       (2,545)
Net cash provided by discontinued operations                                  8,363
                                                                   -----------------   ----------------

Net cash provided by operating activities                                     5,818              5,042
                                                                   -----------------   ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Capital expenditures                                                     (5,588)            (5,917)
    Payments for intangibles and other investments                           (1,094)            (8,251)
    Investing activities of discontinued operations
      Capital expenditures                                                      (48)
      Proceeds from sales of assets                                             634
    Other, net                                                                   75               (372)
                                                                   -----------------   ----------------

Net cash used in investing activities                                        (6,021)           (14,540)
                                                                   -----------------   ----------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net borrowings (repayments) under line of credit agreements               4,200            (16,700)
    Proceeds from issuance of loans payable                                                     50,900
    Principal payments on loans payable                                      (3,044)           (19,791)
    Repayment of note to related party                                         (972)              (973)
    Issuance of common stock                                                    458              1,455
    Repurchase of common stock                                                 (675)            (2,794)
                                                                   -----------------   ----------------

Net cash (used in) provided by financing activities                             (33)            12,097
                                                                   -----------------   ----------------

Effect of exchange rate on cash                                                (217)               (74)
                                                                   -----------------   ----------------

Net change in cash and cash equivalents                                        (453)             2,525
Cash and cash equivalents at beginning of period                              4,651              4,796
                                                                   -----------------   ----------------
Cash and cash equivalents at end of period                         $          4,198    $         7,321
                                                                   -----------------   ----------------

</TABLE>

   See accompanying notes to condensed consolidated financial statements.


                                       5

<PAGE>

WESTAFF, INC.

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

1.   BASIS OF PRESENTATION

     The accompanying condensed consolidated financial statements of Westaff,
     Inc. and its domestic and foreign subsidiaries (together, the Company), as
     of and for the 12 and 36 week periods ended July 10, 1999 and July 11, 1998
     are unaudited. Material intercompany accounts and transactions have been
     eliminated.

     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. As a result of this decision,
     the medical operations are classified as discontinued operations and
     presented as such in these Condensed Consolidated Balance Sheets and
     Condensed Consolidated Statements of Operations, and in the Condensed
     Consolidated Statement of Cash Flows for the 36 weeks ended July 10, 1999.

     In connection with the preparation of the Company's audited financial
     statements for its fiscal year ended October 31, 1998 and subsequent to the
     filing with the Securities and Exchange Commission (the Commission) of its
     Quarterly Report on Form 10-Q for the third quarter ended July 11, 1998,
     the Company became aware of certain procedural and clerical errors that
     occurred during the third quarter of fiscal 1998 in connection with the
     calculation of interim estimated 1998 Medicare revenues for its medical
     operations. The errors resulted in an overstatement of Medicare revenues
     for the third quarter of fiscal 1998 of $941, a resulting overstatement of
     income taxes of $376, an overstatement of net income of $565 and an
     overstatement of basic and diluted earnings per share of $0.03 and $0.04,
     respectively. Restated interim financial statements for the fiscal quarter
     ended July 11, 1998 were filed with the Commission on January 29, 1999. The
     net effect of these errors are included in "Income from discontinued
     operations, net of income taxes" and in basic and diluted loss per share
     from discontinued operations in the Condensed Consolidated Statements of
     Operations for the 12 and 36 weeks ended July 11, 1998.

     The condensed consolidated financial statements, in the opinion of
     management, reflect all adjustments, which are of a normal recurring
     nature, necessary for a fair presentation of the financial position,
     results of operations and cash flows for the periods presented.

     Certain financial information which is normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles, but which is not required for interim reporting purposes, has
     been condensed or omitted. The accompanying condensed consolidated
     financial statements should be read in conjunction with the financial
     statements and notes thereto included in the Company's Annual Report on
     Form 10-K for the fiscal year ended October 31, 1998.

     The Company's fiscal year is a fifty-two or fifty-three week period ending
     the Saturday nearest the end of October. For interim reporting purposes,
     the first three fiscal quarters comprise twelve weeks each while the fourth
     fiscal quarter consists of sixteen or seventeen

                                      6
<PAGE>
WESTAFF, INC.

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

     weeks. The results of operations for the 12 and 36 week periods ended July
     10, 1999 are not necessarily indicative of the results to be expected for
     the full fiscal year or for any future period.

2.   DISCONTINUED OPERATIONS

     In November 1998, the Company announced its decision to sell Western
     Medical and it has been sold, as more fully described below. Western
     Medical provided temporary health care personnel to serve an array of home
     care and institutional health care needs, including Medicare patients,
     through a network of geographically dispersed company-owned, franchise
     agent and license offices. During the fourth quarter of fiscal 1998, the
     Company recorded an after-tax charge of $3,480 on the planned disposal of
     Western Medical. This after-tax charge included $2,500 for the estimated
     write-down of assets to estimated net realizable value, $240 of estimated
     costs to be incurred in selling the operation and $740 of estimated
     operating losses to be incurred during the disposal period.

