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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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AMENDMENT NO. 1
TO
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 28, 2000
COMMISSION FILE NUMBER 000-27130

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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 Identification No.)
incorporation and organization)

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

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

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of class)

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $21,372,697 as of February 20, 2001, based on the
closing price of the Registrant's Common Stock on the Nasdaq National Market
reported for that trading day. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded from this computation in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of February 20, 2001 the Registrant had outstanding 15,871,204 shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The undersigned Registrant hereby amends the information set forth on the
cover page immediately following the heading "Documents Incorporated by
Reference" to read in full as follows:

None.

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INDEX
WESTAFF, INC.

PAGE NO.
--------

PART I

ITEM 1. BUSINESS.................................................... 2

ITEM 2. PROPERTIES.................................................. 19

ITEM 3. LEGAL PROCEEDINGS........................................... 20

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 20

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 21

ITEM 6. SELECTED FINANCIAL DATA..................................... 22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 31

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 31

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 32

ITEM 11. EXECUTIVE COMPENSATION...................................... 34

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 46

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 48

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 49

SIGNATURES.................................................. IV-2

POWER OF ATTORNEY........................................... IV-3

PART I

The undersigned Registrant hereby restates Part I, Item 1 in its entirety as
originally filed in its Form 10-K Annual Report for the fiscal year ended
October 28, 2000 ("Form 10-K").

ITEM 1. BUSINESS.

The following Business Section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including those set forth under "Factors Affecting
Future Operating Results" beginning on page 15 below and elsewhere in, or
incorporated by reference into, this Annual Report on Form 10-K. This Form 10-K
for the fiscal year ended October 28, 2000 contains service marks of the
Company.

GENERAL

The Company provides temporary staffing services primarily in suburban and
rural markets ("secondary markets"), as well as in the downtown areas of major
urban centers ("primary markets"), in the United States and selected
international markets. Through its network of Company-owned, franchise agent and
licensed offices, the Company offers a wide range of temporary staffing
solutions, including replacement, supplemental and on-site programs to
businesses and government agencies. The Company has over 50 years of experience
in the staffing industry, and, as of October 28, 2000 operated through over 350
business services offices in 44 states, the District of Columbia and five
foreign countries. The Company is currently proceeding with arrangements to
operate in Mexico. As of October 28, 2000, approximately 72.6% of these offices
were owned by the Company, 22.9% were operated by franchise agents and 4.5% were
operated by licensees.

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

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

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

"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations."

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

BUSINESS STRATEGY

The Company's objective is to become a leading provider of essential support
services in secondary markets throughout the United States and in selected
international markets. Pending the completion of the Company's search for a new
Chief Executive Officer, the key elements of the Company's business strategy
include:

FOCUS ON SALES WITHIN THE ESSENTIAL SUPPORT SERVICES SECTOR. The Company
focuses on placing essential support personnel in markets for clerical, light
industrial and light technical temporary staffing. The Company believes that
essential support services are the foundation of the temporary staffing industry
and will remain so for the foreseeable future. The Company also believes that
employees performing essential support functions are, and will remain, an
integral part of the labor market in local, regional and national economies
around the world. The Company believes that it is well-positioned to capitalize
on these business segments because of its ability to attract and retain
essential support personnel and its specialized knowledge of the staffing needs
of customers.

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

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

MAINTAIN ENTREPRENEURIAL AND DECENTRALIZED OFFICES WITH STRONG CORPORATE
SUPPORT. The Company seeks to foster an entrepreneurial environment by operating
each office as a separate profit center, by giving managers and staff
considerable operational autonomy and financial incentives and by establishing
franchise agent and licensed offices in appropriate markets. The Company has
designed programs to encourage a "team" approach in all aspects of sales and
recruiting, to improve productivity and to maximize profits. The Company
believes that this structure allows it to recruit and retain highly motivated
managers who have demonstrated the ability to succeed in a competitive
environment. This

structure also allows managers and staff to focus on branch operations while
relying on corporate headquarters for support in back-office operations, such as
risk management programs and unemployment insurance, credit, collections, advice
on legal and regulatory matters, quality standards and marketing.

ENHANCE INFORMATION SYSTEMS. The Company believes its management
information systems are instrumental to the success of its operations. The
Company's business depends on its ability to store, retrieve, process and manage
significant amounts of data. The Company continually evaluates the quality,
functionality and performance of its systems in an effort to ensure that these
systems meet the operational needs of the Company. During fiscal 1999 and fiscal
2000, the Company completed the implementation and rollout of a frame relay
network, completed the conversion of the majority of its back-office functions
to an integrated enterprise resource planning ("ERP") application provided by
Lawson Software and is in the process of completing the rollout of the Westaff
Automated Visionary Enterprise ("WAVE"), a full-featured branch office tool
designed to assist in order management, candidate search and recruiting,
customer service management, and sales management that also allows for sharing
of information between offices. The Company is presently finalizing plans to
convert the temporary payroll functions to the Lawson system and expects to
complete this process during fiscal 2002. The Company continues to invest in
efforts to upgrade and improve the functionality, performance and utility of its
systems. Furthermore, the Company is currently working on a collaborative
agreement with Lawson Software to provide enhanced functionality to better meet
the needs of the temporary staffing industry. The Company believes that its
investments in information technology will increase management's ability to
store, retrieve, process and manage information. As a result, the Company
believes it will be able to improve service to its customers and employees by
reducing errors and speeding the resolution of inquiries, while more efficiently
allocating resources devoted to developing and maintaining the Company's
information technology infrastructure. See "Factors Affecting Future Operating
Results--Reliance on Management Information Systems" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

CONTROL COSTS THROUGH EMPHASIS ON RISK MANAGEMENT. Workers' compensation
and unemployment insurance premiums are significant expenses in the temporary
staffing industry. Workers' compensation costs are particularly high in the
light industrial sector. Furthermore, there can be significant volatility in
these costs. During fiscal 2000, the Company recorded additional charges of
$2.1 million to increase workers' compensation accruals as a result of medical
inflation, higher benefits costs and an increase in claims frequency. The
Company has developed risk management programs and loss control strategies that
it believes improve management's ability to control these employee-related costs
through pre-employment safety training, safety assessment and precautions in the
work place, post-accident procedures and return to work programs. The Company
also has created strong financial incentives for branch offices to implement its
risk management procedures. The Company believes that its emphasis on
controlling employee-related costs enables branch office managers to price
services more competitively and improve profitability.

GROWTH STRATEGY

The Company's current growth strategy focuses on internal growth. In the
future, the Company may pursue strategic external and complementary
acquisitions.

INTERNAL GROWTH. The principal element of the Company's growth strategy has
been, and continues to be, its focus on internal growth. Same store sales from
continuing operations increased 8.0%, 3.6% and 3.3% in fiscal 1998, fiscal 1999
and fiscal 2000, respectively, as compared to the prior annual periods. The
Company's internal growth strategy consists of the following:

- INCREASE SALES AND PROFITABILITY AT EXISTING OFFICES. The Company
believes that a substantial opportunity exists to increase sales of
services and profitability in existing offices. The

Company has incentive compensation plans to encourage branch office
managers and staff to increase productivity and profits at the branch
level while maintaining accountability for costs and collections of
accounts receivable. For account representatives, the Company added a
new commission plan for fiscal 2001 to encourage sales growth. In
addition, the Company has maintained its corporate-level branch
management function to establish and monitor branch office performance
targets and develop programs to support branch operations. The Company
eliminated a senior level management position in branch operations
following the cancellation of the recapitalization agreement in
May 2000.

- SELECTIVELY EXPAND ON-SITE AND ON-LOCATION PROGRAMS. The Company has
taken advantage of industry trends by continuing to promote its
"On-Location" program and its on-site (also referred to as
"vendor-on-premises") programs. As of October 28, 2000, the Company had
18 On-Location sites and 34 on-site programs. Under these programs, the
Company can assume administrative responsibility for coordinating all
essential staffing services throughout a customer's location, including
skills testing and training.

The On-Location program provides for an independent branch office
located at the customer's facility. It is intended for large on-site
accounts with more than $500,000 in annual revenue. A manager level
person is assigned to the On-Location facility and this program is
typically not seasonal. On-site relationships provide customers with
dedicated account management which can more effectively meet the
customer's changing staffing needs with high quality, consistent
service. These programs tend to have lower gross margins than those for
retail customers, higher volumes, comparatively lower operating
expenses and relatively longer customer relationships. These programs
also may provide an office with sufficient gross profit dollars to
cover fixed expenses as well as conduct activities to generate name
recognition for recruiting and marketing purposes.

- PURSUE EXPANSION BY ESTABLISHMENT OF NEW OFFICES. The Company seeks to
open new Company-owned and franchise agent offices primarily in
existing markets to benefit from common area management,
cross-marketing opportunities and leveraging of administrative
expenses. The Company's corporate and operating management jointly
develop expansion plans for new offices based upon various criteria,
including market demand, availability of qualified personnel, the
regulatory environment in the relevant market and whether a new office
would complement or broaden the Company's current geographic network.
In the past, the Company preferred to limit expansion of its franchise
agent program to proven industry professionals interested in pursuing
markets that are not strategic to the Company, but since the third
quarter of fiscal 2000 the Company has been willing to consider other
qualified franchise prospects as it plans to grow its franchise
program. The Company continues to support its current licensees, but it
no longer offers a license agreement to new prospects.

- DEVELOP LINES OF BUSINESS. While the Company intends to maintain its
focus on the essential services sector of the staffing industry, its
growth strategy includes expanding its permanent placement line of
business and developing additional lines of business such as accounting
and finance personnel. The Company believes that there are
opportunities to enhance its sales in complementary lines of business
and position it to better serve the multiple needs of its customers.