     During the first and second quarters of fiscal 1999 the Company completed
     the sale of certain of its franchise agent and company-owned medical
     offices and also entered into a termination agreement with one of its
     medical licensees.

     On May 15, 1999, the company signed a definitive agreement for the sale of
     the remaining medical business. As a result of the agreement, the Company
     re-evaluated its estimated loss on disposal of the discontinued medical
     business and during the second quarter of fiscal 1999 recorded an
     additional estimated after-tax loss of $1,315 or $0.08 per share; however,
     the sale did not close as scheduled. Subsequently, the Company entered into
     a separate agreement with another entity to purchase the remaining medical
     business. This sale closed on August 9, 1999. Under the terms of the new
     agreement, the Company will retain the trade and Medicare accounts
     receivable and due from licensee balances. During the third quarter, the
     Company recorded an additional estimated after-tax loss related to the
     medical operations of $2,820 or $0.18 per diluted share. The increased loss
     primarily reflects additional operating losses resulting from the extended
     period required to close the sale, a reduction in the estimated proceeds
     from the sale and additional reserves for trade and Medicare accounts
     receivable and due from licensee balances.

     Revenues of the medical operations were $10,017 and $14,816 for the 12
     weeks ended July 10, 1999 and July 11, 1998, respectively, and $33,972 and
     $42,950 for the 36 weeks ended July 10, 1999 and July 11, 1998,
     respectively. Medical operations' revenues are not included in sales of
     services and license fees as reported in the Condensed Consolidated
     Statements of Operations. Summarized balance sheet data for discontinued
     operations, which includes the trade and Medicare accounts receivable and
     due from licensee balances to be retained by the Company, is as follows:

                                      7
<PAGE>

WESTAFF, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  JULY 10,          OCTOBER 31,
                                                                    1999               1998
                                                              ----------------   -----------------
                                                                 (Unaudited)
<S>                                                           <C>                <C>
Current assets (primarily receivables)                        $        17,111    $         21,675
Property, plant and equipment, net                                      1,725               2,085
Intangible assets, net                                                  3,730               5,712
Other assets                                                              291                 285
Current liabilities                                                    (8,042)             (5,930)
Noncurrent liabilities                                                    (80)                (74)
                                                              ----------------   -----------------
Net assets of discontinued operations                         $        14,735    $         23,753
                                                              ----------------   -----------------
</TABLE>

3.   EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                  12 WEEKS ENDED                       36 WEEKS ENDED
                                                          --------------------------------     --------------------------------
                                                              JULY 10,          JULY 11,           JULY 10.          JULY 11,
                                                               1999              1998               1999              1998
                                                          --------------    --------------     --------------    --------------
<S>                                                       <C>               <C>                <C>               <C>
Income from continuing operations                         $       3,514     $       3,194      $       8,720     $       7,729
                                                          --------------    --------------     --------------    --------------

Denominator for basic earnings per share -
       weighted average shares                                   15,843            15,498             15,863            15,454

Effect of dilutive securities:
       Stock options                                                  1               295                  1               234
                                                          --------------    --------------     --------------    --------------
Denominator for diluted earnings per share - adjusted
       weighted average shares and assumed conversions           15,844            15,793             15,864            15,688
                                                          ==============    ==============     ==============    ==============
Basic earnings per share                                  $        0.22     $        0.21      $        0.55     $        0.50
                                                          ==============    ==============     ==============    ==============
Diluted earnings per share                                $        0.22     $        0.20      $        0.55     $        0.49
                                                          ==============    ==============     ==============    ==============

Anti-dilutive weighted shares excluded from diluted
       earnings per share                                           740                 -                747                 3
                                                          --------------    --------------     --------------    --------------
</TABLE>

     Anti-dilutive 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 anti-dilutive.

                                      8
<PAGE>

WESTAFF, INC.