- EXPAND INTERNATIONAL PRESENCE. The Company intends to expand its
international presence primarily through internal growth. As of
October 28, 2000, the Company operated 55 offices in Australia, the
United Kingdom, Norway, New Zealand and Denmark, and had begun its
expansion into Mexico. The Company has experienced growth in its
international markets, with sales of services, excluding the effect of
foreign currency rate fluctuations, increasing 19.6% in fiscal 1999
compared to fiscal 1998 and 13.0% in fiscal 2000 compared to fiscal

1999. The Company believes that its established international presence
will enable it to take advantage of growing overseas markets where the
high cost of maintaining permanent employees encourages the use of
temporary personnel.

PURSUIT OF COMPLEMENTARY AND STRATEGIC ACQUISITIONS. The Company currently
intends to focus on internal growth. In the future, the Company may also pursue
opportunities for growth through acquisitions in existing as well as new
markets. The Company did not pursue any strategic external acquisitions in
fiscal 2000 nor has it pursued any such acquisitions in fiscal 2001 to date. The
Company currently has no plans to pursue strategic acquisitions during fiscal
2001.

In evaluating potential acquisition candidates, the Company in the past has
focused on independent staffing companies with a history of profitable
operations, a strong management team, a recognized presence in secondary markets
and compatible corporate philosophies and culture. The Company has used, and may
continue to use, a team approach by making select corporate officers and
department heads responsible for identifying prospective acquisitions,
performing due diligence, negotiating contracts and subsequently integrating the
acquired companies. The integration of newly acquired companies generally
involves standardizing each company's accounting and financial procedures with
those of the Company. Acquired companies typically are brought under the
Company's uniform risk management program and key personnel of acquired
companies often became part of field management. Marketing, sales, field
operations and personnel programs must be reviewed and, where appropriate,
conformed to the best practices of the Company's existing operations.

In fiscal 2000, the Company engaged in a limited number of "internal"
acquisitions, i.e., the purchase of existing franchise agent or licensed
operations, and may continue doing so in fiscal 2001. The Company has a right of
first refusal on any sale of franchise agent or licensed operations. Since the
beginning of fiscal 2000, the Company has acquired one business services
licensed office, but it has not acquired the interests of any franchise agents.
The Company is currently negotiating with two licensees who wish to purchase the
Company's interests in their licensed operations.

SERVICES

The Company's business services division places essential support personnel
in clerical, light industrial and light technical positions through an
international network of offices. Essential support personnel often fill
clerical, light industrial and light technical positions such as word
processing, data entry, reception, customer service and telemarketing, warehouse
labor, manufacturing, assembly and lab assistance. During the first quarter of
fiscal 2001, the Company opened an Accounting Division to focus on placing
skilled accounting and finance personnel. As of October 28, 2000, the Company's
domestic and international business services operations comprised over 350
offices.

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

As of October 28, 2000, the Company's international operations comprised 55
Company-owned offices: 18 in Australia; 23 in the United Kingdom; six in Norway;
four in New Zealand; and four in Denmark. Through these offices, the Company
provides regular and temporary personnel services in the clerical and light
industrial support areas. The Company employs a managing director for each
foreign country who oversees all operations in that country. For fiscal 1999 and
fiscal 2000, 13.4% and

13.9% respectively, of total system revenues from continuing operations were
derived from the Company's international operations. Same store sales for
international operations increased 12.3% and 13.8% for fiscal 1999 and fiscal
2000, respectively, as compared to the same prior year periods. A total of 23
offices in the United Kingdom, 18 offices in Australia and six offices in Norway
have certification under ISO 9002, a total quality management program.

OPERATIONS

As of October 28, 2000, the Company operated through a network of over 350
business services offices in 44 states, the District of Columbia and five
foreign countries. The Company is currently proceeding to operate in Mexico in
fiscal 2001, and it incorporated a subsidiary there during the fourth quarter of
fiscal 2000. In addition, the Company from time to time establishes recruiting
offices both for recruiting potential temporary employees and for testing demand
for its services in new market areas. The Company's operations are
decentralized, with branch, area, regional and zone managers and franchise
agents and licensees enjoying considerable autonomy in hiring, determining
business mix and advertising.

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

NOV. 2, NOV. 1, OCT. 31, OCT. 30, OCT. 28,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------

Number of Offices by Ownership(1):
Company-owned....................................... 217 226 267 264 257
Franchise agent..................................... 103 103 82 75 81
Licensed............................................ 7 11 25 24 16
Total............................................. 327 340 374 363 354
--- --- --- --- ---

Number of Offices by Location(1):
Domestic............................................ 280 288 315 308 299
International....................................... 47 52 59 55 55
Total............................................. 327 340 374 363 354
--- --- --- --- ---

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(1) Excludes Company-owned recruiting offices and medical services.

COMPANY-OWNED OFFICES. Employees of each Company-owned office report to a
manager who is responsible for day-to-day operations and the profitability of
that office. Branch managers generally report to area and /or regional managers.
As of December 29, 2000, there were three zone managers and 13 regional managers
for the domestic Company-owned offices. The Company has a variety of incentive
plans in place for its domestic and international offices. One or more of these
plans may be offered to branch staff as well as branch, area, regional and zone
managers. These plans are designed to motivate employees to maximize the growth
and profitability of their offices, control costs and/or improve collections of
accounts receivable. The Company believes that its incentive-based compensation
plans should encourage employees in its Company-owned offices to increase sales
and profits, resulting in an entrepreneurial, creative and committed team.

FRANCHISE AGENT OFFICES. The Company's franchise agents have the exclusive
right by contract to sell certain of the Company's services and to use the
Company's service marks, business names and systems in a specified territory.
The Company's franchise agent agreements generally allow franchise agents to
open multiple offices within their exclusive territories. As of October 28,
2000, the Company's 37 business services franchise agents operated 81 franchise
agent offices. The Company designs its franchise agent program to provide
attractive terms to franchise agents. Sales generated by franchise agent
operations and related costs are included in the Company's consolidated sales of
services and

cost of services, respectively, and during fiscal 1998, 1999, and 2000,
franchise agents offices represented 21.6%, 20.2%, and 19.8% respectively, of
the Company's sales of services.

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

Franchise agents are required to follow the Company's operating procedures
and standards in recruiting, screening, classifying and retaining temporary
personnel. Under the Company's name, the franchise agent solicits orders for
temporary employees from customers and assigns the Company's temporary employees
to customers in response to such orders. In an effort to control liability
associated with workers' compensation claims, the Company's risk management
department works closely with franchise agent offices in evaluating job
assignments and seeking to promote sales while effectively managing risks. The
Company handles all government withholding, quarterly reports and W-2s, and
maintains comprehensive insurance coverage for all temporary employees sent on
assignment by franchise agent offices. In addition, through on-site safety and
quality assurance inspections, franchise agent offices evaluate risks and check
compliance with state and federal safety regulations. In some cases, the Company
may, in conjunction with the Company's insurance carrier, employ the services of
a professional loss control engineer.

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

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

Licensees operate within the framework of the Company's policies and
standards. They recruit and employ temporary employees according to the
Company's guidelines, and pay these employees using the Company's payroll
procedures. However, licensees must obtain their own workers' compensation,
liability, fidelity bonding and state unemployment coverage, which determine
their payroll costs. The Company bills all licensees' customers and collects
their remittances. License agreements are for a term of five years and are
renewable for multiple five-year terms. As of October 28, 2000, the Company's
six business services licensees operated 16 licensed offices. The Company is
currently negotiating with two

licensees who wish to purchase the Company's interests in their licensed
operations. These two licensees operate a total of four licensed offices.

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

The Company's sale of franchises and licenses is regulated by the Federal
Trade Commission and by state business opportunity and franchise laws. The
Company has either registered, or been exempted from registration, in 13 of the
15 states that require registration in order to offer franchises or licenses. In
two of the 15 states, the Company has not yet sought registration and is
therefore not currently authorized to offer franchise or license arrangements.

MANAGEMENT INFORMATION SYSTEMS

The Company believes that its management information systems are
instrumental to the success of its operations and the Company continually
evaluates the quality, functionality and performance of its systems in an effort
to ensure that these systems meet the operational needs of the Company.

The Company's management information systems provide functionality in both
the field offices and in the corporate back-office to support the operations of
the Company. Field office functionality includes the WAVE, a full-featured
branch office tool, designed to assist in order management, candidate search and
recruiting, customer service management, and sales management that also allows
for sharing of information between offices. The Company began implementing the
WAVE in fiscal 1999. As of December 31, 2000, 201 offices were live on the WAVE.
The Company expects to complete the rollout of the WAVE by the end of the fourth
quarter of fiscal 2001. During the course of the rollout, the Company was
informed that the third party software vendor for the WAVE ceased operations.
The Company has acquired license rights to the source code for this application
and future development of this product is being handled by the Company's
internal Information Systems staff. The Company is currently developing
enhancements to allow customer and employee information on the WAVE to interface
directly with the billing and payroll applications to improve efficiency.

During fiscal 2000, the Company completed the implementation and rollout of
a frame relay network which allows Company-wide access to field and corporate
office applications, electronic mail, MS Office, Internet access, Westnet (the
Company's intranet) and also allows for enhanced communication and data
transmission capabilities among the field, corporate offices, customers and
essential employees. This functionality is provided down to the desktop level of
all branch office personnel utilizing thin-client technology. This design
affords high efficiency through low-cost, low bandwidth data lines. Thin-client
technology also affords the ability to deploy and upgrade applications very
quickly to all personnel. Since all applications reside within the two corporate
data centers, each desktop does not have to be touched when an upgrade is
performed. This will result in potential cost reductions in the future, as
personnel will not have to be dispatched to each office to perform any upgrades.

In addition, field offices use a billing and payroll application, which is
designed to provide timely and accurate payment for temporary employees and
billing to the Company's customers. Under this system, field offices capture and
input customer, employee, billing and payroll information. This information is
transferred daily to centralized servers, where payroll, billing and financial
information is processed overnight. These systems provide the Company with the
ability to print checks at most of its offices within 24 hours after receipt of
the time card. Invoices are also processed daily and are mailed from the
Company's centralized corporate offices. This system also supports branch office
operations

with daily, weekly, monthly and quarterly reports that provide information
ranging from customer activity to office profitability.