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

4.   COMPREHENSIVE INCOME

     Comprehensive income consists of the following:

<TABLE>
<CAPTION>
                                       12 WEEKS ENDED             36 WEEKS ENDED
                                    ---------------------      ----------------------
                                    JULY 10,     JULY 11,      JULY 10,      JULY 11,
                                      1999         1998          1999          1998
                                    --------     --------      --------      --------
<S>                                 <C>          <C>           <C>           <C>
Net income                          $    694     $ 2,588       $  4,585      $ 7,524
Cumulative currency translation          (68)       (447)           (20)        (932)
                                    --------     -------       --------      -------
Comprehensive income                $    626     $ 2,141       $  4,565      $ 6,592
                                    --------     -------       --------      -------
</TABLE>

5.  OPERATING SEGMENTS

<TABLE>
<CAPTION>
                                                          Domestic         International      Consolidated
                                                      ---------------    ----------------   ----------------
<S>                                                   <C>                <C>                <C>
12 WEEKS ENDED JULY 10, 1999

Sales of services and license fees                       $ 128,553            $ 21,491          $ 150,044
Operating income from continuing operations              $   5,761            $    413          $   6,174

12 WEEKS ENDED JULY 11, 1998

Sales of services and license fees                       $ 116,173            $ 18,036          $ 134,209
Operating income from continuing operations              $   5,112            $    403          $   5,515

36 WEEKS ENDED JULY 10, 1999

Sales of services and license fees                       $ 369,531            $ 60,244          $ 429,775
Operating income from continuing operations              $  14,846            $    895          $  15,741

36 WEEKS ENDED JULY 11, 1998

Sales of services and license fees                       $ 338,705            $ 51,090          $ 389,795
Operating income from continuing operations              $  12,612            $    900          $  13,512

</TABLE>

6.   COMMITMENTS AND CONTINGENCIES

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

                                      9
<PAGE>

WESTAFF, INC.

ITEM 2.  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 Condensed Consolidated Financial Statements
and Notes thereto included herein and with the Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1998.

In addition to historical information, this management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. These forward-looking statements include, but are not
limited to, statements regarding sales, acquisitions, gross margin, workers'
compensation costs, selling and administrative expenses, interest expense,
income taxes, capital expenditures, capital resources, management information
systems, Year 2000 issues and medical operations. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date hereof. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

The forward-looking statements included herein are also subject to a number
of other risks and uncertainties that could cause the Company's actual
results and financial position to differ materially from those anticipated in
the forward-looking statements. Such risks and uncertainties include, but are
not limited to: demand for the Company's services, the competition within its
markets, the loss of a principal customer and the Company's ability to
increase the productivity of its existing offices, to control costs, to
expand operations and the availability of sufficient personnel. There are
also risks and uncertainties relating to the ability of the Company to
complete the disposal of its medical operations in a timely and cost
effective manner. Due to the foregoing factors, it is possible that in some
future period the Company's results of operations may be below the
expectations of public market analysts and investors. In addition, the
Company's results of operations have historically been subject to quarterly
and seasonal fluctuations, with demand for temporary staffing historically
highest in the fourth fiscal quarter, due largely to the planning cycles of
many of the Company's customers, and typically lower in the first fiscal
quarter, due, in part, to national holidays as well as to plant shutdowns
during and after the holiday season. These and other risks and uncertainties
related to the Company's business are described in detail in the "Factors
Affecting Future Operating Results" section of the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1998.

OVERVIEW

The Company provides temporary staffing services primarily in suburban and
rural markets ("secondary markets"), as well as in the downtown areas of
major urban centers ("primary markets"), in the United States and selected
international markets. Through its network of Company-owned, franchise agent
and licensed offices, the Company offers a wide range of

                                      10

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

temporary staffing solutions, including replacement, supplemental and on-site
programs to businesses and government agencies. The Company has over 50 years
of experience in the staffing industry and operates through over 370 business
services offices in 45 states, the District of Columbia and five foreign
countries.

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

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

DISCONTINUED OPERATIONS

In November 1998, the Company announced its plan to sell 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 and, accordingly, has segregated the net assets of
the discontinued operations in the Condensed Consolidated Balance Sheets at
July 10, 1999 and October 31, 1998, the operating results of the discontinued
operations in the Condensed Consolidated Statements of Operations for the 12
and 36 weeks ended July 10, 1999 and July 11, 1998 and the cash flows from
discontinued operations in the Condensed Consolidated Statement of Cash Flows
for the 36 weeks ended July 10, 1999.