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

During fiscal 1999 and fiscal 2000, the Company converted the majority of
its back-office functions to an integrated ERP application provided by Lawson
Software. Presently, major back office functions including general ledger,
accounts payable, accounts receivable, purchasing, regular payroll and asset
management operate within the integrated Lawson system. These systems are
tightly integrated and provide for "drill-around" capabilities among the various
back-office applications. The Company also has implemented the Lawson system's
datamart capabilities that provide for ease of reporting and financial analysis
as well as the sharing of financial and operational information to zone and
regional managers via the Company's intranet. While not yet implemented, the
Lawson system also includes features to permit the Company's customers to review
their own billing and accounts receivable records via the Internet. Other
features will allow Company employees and, ultimately, temporary staff to review
their own payroll, benefits and human resource information, all via the use of
the Internet.

Currently, temporary payroll is processed on the Company's legacy payroll
system. The Company is finalizing plans to convert the temporary payroll
functions to the Lawson system during fiscal 2002. The Company continues to
invest in efforts to upgrade and improve the functionality, performance and
utility of its systems. Furthermore, the Company is currently working on a
collaborative agreement with Lawson Software to provide enhanced functionality
and seamless integration with front-office applications to better meet the needs
of the temporary staffing industry. There can be no assurance that the Company
will meet anticipated completion dates for its system initiatives, that such
systems will be completed in a cost-effective manner or that such systems will
support the Company's future growth or provide significant gains in efficiency
and productivity. The failure of these systems to meet these expected goals
could result in increased system costs and could have a material adverse effect
on the Company's business, results of operations, cash flows or financial
condition.

Through the end of fiscal 2000, the Company incurred capital expenditures of
approximately $12.5 million in connection with the implementation of the WAN,
conversion to the Lawson system and implementation of the WAVE. This includes
costs of hardware, software and internal and external costs associated with
these projects, of which $6.2 million was incurred during fiscal 1998,
$4.9 million was incurred in fiscal 1999, and $1.4 million was incurred in
fiscal 2000. Capital expenditures relating to key information services projects
are currently estimated to be approximately $3.5 million for fiscal 2001. See
"Factors Affecting Future Operating Results--Reliance on Management Information
Systems" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

RISK MANAGEMENT PROGRAMS

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

The Company's risk management programs employ a variety of workers'
compensation loss prevention and loss control strategies including: customer
safety evaluations, individual local office expense allocation formulas, and
aggressive claims management techniques to help control and reduce risks.

The Company's specific loss control strategies include a written screening
process for light industrial work sites to ensure that temporary employees are
placed within the Company's strict safety guidelines. A new Corporate Safety
Manager was hired to assist offices in all safety program areas including
inspections of high-profile account facilities. The Company requires general as
well as site-specific safety orientation training and appropriate personal
protective equipment in light industrial assignments. Safety equipment includes
back supports, safety glasses, protective footwear and cut-proof gloves. Each
accident is carefully reviewed by the Company to ensure that safety procedures
were followed and that additional safety considerations are implemented to avoid
any future injuries at a customer's work site. In addition, the Company
carefully monitors the job assignments to prevent placing employees in certain
high-risk jobs that prove too risky or are prohibited under the Company's
guidelines.

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

The Company also employs a number of creative and aggressive claims
management techniques to help control losses. After each workers' compensation
injury, for example, post-accident drug testing is performed as part of the
initial examination. In some circumstances, if the claimant tests positive for
illegal drug usage, the claim may be denied in its entirety or benefits
drastically reduced. If the injury prevents the employee from returning to work
immediately, the Company moves forward with aggressive claims management. The
Company has maintained a long-term relationship with its insurance carrier and
claims administrator, and this intricate relationship has helped the Company to
ensure consistency in applying its risk management programs.

The Company's corporate claims management team, as well as all regional
managers, have frequent meetings and conference calls with the claims
administrator and can examine the claims adjusters' notes on-line. On an ongoing
basis, the Company's workers' compensation specialists actively analyze claims
to challenge compensability issues, the appropriateness of medical treatment and
whether reserve balances are properly established. The Company also considers
whether or not the customer or a third party may be a source for subrogation in
the event civil recoveries are allowable to the injured employee.

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

COMPETITION

The temporary staffing industry is highly competitive with few barriers to
entry. The Company believes that the majority of commercial temporary staffing
companies are local, full-service or specialized operations with less than five
offices. Within local markets, typically no single company has a dominant share
of the market. The Company also competes for qualified temporary personnel and
customers with larger, national full-service and specialized competitors in
local, regional, national and international markets. The principal national
competitors are Adecco SA, Spherion Corp. (commercial

staffing segment), Kelly Services, Inc., Manpower, Inc., RemedyTemp, Inc., and
Personnel Group of America, Inc. Many of the Company's principal competitors
have greater financial, marketing and other resources than the Company. In
addition, there are a number of medium-sized firms which compete with the
Company in certain markets where they may have a stronger presence, such as
regional or specialized markets.

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

EMPLOYEES

The Company estimates that as of October 28, 2000 it had approximately
35,000 temporary employees on assignment through its business services division
and employed 1,130 regular staff in its business services division. The
Company's employees are not covered by any collective bargaining agreements. The
Company believes that its relationships with its employees are good.

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

SERVICE MARKS

The Company has various service marks registered with the United States
Patent and Trademark Office, with the State of California and in various foreign
countries. Federal and state service mark registrations may be renewed
indefinitely as long as the underlying mark remains in use. The Company's
service marks include Westaff-Registered Trademark-, Be a
Temp-Registered Trademark- and Western Staff Services-Registered Trademark-, The
Essential Support Services Leader-Registered Trademark-, On Location &
Essential-Registered Trademark-, and Accountants USA-Registered Trademark-. The
Company's applications to federally register the service marks Westaff Wave(sm)
and It's About Respect(sm) are pending. The Company is no longer pursuing a USA
Temp service mark.

MEDICAL SERVICES

In November 1998, the Company announced its plan to sell Western Medical.
The Company's decision to sell the medical operations was prompted in large
measure by the increasingly complex and unfavorable regulatory environment
affecting the Medicare business and the impact that changes in regulations had
and likely would have had on the ability of the Company to operate profitably in
the medical sector. The disposition of the medical operations enables the
Company to focus on business services, where management believes that long-term
growth prospects are more attractive.

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 accompanying Consolidated Financial
Statements and Notes thereto. In connection with the decision to discontinue the
medical operations, the Company recorded an after-tax loss in fiscal 1998 of
$6.3 million or $0.40 per share. This loss was related primarily to reduced
revenues in connection with Medicare's Interim Payment System enacted as part of
the Balanced Budget Act of 1997, reduced revenues as a result of settlement of a
prior year Medicare audit, additional reserves for Medicare accounts receivable,
increases in allowances for doubtful accounts and other charges. In addition,
during fiscal 1998 the Company recorded an after-tax charge on the planned
disposal of its medical operations of $3.5 million or $0.23 per share. This
included an estimated charge for the write down of assets to estimated net
realizable value, estimated costs to sell the operations and estimated operating
losses during the disposal period.

During fiscal 1999, the Company sold certain of its franchise agent and
Company-owned medical offices and entered into a termination agreement with one
of its medical licensees. During the fourth quarter of fiscal 1999, the Company
completed the sale of the remaining medical business. Under the terms of the
sale, the Company retained the trade and Medicare accounts receivable as well as
due from licensee balances. In fiscal 1999, the Company recorded after-tax
losses relating to discontinued operations of $6.6 million or $0.42 per share.
These losses represented reserves for trade and Medicare accounts receivable and
due from licensee balances, and also included additional operating losses
resulting from the extended period required to close the sale and a reduction in
estimated proceeds from the sale.

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

As of October 28, 2000, the Company had received $1.7 million in cash
proceeds from the sale of its medical operations, with an additional
$1.0 million due on the balance of the purchase price. The $1.0 million balance
due, plus interest thereon, is owed to the Company under a guaranteed promissory
note, which is in default. See Item 3, "Legal Proceedings."

The amount of the estimated loss on disposal of the medical operations is
based on a number of assumptions. These include the estimated costs and
write-offs required to collect the remaining Medicare accounts receivable and
due from licensee balances and estimated costs to be incurred in filling and
settling all remaining Medicare cost reports. There can be no assurance that the
Company will be able to complete the collection of the remaining Medicare
accounts receivable and due from licensee balances on terms and costs similar to
those estimated by the Company. Furthermore, there can be no assurance that the
Company will be successful in collecting the remaining $1.0 million outstanding
purchase price balance due on the sale of the medical business. Should actual
costs differ materially from those estimated by management, the Company would
record additional losses (or gains) in future periods. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations."

FACTORS AFFECTING FUTURE OPERATING RESULTS

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

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

UNCERTAIN ABILITY TO CONTINUE AND MANAGE GROWTH. The Company has
historically experienced significant growth, principally through internal
growth; however, during recent fiscal years internal growth rates have been
slowing. Growth through acquisitions occurred prior to fiscal 1999, when the
Company scaled back its near-term acquisition plans other than franchise
buybacks. The Company's ability to continue its growth and profitability will
depend on a number of factors, including: (i) the strength of demand for
temporary employees in the Company's markets; (ii) the availability of capital
to fund acquisitions; (iii) the ability to maintain or increase profit margins
despite pricing pressures; and (iv) existing and emerging competition. The
Company must also adapt its infrastructure and systems to accommodate growth and
recruit and train additional qualified personnel. Furthermore, the United States
economy is currently showing signs of a possible economic slowdown. Should an
economic slowdown or recession occur, competition for customers in the staffing
industry would increase and may adversely impact management's allocation of the
Company's resources and result in declining revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Growth Strategy."