During the first and second quarters of fiscal 1999 the Company completed the
sale of certain of its franchise agent and company-owned medical offices and
also entered into a termination agreement with one of its medical licensees.
On May 15, 1999, the Company signed a definitive

                                      11

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

agreement for the sale of the remaining medical business. The sale did not
close as scheduled. Subsequently, the Company entered into a separate
agreement with another entity to purchase the remaining medical business.
This sale closed on August 9, 1999. Under the terms of the new agreement, the
Company will retain the trade and Medicare accounts receivable and due from
licensee balances. During the third quarter, the Company recorded an
additional estimated after-tax loss related to the medical operations of $2.8
million or $0.18 per diluted share. The increased loss primarily reflects
additional operating losses resulting from the extended period required to
close the sale, a reduction in the estimated proceeds from the sale and
additional reserves for trade and Medicare accounts receivable and due from
licensee balances. The amount of the estimated loss on disposal of the
medical operations is based on a number of assumptions including the
estimated costs and write-offs required to collect the remaining accounts
receivable balances, estimated costs to complete the transition of the
business to the buyer, estimated selling expenses and estimated costs to be
incurred in filing and settling all remaining Medicare cost reports. There
can be no assurance that the Company will be able to complete the disposal of
the medical business and collection of the remaining trade and Medicare
accounts receivable and due from licensee balances on terms and costs similar
to those estimated by the Company. Should the actual costs or collections
differ materially from those estimated by management, the Company would
record additional losses (or gains) in future periods.

RESULTS OF CONTINUING OPERATIONS

FISCAL QUARTER ENDED JULY 10, 1999 COMPARED TO FISCAL QUARTER
ENDED JULY 11, 1998

SALES OF SERVICES AND LICENSE FEES. Sales of services increased $15.6
million, or 11.7%, for the fiscal quarter ended July 10, 1999 as compared to
the fiscal quarter ended July 11, 1998. The increase resulted from an 8.4%
increase in billed hours and a 3.0% increase in average billing rates per
hour. Billed hours increased primarily due to acquisitions and internal
growth. Acquisitions accounted for approximately $7.0 million of the increase
in sales of services. Same store sales increased approximately 4.1% for the
third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998.
Same store system revenues, which take into account sales increases for
licensed offices, increased 5.0% for the third quarter of fiscal 1999 as
compared to the third quarter of fiscal 1998. Sales of services for the third
quarter of fiscal 1999 increased 10.5% and 19.2%, respectively, for domestic
business services and international business services as compared to third
quarter of fiscal 1998. Excluding the effect of foreign currency rate
fluctuations, sales of services increased 16.0% for international business
services. The increase in average billing rates primarily reflects changes in
the Company's overall business mix and inflationary factors. The Company
continues to experience a relatively slow rate of internal sales growth as
compared with levels experienced earlier in fiscal 1998. This slowing is
consistent with industry trends and the Company expects sales growth to
continue at current internal growth rates through the remainder of fiscal
1999. Furthermore, the Company has scaled back its near-term acquisition
plans and, accordingly, sales growth from acquisitions will be minimal
throughout the remainder of fiscal 1999.

                                      12

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

License fees are charged to licensed offices based either on a percentage of
sales or of gross profit generated by the licensed offices. License fees
increased $232,000, or 41.6%, for the fiscal quarter ended July 10, 1999 as
compared to the fiscal quarter ended July 11, 1998 primarily as a result of
increased sales and gross profits for licensed offices.

COSTS OF SERVICES. Costs of services include hourly wages of temporary
employees, employer payroll taxes, state unemployment and workers'
compensation insurance and other employee-related costs. Costs of services
increased $12.3 million, or 11.6%, for the fiscal quarter ended July 10, 1999
as compared to the fiscal quarter ended July 11, 1998. Gross margin increased
from 21.3% in the third quarter of fiscal 1998 to 21.5% in the third quarter
of fiscal 1999, primarily due to higher license fees (which have no related
costs of services), lower workers' compensation costs and lower general
liability costs as a percentage of sales of services and license fees. Gross
margin for international business services decreased from 21.8% in the third
quarter of fiscal 1998 to 20.6% for the third quarter of fiscal 1999
primarily due to start-up costs associated with a large service contract in
Australia that began during the third quarter of fiscal 1999. The Company
will continue its efforts to improve gross margin where feasible; however,
within the current business climate, the Company believes that there are
fewer opportunities available to increase gross margin, and, in some areas,
the Company anticipates increased downward pressures on margins due to
competition. There can be no assurance that the Company will be successful in
either increasing or maintaining gross margin.

Workers' compensation costs were 2.9% of payroll for the third quarter of
fiscal 1999 and 3.0% for the third quarter of fiscal 1998. These costs tend
to vary depending upon the mix of business between clerical staffing and
light industrial staffing. The Company currently estimates that the accrual
rates for workers' compensation costs will be in the range of 2.9% to 3.1% of
direct labor for fiscal 1999. These rates will be evaluated throughout the
remainder of fiscal 1999 to ensure that they remain appropriate in light of
the Company's loss trends. There can be no assurance that the Company's
programs to control workers' compensation expenses will be effective or that
loss development trends will not require a charge to costs of services in
future periods to increase workers' compensation accruals.