RELIANCE ON EXECUTIVE MANAGEMENT. The Company has retained an executive
search firm to identify suitable candidates for the position of Chief Executive
Officer, and the Company's Compensation Committee is screening and interviewing
candidates. The failure to find a suitable successor candidate for the position
of Chief Executive Officer, or the result of a prolonged search for that
candidate, could have a material adverse effect on the Company's ability to
manage its personnel and efficiently address changes in the business and its
operations. In addition, without a Chief Executive Officer, the Company would be
even more dependent on its senior executives and outside directors. The Company
is highly dependent on its senior executives, including W. Robert Stover, its
Chairman and founder, who has been serving as interim President and Chief
Executive since May 3, 2000, when the recapitalization agreement was terminated
and Michael K. Phippen resigned; Dirk A. Sodestrom, currently Senior Vice
President and Chief Financial Officer who has been serving in that capacity
since January 1, 2001, following Paul A. Norberg's retirement, and on the other
members of its senior management team. The Company entered into an employment
agreement with Mr. Stover effective January 1, 1999 for continuing employment
until he chooses to retire or until his death and that agreement remains in
effect as written, except for a subsequent salary increase when he assumed the
position of interim President and Chief Executive Officer. The Company has
entered into a new employment agreement with Mr. Sodestrom effective January 1,
2001 that contains a requirement for

six-months' advance notice of termination. Employment arrangements with all of
the Company's executive officers other than Mr. Stover are at-will. The loss of
the services of either Mr. Stover or Mr. Sodestrom and other senior executives
or other key executive personnel could have a material adverse effect on the
Company's business, results of operations, cash flows or financial condition.

RELIANCE ON MANAGEMENT INFORMATION SYSTEMS. The Company believes its
management information systems are instrumental to the success of its
operations. The Company's business depends on its ability to store, retrieve,
process and manage significant amounts of data. The Company continually
evaluates the quality, functionality and performance of its systems in an effort
to ensure that these systems meet the operational needs of the Company. During
fiscal 1999 and fiscal 2000, the Company completed the implementation and
rollout of a frame relay network, completed the conversion of the majority of
its back-office functions to an integrated ERP application provided by Lawson
Software and is in the process of completing the rollout of the WAVE, a
full-featured branch office tool, designed to assist in order management,
candidate search and recruiting, customer service management, and sales
management that also allows for sharing of information between offices. The
Company is presently finalizing plans to convert the temporary payroll functions
to the Lawson system and expects to complete this process during fiscal 2002.
The Company continues to invest in efforts to upgrade and improve the
functionality, performance and utility of its systems. Furthermore, the Company
is currently working on a collaborative agreement with Lawson Software to
provide enhanced functionality to better meet the needs of the temporary
staffing industry. The Company has, in the past, discovered problems in
implementing, upgrading or enhancing systems and may, in the future, experience
delays or increased costs to correct such defects. There can be no assurance
that the Company will meet anticipated completion dates for system replacements,
upgrades or enhancements, that such work will be completed in a cost-effective
manner, or that such replacements, upgrades and enhancements will support the
Company's future growth or provide significant gains in efficiency. The failure
of the replacements, upgrades and enhancements to meet these expected goals
could result in increased system costs and could have a material adverse effect
on the Company's business, results of operations, cash flows or financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Management Information Systems."

RISKS RELATED TO INTERNATIONAL OPERATIONS. The Company presently has
operations in Australia, the United Kingdom, Norway, New Zealand and Denmark.
The Company began to establish operations in Mexico in the fourth quarter of
fiscal 2000, and it plans to operate there during fiscal 2001. Operations in
foreign markets are inherently subject to certain risks, including, in
particular, different cultures and business practices, overlapping or differing
tax structures, economic and political uncertainties and compliance issues
associated with accounting and reporting requirements and changing and, in some
cases, complex or ambiguous foreign laws and regulations, particularly as they
relate to employment. All of the Company's sales outside of the United States
are denominated in local currencies and, accordingly, the Company is subject to
risks associated with fluctuations in exchange rates which could cause a
reduction in the Company's profits. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business,
results of operations, cash flows or financial condition.

VARIABILITY OF EMPLOYEE-RELATED COSTS. The Company is responsible for all
employee-related expenses for the temporary employees of its Company-owned and
franchise agent offices, including workers' compensation, unemployment
insurance, social security taxes, state and local taxes and other general
payroll expenses. The Company maintains workers' compensation insurance for all
claims in excess of a loss cap of $500,000 per incident, except with respect to
locations in states where private insurance is not permitted and which are
covered by state insurance funds. The Company accrues for workers' compensation
costs based upon payroll dollars paid to temporary employees. The accrual rates
vary based upon the specific risks associated with the work performed by the
temporary employee. At the beginning of each policy year, the Company reviews
the overall accrual rates with its outside

actuaries and makes changes to the rates as necessary based primarily upon
historical loss trends. Periodically, the Company evaluates its historical
accruals based on an actuarially developed estimate of the ultimate cost for
each open policy year and adjusts such accruals as necessary. These adjustments
can either be increases or decreases to workers' compensation costs, depending
upon the actual loss experience of the Company. During fiscal 2000, the Company
recorded charges of $2.1 million to increase workers' compensation accruals
based on loss exposure. Although management believes that the Company's accruals
for workers' compensation obligations are adequate, there can be no assurance
that the actual cost of workers' compensation obligations will not exceed the
accrued amounts. In addition, there can be no assurance that the Company's
programs to control workers' compensation and other payroll-related expenses
will be effective or that loss development trends will not require a charge to
costs of services in future periods to increase workers' compensation accruals.
Unemployment insurance premiums are set by the states in which the Company's
employees render their services. A significant increase in these premiums or in
workers' compensation-related costs could have a material adverse effect on the
Company's business, results of operations, cash flows or financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Risk Management Programs."

RISKS RELATED TO CUSTOMERS. As is common in the temporary staffing
industry, the Company's engagements to provide services to its customers are
generally of a non-exclusive, short-term nature and subject to termination by
the customer with little or no notice. During fiscal 1999 and 2000, no single
customer of the Company accounted for more than 1.0% and 3.0%, respectively, of
the Company's sales of services. Nonetheless, the loss of any of the Company's
significant customers could have an adverse effect on the Company's business,
results of operations, cash flows or financial condition. The Company is also
subject to credit risks associated with its trade receivables. During fiscal
1999 and fiscal 2000, the Company incurred costs of $2.5 million and
$4.0 million, respectively, for bad debts. Should any of the Company's principal
customers default on their large receivables, the Company's business, results of
operations, cash flows or financial condition could be adversely affected. See
"Business--Services."

VARIABILITY OF OPERATING RESULTS; SEASONALITY. The Company has experienced
significant fluctuations in its operating results and anticipates that these
fluctuations may continue. Operating results may fluctuate due to a number of
factors, including the demand for the Company's services, the level of
competition within its markets, the Company's ability to increase the
productivity of its existing offices, control costs and expand operations, the
timing and integration of acquisitions and the availability of qualified
temporary personnel. In addition, the Company's results of operations could be,
and have in the past been, adversely affected by severe weather conditions. The
Company's fourth fiscal quarter consists of 16 or 17 weeks, while its first,
second and third fiscal quarters consist of 12 weeks each. Moreover, the
Company's results of operations have also historically been subject to seasonal
fluctuations. Demand for temporary staffing historically has been greatest
during the Company's fourth fiscal quarter due largely to the planning cycles of
many of its customers. Furthermore, sales for the first fiscal quarter are
typically lower due to national holidays as well as plant shutdowns during and
after the holiday season. These shutdowns and post-holiday season declines
negatively impact job orders received by the Company, particularly in the light
industrial sector. Due to the foregoing factors, the Company has experienced in
the past, and may possibly experience in the future, results of operations below
the expectations of public market analysts and investors. The occurrence of such
an event could likely have a material adverse effect on the price of the Common
Stock. See "--Variability of Employee--Related Costs" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Continuing Operations."

ABILITY TO ATTRACT AND RETAIN THE SERVICES OF QUALIFIED TEMPORARY
PERSONNEL. The Company depends upon its ability to attract and retain qualified
personnel who possess the skills and experience necessary to meet the staffing
requirements of its customers. During periods of increased economic activity and

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

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

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

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

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

RISKS RELATED TO FRANCHISE AGENT AND LICENSED OPERATIONS. Franchise agent
and licensed operations comprise a significant portion of the Company's sales of
services and license fees. For fiscal 1999 and fiscal 2000, 20.6% and 20.1%,
respectively, of the Company's total sales of services and license fees were
derived from franchise agent and licensed operations. In addition, the Company's
ten largest franchise agents for fiscal 2000 (based on sales volume) accounted
for 11.1% of the Company's sales of services. The loss of one or more of the
Company's franchise agents or licensees, and any associated loss of customers
and sales, could have a material adverse effect on the Company's business,
results of operations, cash flows or financial condition. The Company is
currently negotiating with two licensees who wish to purchase the Company's
interests in their licensed operations. These two licensees operate a total of
four licensed offices. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

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

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

RISKS OF EURO INTRODUCTION. Beginning in January 1999, a new currency
called the "euro" was introduced in certain European countries that are part of
the Economic and Monetary Union ("EMU"). The conversion rates between the euro
and the participating nations' currencies have been fixed irrevocably as of
January 1, 1999, with the participating national currencies being removed from

circulation between January 1 and June 30, 2002 and replaced by euro notes and
coinage. A significant amount of uncertainty exists as to the effect the euro
will have on the marketplace. Currently, the Company does not operate in any
countries that are part of the EMU; however, the Company operates in the United
Kingdom, Norway and Denmark, which may join the EMU at a future date. To date,
the Company has not incurred any material costs of addressing the euro formation
and does not anticipate incurring material costs in the future; however, the
Company will continue to assess the effect the euro formation may have on its
internal systems and the sales of its services and take appropriate actions
based on the results of such assessment. There can be no assurance that this
issue and its related costs will not have a material adverse effect on the
Company's future business, results of operations, cash flows or financial
condition. See "Business--Services" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--European Currency."

RISKS RELATED TO ACQUISITIONS. In fiscal 2000, the Company did not make any
strategic external acquisitions nor did it buy back the interests of any
franchise agents. Since the start of fiscal 2000, the Company made one internal
acquisition, a buyout of one licensee that the Company believes was not
material. The Company has no near-term acquisition plans other than possible
franchise agent buybacks or other licensee buyouts, and no such acquisition
transactions are presently pending.