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 increased
$388,000, or 10.6%, for the third quarter of fiscal 1999 as compared to the
third quarter of fiscal 1998. As a percentage of sales of services and
license fees, franchise agents' share of gross profit was 2.7% during each of
the third quarters of fiscal 1998 and 1999.

SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $2.5 million, or
12.9%, for the third quarter of fiscal 1999 as compared to the third quarter
of fiscal 1998. As a percentage of sales of services and license fees,
selling and administrative expenses increased from 14.5% for the third
quarter of fiscal 1998 to 14.6% for the third quarter of fiscal 1999. The
increase in selling and administrative

                                      13

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

expenses as a percentage of sales of services and license fees was primarily
due to a higher proportion of business generated through licensed offices and
Company-owned offices as compared to franchise agent offices, higher
amortization costs resulting from increased acquisition activity during late
fiscal 1998, higher bad debt write-offs during the fiscal 1999 period and
increased medical plan costs.

Selling and administrative expenses are also impacted by the Company's
management information systems. In the third quarter of fiscal 1998, the
Company finalized its long-term strategic plan for its next generation
management information and support systems. This plan calls for a phased
migration from the Company's existing systems to the new systems over a
24-month period. Total capital expenditures under the plan are expected to be
approximately $12.6 million including costs of hardware, software and
internal and external costs associated with the implementation of the project.

The initial phase to replace the Company's back-office financial reporting
systems was completed during the second quarter of fiscal 1999 resulting in
increased depreciation expenses starting in the second quarter of fiscal
1999. The second phase will be the implementation and rollout of a new branch
office integrated search and retrieval and remote data capture module. The
initial pilot for the search and retrieval module was completed during the
third quarter of fiscal 1999 and rollout to all domestic business services
offices will begin in the fourth quarter of fiscal 1999. The integrated
remote data capture module is currently in test. The Company estimates that
it will complete the rollout of the front-office system within 12 to 18
months. The Company has also begun implementation and rollout of a wide area
network (WAN) which will allow enhanced communication and data transmission
capabilities among the field and corporate offices. The Company completed a
pilot set-up of the WAN during the fourth quarter of fiscal 1998. The actual
rollout of the network to the field offices is in process and the Company
expects to complete the rollout over the next nine months. As the individual
branch offices are converted to the new integrated front-office system and
network, the Company will incur increased training and depreciation costs.
Furthermore, as each office is connected to the WAN, the Company will incur
increased telecommunication costs. The Company expects to realize
productivity gains as a result of the enhanced communication capabilities and
features of the front-end systems, which may offset the incremental costs
from the system; however, there can be no assurance that such productivity
gains or cost savings will be realized.

The final phase of the new systems will be the implementation of new payroll,
billing and activities management systems integrating both branch office
systems and back-office financial systems. The Company anticipates completion
of the billing and activities management systems during the fourth quarter of
fiscal 1999 and expects to complete the new payroll system in fiscal 2000
with a phased rollout to offices over a 12-month period. As this final phase
is implemented, the Company expects to incur additional expenses for training
and depreciation. In addition, during the rollout period, the Company will be
required to operate the old payroll system and new integrated system
concurrently, which will result in higher administrative expenses.

                                      14

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

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

INTEREST EXPENSE. Interest expense increased $213,000, or 73.7%, for the
third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998,
reflecting higher average borrowings outstanding required to support the
Company's internal growth and acquisitions.

PROVISION FOR INCOME TAXES. The provision for income taxes for the third
quarter of fiscal 1999 was $2.2 million as compared to $2.1 million for the
third quarter of fiscal 1998. This increase was due primarily to the increase
in income before income taxes of $412,000. The effective income tax rate was
38.7% for the third quarter of fiscal 1999 and 40.0% for the third quarter of
fiscal 1998. The reduction in the effective tax rate is primarily due to
federal tax credits and a reduction in the Company's overall composite state
income tax rate. The Company currently estimates that the effective income
tax rate for fiscal 1999 will be approximately 39.5%.

36 WEEK PERIOD ENDED JULY 10, 1999 COMPARED TO 36 WEEK PERIOD
ENDED JULY 11, 1998

SALES OF SERVICES AND LICENSE FEES. Sales of services increased $38.9
million, or 10.0%, for the 36 weeks ended July 10, 1999 as compared to the
same period in fiscal 1998. The increase resulted from a 6.1% increase in
billed hours and a 3.7% increase in average billing rates per hour. Billed
hours increased primarily due to acquisitions and internal growth partially
offset by decreases in reported sales of services as a result of the
conversion of nine franchise agents to the license program. Acquisitions
accounted for approximately $27.9 million of the increase in sales of
services while the conversion of the franchise agents to the license program
resulted in a $10.0 million decrease in reported sales of services. Same
store sales increased approximately 2.4% for the 36 weeks ended July 10, 1999
as compared to the same period in fiscal 1998. Same store system revenues,
which take into account sales increases for licensed offices, increased 2.9%
for the 36 weeks ended July 10, 1999 as compared to the 36 weeks ended July
11, 1998. Sales of services for the 36 weeks ended July 10, 1999 increased
8.8% and 17.9%, respectively, for domestic business services and
international business services as compared to the same period in fiscal
1998. Excluding the effect of foreign currency rate fluctuations, sales of
services increased 20.0% for international business services. The increase in
average billing rates primarily reflects changes in the Company's overall
business mix and inflationary factors.