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

The undersigned Registrant hereby amends Part I, Item 2 of the Form 10-K to
update it as follows:

ITEM 2. PROPERTIES.

The executive offices of the Company are located at 301 Lennon Lane, Walnut
Creek, California. As of February 20, 2001, the Company owned four buildings,
totaling approximately 66,000 square feet, which house its corporate
headquarters. Certain of these buildings were subject to a trust deed that has
been fully repaid. In fiscal 2000, the Company sold two buildings consisting of
approximately 10,000 total square feet for cash proceeds of $1.0 million and has
consolidated its corporate operations utilizing office space made available from
the discontinuation of its medical operations.

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

The undersigned Registrant hereby amends Part I, Item 3 of the Form 10-K to
update it as follows:

ITEM 3. LEGAL PROCEEDINGS.

In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits. The principal risks
that the Company insures against are workers' compensation, bodily injury,
property damage, professional malpractice, errors and omissions and fidelity
losses. On March 9, 2000, Synergy Staffing, Inc. filed a complaint in the
Superior Court of the State of California for the County of Los Angeles, Central
District. The defendants named in the case are Westaff, Inc., W. Robert Stover,
Michael K. Phippen, Paul A. Norberg, Jack D. Samuelson, Gilbert L. Sheffield,
Mike Ehresman and Does 1-10.

The complaint alleges, among other things, that the defendants fraudulently
induced plaintiffs to sell the assets of The Personnel Connection, Inc. The
plaintiff sought to have the court grant a jury trial, and award the plaintiff
compensatory and punitive damages and attorneys' fees and other costs. The
Company's petition for an order compelling arbitration was granted, the Superior
Court lawsuit has been stayed, a demand for arbitration was made and an
arbitration proceeding is pending.

On or about August 18, 2000, Intrepid U.S.A. Inc. filed a demand for
arbitration with the American Arbitration Association in San Francisco,
California. The defendants named in the demand are Westaff (USA), Inc., Western
Medical Services, Inc. and two other subsidiary corporations that were involved
in the operation of the Company's medical business.

The demand alleges, among other things, that the defendants made
misrepresentations and otherwise breached the asset purchase agreement for the
sale of substantially all the assets of the Company's medical business. The
defendants filed an answering statement, counterclaim and demand against
guarantors, denying all liability and seeking payment for the accelerated
$1.0 million balance of the purchase price and other charges due to the Company.
The petitioner filed a reply in which it expanded its damages claim. Discovery
proceedings were conducted and an arbitration hearing has been held. The
arbitrator has taken the case under submission.

Except as disclosed above, the Company is not currently a party to any
material litigation. However, from time to time the Company has been threatened
with, or named as a defendant in, lawsuits, including countersuits brought by
former franchise agents or licensees, and administrative claims and lawsuits
brought by employees or former employees.

The undersigned Registrant hereby restates Part I, Item 4 of the Form 10-K
in its entirety, as originally filed.

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

Not applicable.

The undersigned Registrant hereby amends Part II, Item 5 of the Form 10-K to
update it as follows:

PART II

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

The Company's Common Stock has been included for quotation in the Nasdaq
National Market under the symbol "WSTF" since April 30, 1996. The following
table sets forth, for the periods indicated, the high and low closing sales
prices of the Common Stock as reported on the Nasdaq National Market.

HIGH LOW
-------- --------

Fiscal 1999:
First Quarter ended January 23, 1999...................... $11.63 $5.94
Second Quarter ended April 17, 1999....................... 8.25 4.69
Third Quarter ended July 10, 1999......................... 7.50 5.06
Fourth Quarter ended October 30, 1999..................... 9.06 5.50
Fiscal 2000:
First Quarter ended January 22, 2000...................... 8.63 5.63
Second Quarter ended April 15, 2000....................... 9.25 7.06
Third Quarter ended July 8, 2000.......................... 8.38 3.86
Fourth Quarter ended October 28, 2000..................... 5.06 3.00
Fiscal 2001:
First Quarter through January 20, 2001.................... 3.25 1.50
Second Quarter through February 20, 2001.................. 2.94 2.31

On February 20, 2001, the last reported sales price on the Nasdaq National
Market for the Common Stock was $2.44 per share. As of February 20, 2001, there
were approximately 1,411 beneficial owners of the Common Stock.

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

The undersigned Registrant hereby restates Part II, Item 6 of the Form 10-K
in its entirety, as originally filed.

ITEM 6. SELECTED FINANCIAL DATA.

FISCAL YEAR
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS AND NUMBER OF OFFICES)

Sales of services and license fees........ $662,955 $650,752 $599,709 $530,076 $441,808
Operating income.......................... 14,793 25,350 24,020 15,523 13,757
Income from continuing operations......... 7,235 14,007 13,748 9,210 2,725
======== ======== ======== ======== ========
Diluted earnings per share--continuing
operations.............................. $ 0.46 $ 0.88 $ 0.87 $ 0.60 $ 0.19
======== ======== ======== ======== ========
Pro forma income from continuing
operations(1)........................... $ 8,203
========
Diluted pro forma earnings per share--
continuing operations(1)................ $ 0.57
========

BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................... $ 61,767 $ 59,853 $ 57,702 $ 45,184 $ 31,982
Total assets.............................. 183,072 190,830 197,145 154,530 120,780
Short-term debt........................... 13,250 14,100 20,423 21,298 11,193
Long-term debt (excluding current
portion)................................ 37,250 41,608 44,708 17,631 3,603
Stockholders' equity...................... 73,166 74,941 67,483 57,296 49,252
OTHER OPERATING DATA:
Number of offices (at end of period)
Company-owned........................... 257 264 267 226 217
Franchise agent......................... 81 75 82 103 103
Licensed................................ 16 24 25 11 7
-------- -------- -------- -------- --------
Total................................. 354 363 374 340 327
======== ======== ======== ======== ========

SYSTEM REVENUE DATA (EXCLUDING LICENSE
FEES):
Domestic business services.............. $604,520 $597,874 $549,689 $473,192 $418,546
International business services......... 97,375 92,438 77,492 72,554 58,872
-------- -------- -------- -------- --------
Total................................. $701,895 $690,312 $627,181 $545,746 $477,418
======== ======== ======== ======== ========

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

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

The undersigned Registrant hereby restates Part II, Item 7 of the Form 10-K
in its entirety, as originally filed.

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

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

In addition to historical information, this discussion and analysis includes
certain forward-looking statements regarding events and financial trends that
may affect the Company's future operating results and financial position. These
forward-looking statements include, but are not limited to, statements regarding
sales, acquisitions, gross margin, workers' compensation costs, communication
costs, selling and administrative expenses, depreciation expenses, interest
expense, income taxes, capital expenditures, capital resources, management
information systems 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, the availability of sufficient personnel, including the employment
and retention of a qualified Chief Executive Officer, and the ability of the
Company to complete the realization of the remaining medical assets. Due to the
foregoing factors, it is possible that in some future period the Company's
results of operations may be below the expectations of public market analysts
and investors. In addition, the Company's results of operations have
historically been subject to quarterly and seasonal fluctuations. Demand for
temporary staffing is historically highest in the fourth fiscal quarter, due
largely to the planning cycles of many of the Company's customers, and typically
lower in the first fiscal quarter, due, in part, to national holidays as well as
to plant shutdowns during and after the holiday season. These and other risks
and uncertainties related to the Company's business are described in detail in
"Factors Affecting Future Operating Results."

OVERVIEW

The Company provides temporary staffing services primarily in suburban and
rural markets ("secondary markets"), as well as in the downtown areas of major
urban centers ("primary markets"), in the United States and selected
international markets. Through its network of Company-owned, franchise agent and
licensed offices, the Company offers a wide range of temporary staffing
solutions, including replacement, supplemental and on-site programs to
businesses and government agencies. The Company has over 50 years of experience
in the staffing industry and operates over 350 business services offices in 44
states, the District of Columbia and five foreign countries.

The general level of economic activity and unemployment in the United States
and the countries in which the Company operates significantly affects demand for
the Company's staffing services. Companies 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.

RECENT DEVELOPMENTS

On May 3, 2000, the Company announced that a recapitalization agreement
signed on March 7, 2000 was terminated by mutual consent of all parties. In
connection with the termination, Michael K. Phippen, then President and Chief
Executive Officer, resigned and W. Robert Stover, Chairman of the Board of
Directors, assumed the position of interim President and Chief Executive
Officer. As a result of the recapitalization termination, the Company incurred
$638,000 in pre-tax charges during the second quarter of fiscal 2000 and
recorded additional pre-tax charges of $1.3 million in the third fiscal quarter
ended July 8, 2000.

DISCONTINUED OPERATIONS

In November 1998, the Company announced its plan to sell Western Medical. As
a result of this decision, the Company has classified its medical operations as
discontinued operations and, accordingly, has segregated the net assets of the
discontinued operations in the accompanying Consolidated Financial Statements
and Notes thereto. In connection with the decision to discontinue the medical
operations, the Company recorded an after-tax loss in fiscal 1998 of
$6.3 million or $0.40 per share. This loss was related primarily to reduced
revenues in connection with Medicare's Interim Payment System enacted as part of
the Balanced Budget Act of 1997, reduced revenues as a result of settlement of a
prior year Medicare audit, additional reserves for Medicare accounts receivable,
increases in allowances for doubtful accounts and other charges. In addition,
during fiscal 1998 the Company recorded an after-tax charge on the planned
disposal of its medical operations of $3.5 million or $0.23 per share. This
included an estimated charge for the write down of assets to estimated net
realizable value, estimated costs to sell the operations and estimated operating
losses during the disposal period.

During fiscal 1999, the Company sold certain of its franchise agent and
Company-owned medical offices and entered into a termination agreement with one
of its medical licensees. During the fourth quarter of fiscal 1999, the Company
completed the sale of the remaining medical business. Under the terms of the
sale, the Company retained the trade and Medicare accounts receivable balances
as well as the due from licensee balances. In fiscal 1999, the Company recorded
after-tax losses relating to discontinued operations of $6.6 million or $0.42
per share. These losses primarily represented reserves for trade and Medicare
accounts receivable and due from licensee balances, and also included additional
operating losses resulting from the extended period required to close the sale
and a reduction in the estimated proceeds from the sale.

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

As of October 28, 2000, the Company has received $1.7 million in cash
proceeds from the sale of its medical operations with an additional
$1.0 million due on the balance of the purchase price. The $1.0 million balance
due, plus interest thereon, is owed to the Company under a guaranteed promissory
note, which is in default. See Item 3. Legal Proceedings.

The amount of the estimated loss on disposal of the medical operations is
based on a number of assumptions. These include the estimated costs and
write-offs required to collect the remaining

Medicare accounts receivable and due from licensee balances and estimated costs
to be incurred in filing and settling all remaining Medicare cost reports. There
can be no assurance that the Company will be able to complete the collection of
the remaining Medicare accounts receivable and due from licensee balances on
terms and costs similar to those estimated by the Company. Furthermore, there
can be no assurance that the Company will be successful in collecting the
remaining $1.0 million outstanding purchase price balance due on the sale of the
medical business. Should actual costs differ materially from those estimated by
management, the Company would record additional losses (or gains) in future
periods.

RESULTS OF CONTINUING OPERATIONS

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

FISCAL YEAR
------------------------------------
2000 1999 1998
-------- -------- --------

Sales of services........................................... 99.5% 99.5% 99.7%
License fees................................................ 0.5% 0.5% 0.3%
----- ----- -----
Total sales of services and license fees.................... 100.0% 100.0% 100.0%
Costs of services........................................... 79.4% 78.8% 78.8%
----- ----- -----
Gross profit................................................ 20.6% 21.2% 21.2%
Franchise agents' share of gross profit..................... 2.7% 2.6% 2.8%
Selling and administrative expenses......................... 14.4% 13.4% 13.2%
Depreciation and amortization............................... 1.3% 1.3% 1.2%
----- ----- -----
Operating income from continuing operations................. 2.2% 3.9% 4.0%
Interest expense............................................ 0.5% 0.4% 0.3%
Interest income............................................. -0.1% -0.1% -0.1%
----- ----- -----
Income from continuing operations before income taxes....... 1.8% 3.6% 3.8%
Provision for income taxes.................................. 0.7% 1.4% 1.5%
----- ----- -----
Income from continuing operations........................... 1.1% 2.2% 2.3%
===== ===== =====

FISCAL 2000 COMPARED TO FISCAL 1999

SALES OF SERVICES AND LICENSE FEES. Sales of services increased
$12.4 million, or 1.9%, for fiscal 2000 as compared to fiscal 1999. Average bill
rates increased 2.9% in fiscal 2000 as compared to fiscal 1999, while billed
hours declined slightly. Same store sales increased by 3.3% for fiscal 2000 as
compared to fiscal 1999. Sales of services increased 1.3% for domestic business
services and 5.3% for international business services. Fiscal 2000 domestic
sales of services have been adversely affected by competitive pressures for the
supply of temporary staff as a result of the low unemployment rates in the
United States economy during fiscal 2000 as well as more recent decreasing
demand for temporary staffing services in some sectors of the economy. Recent
trends in the United States economy are indicating a possible slowdown in
economic activity. Depending upon the extent of the economic slowdown, the
Company currently estimates that its sales will decline during at least the
first quarter of fiscal 2001, and quite likely beyond. Continued declines in
foreign currency exchange rates have negatively impacted the international
results as reported. Excluding the effect of these rate fluctuations, fiscal
2000 international sales of services increased 13.0% as compared to fiscal 1999.
Acquisitions did not have a significant effect on the increase in fiscal 2000
sales of services. During the fourth quarter of fiscal 2000, the Company
purchased the operations of one of its licensees. Fiscal 1999 acquisitions were
limited to buy backs and conversion of six of the Company's franchise agents'
operations to Company-owned offices.

License fees are charged to licensed offices based either on a percentage of
sales or of gross profit generated by the licensed offices. License fees
decreased $199,000 or 6.1%, for fiscal 2000 as compared to fiscal 1999. During
the fourth quarter of fiscal 2000 the Company purchased the operations of one of
its licensees, two licensees converted to the Company's franchise agent program,
and two licensees essentially closed operations. The Company is currently in
negotiations with two of its licensees who wish to purchase the Company's
interest in their licensed operations. License fees for these two licensees in
fiscal 2000 were approximately $1.2 million. If these negotiations are
successful, the Company would recognize a gain on the sale at the date of the
closing; however, future license fee income from these operations would cease.

COST OF SERVICES. Costs of services include hourly wages of temporary
employees, employer payroll taxes, state unemployment and workers' compensation
insurance and other employee-related costs. Costs of services increased
$13.7 million, or 2.7%, for fiscal 2000 as compared to fiscal 1999. Gross margin
declined from 21.2% in fiscal 1999 to 20.6% in fiscal 2000 primarily due to
higher workers' compensation costs and lower license fees. Additionally, the
Company has expanded its On-Location program accounts which generally carry
lower margins than traditional service accounts, and is experiencing increased
downward pressures on margins due to competition. The Company will continue its
efforts to improve gross margin where feasible, however, within the current
business climate and with increased workers' compensation costs, the Company
believes that there are fewer opportunities available to increase gross margin.
There can be no assurance that the Company will be successful in either
increasing or maintaining gross margin.

Workers' compensation costs were 4.0% of payroll for fiscal 2000 and 3.0%
for fiscal 1999. As a result of increases in the Company's actuarially estimated
ultimate losses for all open policy years, the Company recorded an additional
charge for workers' compensation costs of $2.1 million, or $0.08 per share, net
of taxes, during the fourth quarter of fiscal 2000. The Company currently
estimates that the accrual rates for workers' compensation costs will be in the
range of 4.2% to 4.8% of direct labor for fiscal 2001. These rates may change
depending upon the results of actuarial estimates. The Company will review
interim actuarial estimates throughout fiscal 2001 to ensure that accrual rates
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 $822,000, or 4.8%,
for fiscal 2000 as compared to fiscal 1999. As a percentage of sales of services
and license fees, franchise agents' share of gross profit increased from 2.6%
during fiscal 1999 to 2.7% for fiscal 2000.

SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $8.2 million, or
8.6%, for fiscal 2000 as compared to fiscal 1999. As a percentage of sales of
services and license fees, selling and administrative expenses increased from
14.7% for fiscal 1999 to 15.7% for fiscal 2000. As noted in Recent Developments
above, fiscal 2000 includes $1.9 million in pre-tax charges as a result of the
terminated recapitalization. Fiscal 2000 also reflects increased costs for bad
debts, increased communication costs in connection with the Company's wide area
network, higher depreciation and outside services costs for on-going management
information system initiatives (see Item 1. Business--Management Information
Systems) and increased foreign currency transaction losses due to the effect of
declining exchange rates with the Company's international operations.
Additionally, selling and administrative expenses for fiscal 1999 were lower as
a result of domestic gross receipt tax refunds and United Kingdom advance
corporation tax refunds. The Company has moved aggressively to tighten the
controls over credit granting and collections;

however, there can be no assurance that such actions will result in a reduction
in bad debt levels in the future.

As noted above, selling and administrative expenses are impacted by the
Company's management information systems. During fiscal 1999 and fiscal 2000,
the Company replaced its back-office financial reporting systems, implemented a
new billing and activities management system and implemented a wide area network
to allow for enhanced communication and data transmission capabilities among the
field and corporate offices. The Company has also been rolling out a new branch
office search and retrieval and remote data capture module. As of October 28,
2000, 183 domestic offices were live on the front-office system. The Company
expects to complete the initial roll-out of the front office system by the end
of the fourth quarter of fiscal 2001. The Company is currently working on system
upgrades and functional enhancements for its financial and billing systems and
is developing plans to convert its current temporary payroll system to a new
system in fiscal 2002. The Company is also working with its key software vendor
to build additional functionality within the core product that will better serve
the needs of the temporary staffing industry.

As a result of these system initiatives, the Company incurred increased
costs for communications, depreciation and system maintenance during fiscal 1999
and fiscal 2000. As the wide area network is fully deployed, the Company expects
communications costs for fiscal 2001 to be similar to fiscal 2000. Furthermore,
the Company's temporary payroll system is now fully depreciated. Accordingly,
depreciation expense for fiscal 2001 is expected to decrease as compared to
fiscal 2000. The Company continues to invest in efforts to upgrade and improve
the functionality, performance and utility of its systems. Furthermore, the
Company's temporary payroll system is critical to the success of the Company and
the planned conversion to the new system will be key to enhancing the
performance and functionality of the payroll process. There can be no assurance
that the Company will meet anticipated completion dates for its system
initiatives, that such systems will be completed in a cost-effective manner or
that such systems will support the Company's future growth or provide
significant gains in efficiency and productivity. The failure of these systems
to meet these expected goals could result in increased system costs and could
have a material adverse effect on the Company's business, results of operations,
cash flows or financial condition.

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

PROVISION FOR INCOME TAXES. The provision for income taxes for fiscal 2000
decreased $4.4 million, or 48.3%, as compared to fiscal 1999 reflecting the
decrease in pre-tax income from continuing operations of $11.2 million. The
effective income tax rate was 39.5% for both fiscal years. The Company currently
estimates that the effective income tax rate for fiscal 2001 will be
approximately 40.0%.

FISCAL 1999 COMPARED TO FISCAL 1998

SALES OF SERVICES AND LICENSE FEES. Sales of services increased
$49.9 million, or 8.3%, for fiscal 1999 as compared to fiscal 1998. The increase
resulted from a 4.6% increase in billed hours and a 3.6% increase in average
billing rates per hour. Billed hours increased primarily due to acquisitions,
increased demand for the Company's services in existing offices and new office
openings. Same store sales increased approximately 3.6% for fiscal 1999 as
compared to fiscal 1998. Acquisitions accounted for approximately $27.9 million
of the increase in sales of services. Sales of services for fiscal 1999
increased 6.7% and 19.3%, respectively, for domestic business services and
international business services as compared to fiscal 1998. Excluding the effect
of foreign currency rate fluctuations, sales of services increased 19.6% for
international business services. The increase in average billing rates reflects
changes in the Company's overall business mix and inflationary factors.