                                      15

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

License fees increased $1.0 million or 89.7%, for the 36 week period ended
July 10, 1999 as compared to the same period in fiscal 1998 primarily as a
result of conversions of franchise agents to the license program.

COSTS OF SERVICES. Costs of services increased $30.5 million, or 9.9%, for
the 36 week period ended July 10, 1999 as compared to the same period in
fiscal 1998. Gross margin increased from 20.9% in the fiscal 1998 period to
21.2% for the same period in fiscal 1999, primarily due to higher license
fees and lower workers' compensation costs as a percentage of sales of
services and license fees. Gross margin for international business services
decreased from 21.5% for the 36 week period ended July 11, 1998 to 21.1% for
the 1999 period due primarily to high volume, lower margin business in
Australia. Workers' compensation costs were 2.9% of payroll for the 36 week
period ended July 10, 1999 and 3.3% for the 36 week period ended July 11,
1998.

FRANCHISE AGENTS' SHARE OF GROSS PROFIT. Franchise agents' share of gross
profit decreased $210,000 or 1.9%, for the 36 weeks ended July 10, 1999 as
compared to the 36 weeks ended July 11, 1998. As a percentage of sales of
services and license fees, franchise agents' share of gross profit declined
from 2.9% during the fiscal 1998 period to 2.6% for the fiscal 1999 period.
This decrease is primarily the result of franchise agent conversions to the
license program as noted above.

SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $7.5 million, or
13.1%, for the 36 weeks ended July 10, 1999 as compared to the 36 weeks ended
July 11, 1998. As a percentage of sales of services and license fees, selling
and administrative expenses increased from 14.6% for the fiscal 1998 period
to 15.0% for the fiscal 1999 period. The increase in selling and
administrative expenses as a percentage of sales of services and license fees
was primarily due to the same factors as noted above for the third quarter of
fiscal 1999.

INTEREST EXPENSE. Interest expense increased $678,000, or 76.0%, for the 36
weeks ended July 10, 1999 as compared to the 36 weeks ended July 11, 1998,
reflecting higher average borrowings outstanding required to support the
Company's internal growth and acquisitions.

PROVISION FOR INCOME TAXES. The provision for income taxes for the 36 weeks
ended July 10, 1999 was $5.7 million as compared to $5.2 million for the same
period in fiscal 1998. This increase was due primarily to the increase in
income before income taxes of $1.5 million. The effective income tax rate for
the fiscal 1999 period was 39.5% compared to 40.0% for the fiscal 1998
period. The Company currently estimates that the effective income tax rate
for fiscal 1999 will be approximately 39.5%.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has financed its operations through cash generated
by operating activities and through various forms of debt and equity
financings and bank lines of credit. The

                                      16

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

Company's principal use of cash is for financing of accounts receivable,
particularly during periods of growth and, in recent years, for acquisitions.
Temporary personnel are generally paid on a weekly basis while payments from
customers are generally received 30 to 60 days after billing for business
services. As a result of seasonal fluctuations, accounts receivable balances
are historically higher in the fourth fiscal quarter and are generally at
their lowest during the first fiscal quarter. Accordingly, short-term
borrowings used to finance accounts receivable generally follow a similar
seasonal pattern. For purposes of the following discussion of cash flows, the
cash flows from discontinued operations have been segregated for the fiscal
1999 period. Cash flows are presented on a consolidated basis for the fiscal
1998 period.

Net cash from operating activities was $5.8 million for the 36 weeks ended
July 10, 1999 and $5.0 million for the 36 weeks ended July 11, 1998. The
increase in cash from operating activities is primarily due to a reduction in
the net assets of the discontinued operations, primarily resulting from
collections of receivables.

Cash used for capital expenditures, which are generally for software,
computers and peripherals, and office furniture and equipment, totaled $5.6
million for the 36 weeks ended July 10, 1999 and $5.9 million for the 36
weeks ended July 11, 1998. Capital expenditures during each of the fiscal
1998 and 1999 periods are primarily associated with payments for the
Company's next generation management information and support systems. Capital
expenditures for these systems are expected to be approximately $12.6 million
including costs of hardware, software and internal and external costs
associated with implementation of the project. The Company incurred $3.6
million of such capital expenditures during the first three quarters of
fiscal 1999 and expects to spend a total of approximately $4.7 million during
fiscal 1999 and approximately $1.5 million during fiscal 2000.