License fees increased $1.2 million, or 56.7%, for fiscal 1999 as compared
to fiscal 1998 primarily due to internal growth and to conversions of franchise
agents to the license program. During fiscal 1998, nine franchise agents
converted to the license program and two licensees purchased the Company's
interest in their licenses and became independent.

COST OF SERVICES. Costs of services increased $40.0 million, or 8.5%, for
fiscal 1999 as compared to fiscal 1998. Gross margin was 21.2% in both fiscal
1999 and fiscal 1998. Gross margin for domestic business services increased from
20.8% in fiscal 1998 to 20.9% in fiscal 1999. Gross margin for international
business services decreased from 21.5% in fiscal 1998 to 20.2% in fiscal 1999,
primarily due to lower margins in Australia in connection with a large contract
with fees based on productive output, which had not yet achieved its targeted
productivity levels.

Workers' compensation costs were 3.0% of payroll for fiscal 1999 and 3.2%
for fiscal 1998. These costs tend to vary depending upon the mix of business
between clerical staffing and light industrial staffing.

FRANCHISE AGENTS' SHARE OF GROSS PROFIT. Franchise agents' share of gross
profit increased $370,000, or 2.2%, for fiscal 1999 as compared to fiscal 1998.
As a percentage of sales of services and license fees, franchise agents' share
of gross profit declined from 2.8% during fiscal 1998 to 2.6% for fiscal 1999.
This decrease is primarily the result of franchise conversions to the license
program in fiscal 1998 as noted above.

SELLING AND ADMINISTRATIVE EXPENSES (INCLUDING DEPRECIATION AND
AMORTIZATION). Selling and administrative expenses increased $9.3 million, or
10.8%, for fiscal 1999 as compared to fiscal 1998. As a percentage of sales of
services and license fees, selling and administrative expenses increased from
14.4% for fiscal 1998 to 14.7% for fiscal 1999. The increase in selling and
administrative expenses as a percentage of sales of services and license fees
was primarily due to higher costs incurred in connection with the Company's
management information system initiatives (see Fiscal 2000 compared to Fiscal
1999--Selling and Administrative Expenses and Item 1. Business--Management
Information Systems), increased bad debts, higher medical plan costs and higher
amortization costs resulting from acquisitions. The increased costs associated
with the Company's information system initiatives include higher communication
costs in connection with the implementation of the Company's wide area network,
increased depreciation costs and higher maintenance costs associated with the
new software products. The relative volume of franchise business also affects
the overall selling and administrative costs. As the proportion of franchise
sales and gross profit declines relative to total sales (due to conversions from
franchise agent offices to licensed offices or Company-owned offices), franchise
agents' share of gross profit declines as a percentage of sales of services and
license fees, and selling and administrative costs tend to increase as a
percentage of sales of services and license fees.

INTEREST EXPENSE. Interest expense increased $961,000, or 61.5%, for fiscal
1999 as compared to fiscal 1998, reflecting higher average borrowings
outstanding during fiscal 1999 required to support the Company's internal
growth, capital expenditures and acquisitions.

PROVISION FOR INCOME TAXES. The provision for income taxes for both fiscal
1998 and fiscal 1999 was $9.2 million. The effective income tax rate for fiscal
1999 was 39.5% as compared to 40.0% in fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has financed its operations through cash generated
by operating activities and through various forms of debt and equity financing
and bank lines of credit. The Company's principal use of cash is for financing
of accounts receivable, particularly during periods of growth and, in relatively
recent years, for management information systems initiatives. Temporary
personnel are generally paid on a weekly basis while payments from customers are
generally received

30 to 60 days after billing. As a result of seasonal fluctuations, accounts
receivable balances are historically higher in the fourth fiscal quarter and are
generally at their lowest during the first fiscal quarter. Accordingly,
short-term borrowings used to finance accounts receivable generally follow a
similar seasonal pattern.

Net cash provided by operating activities was $16.7 million, $15.4 million,
and $4.4 million for fiscal 2000, fiscal 1999 and fiscal 1998, respectively. In
fiscal 2000, increased net cash flows were primarily provided by net deferred
tax benefits realized on the discontinued medical operations, increases in the
provision for bad debts, changes in due from licensees due to changes in the
number of licensees and collection of receivables, and changes in other asset
balances. Fiscal 1999 cash flows provided by operating activities included
$10.9 million provided by discontinued operations, primarily due to the
collection of receivables. In fiscal 1998, cash flows provided by operating
activities were reduced by $6.2 million as a result of medical business
operating losses and the estimated loss on the disposal of these operations.

Cash used for capital expenditures, which are primarily for management
information systems initiatives, other software, computers and peripherals, and
office furniture and equipment, totaled $4.4 million, $8.2 million and
$8.9 million for fiscal 2000, fiscal 1999 and fiscal 1998, respectively. The
increase in capital expenditures during fiscal 1999 and fiscal 1998 is
associated with payments for the Company's next generation management
information and support systems--in particular, its wide area network and
back-office financial and accounting suites. In fiscal 1999, the Company began
rolling out a new front office search and retrieval and data capture model.
Capital expenditures for these systems through the end of fiscal 2000 totaled
$12.5 million including costs of hardware, software and internal and external
costs associated with implementation of the projects. The Company is currently
working on systems upgrades and functional enhancements to its financial and
billing systems. The Company currently anticipates total fiscal 2001 capital
expenditures to be approximately $5.0 million.

During fiscal 2000, fiscal 1999 and fiscal 1998, cash outflows for new
acquisitions and for contingent payments under existing acquisitions totaled
$136,000, $1.7 million, and $15.4 million, respectively. The Company currently
intends to focus on internal growth and has no plans to make major acquisitions
at this time. In the future, the Company may again pursue opportunities for
growth through strategic external acquisitions.

Cash of $1.7 million was received through fiscal 2000 in connection with the
sale of the medical operations. An additional $1.0 million is due on the balance
of the purchase price under a guaranteed promissory note which is in default
(see Item 3. Legal Proceedings). Cash outflows in fiscal 1998 of $2.6 million
from investing activities of the discontinued medical operations primarily
represented payments for acquisitions and capital expenditures.

During the second and third quarters of fiscal 2000, the Company sold two of
its six corporate headquarter buildings for cash proceeds of $1.0 million and
has consolidated its corporate operations utilizing office space made available
from the discontinuation of its medical operations.

During fiscal 2000, the Company reduced borrowings by a net $5.2 million.
The Company's ability to maintain relatively lower debt levels during fiscal
2000 is primarily attributable to lower levels of sales growth and to reductions
in capital expenditures for management information systems implementations as
compared to fiscal 1999 and fiscal 1998. The Company has senior secured credit
facilities for up to $108.0 million consisting of a $90.0 million five-year
revolving line of credit and an $18.0 million six-year term loan. Direct
advances under the revolving credit agreement are limited by outstanding
irrevocable standby letters of credit of 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. As of October 28, 2000, the Company had $7.3 million available under its
revolving credit facility, with $10.0 million outstanding for direct advances
and $9.6 million outstanding

for letters of credit. Effective November 1, 2000, the Company obtained an
$11.8 million financial guarantee bond, expiring November 1, 2001, to secure a
portion of its workers' compensation premium and deductible obligations.
Additionally, in December 2000 the Company increased its outstanding irrevocable
standby letters of credit to $11.8 million.

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.

The Company's debt facilities contain certain financial and other covenants,
the most restrictive of which is a total debt to capitalization ratio. The
Company was in compliance with these covenants as of October 28, 2000.

Based on current projections, the management believes there is a possibility
that the Company may be out of compliance with one of its credit facility's
financial covenants in the first quarter of fiscal 2001. The Company has been
out of compliance with one or more covenants in the past and has received
waivers and amendments with respect to such covenants from its bank lenders. The
management believes that in the event the Company is out of compliance with the
covenant, it will be able to obtain a waiver or amendment; however, there can be
no assurance that the Company's bank lenders would grant one. If the Company
were unable to obtain the waiver or amendment, management believes that
alternative sources of financing for amounts outstanding under its credit
facility could be obtained; however, there can be no assurance that such
alternative sources of financing could be obtained.

During fiscal 2000, fiscal 1999 and fiscal 1998, the Company repurchased
150,000, 100,000 and 180,000 shares of common stock on the open market for
aggregate cash consideration of $712,000, $675,000 and $3.0 million,
respectively. During fiscal 2000, fiscal 1999 and fiscal 1998, 93,000, 136,000
and 186,000 shares were reissued under the employee stock option and purchase
plans with aggregate cash proceeds of $424,000, $822,000 and $1.8 million,
respectively.

In July 1998, the Company acquired substantially all of the assets of The
Personnel Connection, Inc. Consideration for the acquisition consisted of cash
and common stock, with a contingent obligation to issue up to an additional
100,000 shares of common stock dependent on the fair market value of the
Company's stock subsequent to the acquisition. On January 27, 2000, the Company
paid the selling parties $800,000 in lieu of issuing additional shares, with an
offsetting reduction in additional paid-in capital.

On June 20, 2000, the Company's Board of Directors declared a special cash
dividend of $0.30 per share of common stock paid on July 18, 2000 to
stockholders of record as of July 5, 2000. The distribution totaled
$4.7 million.

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 Common Stock which may be offered in the future in connection with the
Company's acquisition program, of which approximately 420,000 shares have been
issued.

The Company has filed registration statements under the Securities Act with
respect to an aggregate of 2.3 million shares of common stock reserved for
issuance under its equity incentive plans, thus permitting the resale of such
shares by non-affiliates in the public market without restriction under the
Securities Act upon the exercise of stock options. As of October 28, 2000,
options to purchase an aggregate of 367,000 shares of common stock were
outstanding under the Company's equity incentive plans.