Cash outflows for new acquisitions and for contingent payments under existing
acquisitions totaled $1.1 million for the 36 weeks ended July 10, 1999 and
$8.3 million for the 36 weeks ended July 11, 1998. Payments of $446,000 and
$30,000 related to acquisitions are due for the remainder of fiscal 1999 and
fiscal 2000, respectively, with additional consideration contingent on sales,
gross profit or pre-tax income of the acquired businesses in future periods.
Cash flows from investing activities of discontinued operations includes a
net inflow of $586,000 primarily relating to proceeds received from the sale
of one of the Company's medical affiliates.

The Company increased borrowings by a net $200,000 during the 36 weeks ended
July 10, 1999. During the 36 week period ended July 11, 1998, the Company
increased borrowings by a net $13.4 million, primarily to fund acquisitions
and capital expenditures.

During the 36 week periods ended July 10, 1999 and July 11, 1998, the Company
repurchased 100,000 and 163,500 shares, respectively, of common stock on the
open market for aggregate cash consideration of $675,000 and $2.8 million,
respectively. During the 36 weeks ended July 10, 1999, 67,681 shares were
reissued under the employee stock option and purchase plans with aggregate
cash proceeds of $458,000.

                                      17

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

On May 20, 1998, the Company executed private placements of 10-year senior
secured notes totaling $30.0 million payable in equal annual installments
beginning in the year 2002. Proceeds from the notes were used to repay
outstanding borrowings under the revolving agreement of $22.6 million, with
the remainder used for working capital and general corporate purposes. Under
the senior secured notes payable, the Company is required to comply with
certain financial and other covenants, the most restrictive of which is a
maximum total debt to capitalization ratio. The Company was in compliance
with these covenants as of July 10, 1999.

The Company has senior secured credit facilities for up to $108.0 million
consisting of a $90.0 million, five-year revolving agreement and an $18.0
million six-year term loan for working capital needs and general corporate
purposes, including capital expenditures and acquisitions. Direct advances
under the revolving credit agreement are limited by outstanding irrevocable
standby letters of credit up to a maximum amount of $20.0 million. Total
advances are also limited under formulas based on earnings before interest,
taxes, depreciation and amortization (EBITDA) and total debt to total
capitalization. The EBITDA formula is calculated on a rolling four quarter
basis. The credit facility contains covenants which, among other things,
require the Company to maintain certain financial ratios and generally
restrict, limit or, in certain circumstances, prohibit the Company with
respect to capital expenditures, disposition of assets, incurrence of debt,
mergers and acquisitions, loans to affiliates and purchases of investments.
As of July 10, 1999, the Company had $8.6 million in outstanding letters of
credit and had borrowed $19.8 million under the revolving agreement. During
the first quarter of 1999, the EBITDA formula related to the revolving
agreement was amended, for compliance purposes, to provide for an add-back of
the losses incurred by Western Medical Services for the third and fourth
quarters of 1998. At July 10, 1999, the Company was in compliance with its
covenants.

On August 9, 1999, the Company completed the sale of the remaining medical
business. Under the terms of the agreement, the Company will retain the trade
and Medicare accounts receivable and due from licensee balances. Proceeds from
the sale as well as cash received on collection of the medical receivables
will generally be used to pay off debt.

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

The Company has filed registration statements under the Securities Act with
respect to an aggregate of 2.3 million shares of common stock reserved for
issuance under its equity incentive plans, thus permitting the resale of such
shares by non-affiliates in the public market without restriction under the
Securities Act upon the exercise of stock options. As of July 10, 1999,
options to purchase an aggregate of 759,004 shares of common stock were
outstanding under the Company's equity incentive plans.

                                      18

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

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

YEAR 2000

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

The Company has completed its initial system inventory and evaluation phase.
For its domestic operations, the Company identified one group of
non-compliant mission critical back-office systems and completed the
installation of Year 2000 compliant replacement systems during the second
quarter of fiscal 1999. The Company identified one additional mission
critical system (the Billing and A/R system) that was not fully Year 2000
compliant and initiated steps to modify this system to bring it into
compliance. However, during the second quarter of fiscal 1999, the Company
decided to replace the Billing and A/R system with a new, Year 2000 compliant
system rather than to further remediate the existing system. The Company's
plan had originally called for replacing the old Billing and A/R system
during fiscal 2000; however, as a result of the successful and timely
implementation of the Company's other back-office systems and the enhanced
features that the new Billing and A/R system will provide, the Company
decided to shorten the timetable for implementing the new system. The Company
currently estimates that it will complete the installation of the new Billing
and A/R system by September 30, 1999. The Company expects to bring its
domestic operations systems to full Year 2000 compliance by September 30,
1999. For the international operations, the Company will be required to
replace or upgrade the payroll/billing systems in two of its international
operations and will also be required to upgrade or replace a number of back
office support systems. The Company is currently in the process of making
these changes. The Company currently plans to have all international
operations fully compliant during the fourth quarter of fiscal 1999. Although
the Company does not expect that the impact of the Year 2000 issue will be
material to the Company's domestic or international operations, there can be
no assurance that the Company

                                      19

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

will not discover additional Year 2000 issues that would have a material
adverse effect on the Company's business, results of operations, cash flows
or financial condition.

The Company completed a comprehensive test of its payroll processing systems
during the third quarter and identified a number of minor processes that will
require repair. These efforts are underway and are expected to be completed
during the fourth fiscal quarter. Testing of remaining systems, as needed, is
expected to be completed during the fourth fiscal quarter. The Company is
also in the process of developing contingency plans. Although the Company
cannot currently estimate the magnitude of the impact if mission critical
systems have not been made Year 2000 compliant prior to the end of calendar
year 1999, if such systems are not compliant, there would be a material
adverse effect on the Company's business, results of operations, cash flows
or financial condition.

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

The Company has also surveyed its key third-party suppliers and vendors,
including key financial institutions, as well as major customers and
landlords, for Year 2000 compliance. The Company has obtained representations
from all critical vendors that they expect to be Year 2000 complaint. The
Company is still in the process of surveying its key customers and landlords
and expects to complete this survey during the fourth quarter of fiscal 1999.
At this time the Company cannot estimate the effect, if any, that
non-compliant systems at these entities could have on the Company's business,
results of operations, cash flows or financial condition, and there can be no
assurance that the impact, if any, will not be material.

EUROPEAN CURRENCY

Beginning in January 1999, a new currency called the "euro" was introduced in
certain European countries that are part of the Economic and Monetary Union
(EMU). During calendar year 2002, all EMU countries are expected to be
operating with the euro as their single currency. A significant amount of
uncertainty exists as to the effect the euro will have on the marketplace.
Additionally, all of the rules and regulations have not yet been defined and
finalized by the European Commission with regard to the euro currency.
Currently, the Company does not operate in any countries that are part of the
EMU; however, the Company operates in the United Kingdom and Denmark, which
may join the EMU at a future date. Although there is currently no impact of
the euro on the Company's European operations, the Company will continue to
monitor and assess developments regarding the euro. Should the Company
determine in the future that the euro will have an effect on its internal
systems and the sales of its services, the Company would take appropriate
actions based on the results of such assessment.

                                      20

<PAGE>

WESTAFF, INC.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
-------------------------------------------------------------------------------

The Company has not yet incurred material costs in addressing the euro
formation, but there can be no assurance that this issue and its related
future costs, if any, will not have a material adverse effect on the Company's
business, results of operations, cash flows or financial condition.

                                      21

<PAGE>

PART II.  OTHER INFORMATION
-------------------------------------------------------------------------------

Item 1.           LEGAL PROCEEDINGS

                           The Company is not currently a party to any
                  litigation that could have a material adverse effect on its
                  business, results of operations, financial position or cash
                  flows. 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, and
                  administrative claims and lawsuits brought by employees or
                  former employees.

Item 2.           CHANGES IN SECURITIES

                           Not applicable.

Item 3.           DEFAULTS UPON SENIOR SECURITIES

                           Not applicable.

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

                           Not applicable.

Item 5.           OTHER INFORMATION

                           Not applicable.


Item 6.           EXHIBITS AND REPORTS ON FORM 8-K

                           (a)      Exhibits

                                 EXHIBIT INDEX

Exhibit
Number                            Description
-------                           -----------
10.8.13           Second Amendment to Note Purchase Agreement and Transaction
                  Documents
10.8.14           Consent to Asset Sale and Release of Liens
27.1              Financial Data Schedule

-----------------

                           (b)      Reports on Form 8-K

                                    Current Report on Form 8-K dated May 27,
                  1999 filed with the Securities and Exchange Commission on May
                  27, 1999.

                                      22

<PAGE>


                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                       WESTAFF, INC.


AUGUST 24, 1999                     /S/ PAUL A. NORBERG
---------------                     -------------------
     Date                             Paul A. Norberg
                                Executive Vice President and
                                  Chief Financial Officer



                                      23