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

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"). The conversion rates between the euro and the participating nations'
currencies have been fixed irrevocably as of January 1, 1999, with the
participating national currencies being removed from circulation between
January 1 and June 30, 2002 and replaced by euro notes and coinage. A
significant amount of uncertainty exists as to the effect the euro will have on
the marketplace. Currently, the Company does not operate in any countries that
are part of the EMU; however, the Company operates in the United Kingdom, Norway
and Denmark, which may join the EMU at a future date. To date, the Company has
not incurred any material costs of addressing the euro formation and does not
anticipate incurring material costs in the future; however, the Company will
continue to assess the effect the euro formation may have on its internal
systems and the sales of its services, and take appropriate actions based on the
results of such assessment. There can be no assurance that this issue and its
related costs will not have a material adverse effect on the Company's future
business, results of operations, cash flows and financial condition.

The undersigned Registrant hereby restates Part II, Item 8 of the Form 10-K
in its entirety, as originally filed.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

The undersigned Registrant hereby restates Part II, Item 9 of the Form 10-K
in its entirety, as originally filed.

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

After the Audit Committee of the Company's Board of Directors initiated a
process of screening accounting firms based on responses to a request for
proposal, the previous independent accountants of Westaff, Inc. (the "Company"),
PricewaterhouseCoopers LLP, resigned on May 20, 1999. On July 14, 1999,
following the completion of this selection process, the Company selected Arthur
Andersen LLP as the Company's independent accountants. Arthur Andersen LLP
accepted the engagement on August 18, 1999.

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

For the Company's fiscal year ended October 30, 1999 and October 28, 2000,
there were no disagreements with its accountants on accounting and financial
disclosure.

PART III

The undersigned Registrant hereby amends Part III, Item 10 of the Form 10-K
to update it as follows:

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth certain information as of February 20, 2001
with respect to each person who is a director or executive officer of the
Company(1) and includes certain significant key employees.

NAME AGE POSITION
- ---- -------- -----------------------------------------

W. Robert Stover(2)(3)(5)............................ 79 Chairman of the Board, interim President
and Chief Executive Officer

Dirk A. Sodestrom.................................... 43 Senior Vice President and Chief Financial
Officer

Robin A. Herman...................................... 49 Senior Vice President, General Counsel
and Secretary

M. John Grossu....................................... 58 Senior Vice President of Strategic
Business Solutions

Christa C. Leonard................................... 43 Vice President and Treasurer

John Sanders(6)...................................... 36 Vice President and Controller

Joseph R. Coute...................................... 53 Vice President and Director of Human
Resources

David P. Wilson...................................... 38 Vice President, Director of Information
Services

Gilbert L. Sheffield(2)(3)(4)(5)..................... 71 Director

Jack D. Samuelson(2)(3)(4)(5)........................ 76 Director

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

(1) The Company intends to recruit at least one new director by June 14, 2001.
There are presently three vacancies on the Board.

(2) Member of the Audit Committee of the Board. The new director whom the
Company intends to recruit would serve on the Audit Committee.

(3) Member of the Secondary Committee of the Compensation Committee of the
Board.

(4) Member of the Primary Committee of the Compensation Committee of the Board.

(5) Member of the Strategic Planning Committee of the Board.

(6) Mr. Sanders' hire date is February 20, 2001.

DIRECTORS AND EXECUTIVE OFFICERS

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

W. ROBERT STOVER. Mr. Stover founded the Company in 1948 and has been
continuously involved in the management of the Company since that time. Since
the Company's incorporation in 1954, Mr. Stover has held the position of
Chairman of the Board. From 1954 to 1985, Mr. Stover served as

President of the Company, and from 1985 to the end of calendar year 1998 as
Chief Executive Officer. He stepped down as Chief Executive Officer effective
January 1, 1999 and continued to serve as Chairman of the Board until May 3,
2000, when he assumed the position of interim President and Chief Executive
Officer following the termination of the recapitalization agreement that was a
management-led buyout transaction.

DIRK A. SODESTROM. Mr. Sodestrom joined the Company as Controller in
February 1991. In December 1992, he was elected to the additional position of
Vice President. In June 1998, Mr. Sodestrom was named a Senior Vice President of
the Company. Effective January 1, 2001, Mr. Sodestrom was appointed as Chief
Financial Officer. Mr. Sodestrom was employed from 1980 to 1991 by Price
Waterhouse LLP, most recently as a Senior Audit Manager. He is a certified
public accountant on inactive status.

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

M. JOHN GROSSU. Mr. Grossu joined the Company as Senior Vice President-Zone
Manager (California) in May 1996. Effective February 1999, he was assigned
additional responsibilities for international operations and his title was
changed to Senior Vice President, Group Operations Europe and Zone Manager
(California). In June 2000, he was appointed Senior Vice President, Strategic
Business Solutions. Mr. Grossu's prior staffing industry experience includes
approximately 25 years with Kelly Services, Inc.

CHRISTA C. LEONARD. Ms. Leonard was hired as Vice President and Treasurer
of the Company effective November 15, 2000 to fill a vacancy in the Office of
Treasurer. Ms. Leonard was previously employed by USI Insurance Services Corp.
as Vice President, Treasury and Tax, from 1996 to 2000. She has approximately
nine years' prior work experience in the public accounting field, most recently
from 1995 to 1996 with Roberts Schultz & Co., and also with Wallace Meyer & Co.
from 1992 to 1994 and KPMG Peat Marwick & Co. from 1987 to 1992. She is a
certified public accountant on inactive status.

JOHN SANDERS. Mr. Sanders was hired effective February 20, 2001 as Vice
President and Controller to succeed Mr. Sodestrom. Before joining the Company,
Mr. Sanders was Controller for Planetweb, Inc. from 1999 to January 2001. He
previously was employed as Director of Finance for SCAN Health Plan from 1997 to
1999; as Vice President of Affiliated Computer Services, Inc. from 1995 to 1997;
as a Senior Manager for Price Waterhouse LLP from 1993 to 1995, and as a Manager
for Deloitte & Touche LLP from 1986 to 1993. He is a certified public accountant
on inactive status.

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

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

GILBERT L. SHEFFIELD. Mr. Sheffield has been a director of the Company
since March 1995. He has served in a number of capacities in the
telecommunications industry, most recently as the President, Chief Executive
Officer and a director of PacTel Communications Companies from 1987 to 1990.
Mr. Sheffield began his career in 1953 with Pacific Telephone and Telegraph,
where he was employed until 1969, when he was appointed the first Director of
the California Department of Human

Resources Development. In 1971, Mr. Sheffield returned to Pacific Telephone and
Telegraph, from which he retired in 1984 as Executive Vice President of
Operations. Following two years in the real estate investment business, he
returned to Pacific Telesis in 1986 as Executive Vice President and Chief
Operating Officer of PacTel Corporation. Mr. Sheffield is now retired.

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

Information concerning directors and executive officers under the caption
"Election of Directors" and "Board Meetings and Committees" in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 23,
2001 (the "Proxy Statement"), is incorporated herein by reference.

COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's executive officers, directors and persons who
beneficially own more than 10% of the Company's Common Stock to file initial
reports of ownership and reports of changes in ownership with the Securities and
Exchange Commission ("SEC"). Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms filed by such
persons.

Based solely on the Company's review of such forms and amendments thereto
furnished to the Company and written representations from certain reporting
persons, the Company believes that all executive officers, directors and greater
than 10% stockholders complied with all filing requirements applicable to them
with respect to transactions during fiscal 2000, except as follows. The Stover
Foundation did not file its initial Form 3 report of beneficial ownership on the
December 27, 1999 due date, but did file that report on or about April 14, 2000
under the signature of W. Robert Stover as its Vice President, Treasurer and
Director. Mr. Stover as Co-Trustee of the Stover Revocable Trust dated
November 16, 1988, as amended, had filed a Form 4 on January 21, 2000 to report
the gift to the Stover Foundation that is reflected on the late Form 3 filing.
On the relevant dates, Mr. Stover was Chairman of the Board.

The undersigned Registrant hereby supplements Part III, Item 11 of the
Form 10-K as follows:

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation earned by all individuals
serving as the Company's Chief Executive Officer or acting in a similar capacity
during fiscal 2000, the four other highest-paid executive officers who were
serving at the end of fiscal 2000 whose salary and bonus for fiscal 2000 was in
excess of $100,000, and two individuals for whom disclosure would have been
provided but for the fact that they were not serving as executive officers at
the end of fiscal 2000, for services rendered in all capacities to the Company
and its subsidiaries for each of the last three fiscal years. No executive
officer who would have otherwise been includable in such table on the basis of
salary and bonus earned for fiscal 2000 has been excluded by reason of his or
her termination of employment or change in executive status during that fiscal
year. The individuals included in the table collectively will be referred to as
the "Named Officers."

LONG-TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) OPTIONS (#)(1)(4) ($)(5)(6)(7)
- --------------------------- -------- ---------------- -------- ----------------- ------------

W. Robert Stover .............. 2000 221,538 -- -- 5,608
Chairman of the Board of 1999 104,616 -- -- 2,619
Directors, interim President 1998 250,000 -- -- 6,036
and Chief Executive
Officer(2)

Michael K. Phippen ............ 2000 287,686 -- 100,000 4,961
President, Chief Executive 1999 365,398 -- -- 9,161
Officer and Director(3) 1998 250,000 250,000 175,000 12,874

Paul A. Norberg ............... 2000 223,461 -- -- 5,892
Executive Vice President, 1999 215,000 -- -- 5,401
Chief Financial Officer and 1998 193,270 95,000 15,000 7,521
Director(8)

Dirk A. Sodestrom ............. 2000 165,000 -- 15,000 1,098
Senior Vice President and 1999 150,000 -- -- 776
Controller (9) 1998 140,769 67,500 18,750 1,063

Robin A. Herman ............... 2000 143,461 -- -- 3,834
Senior Vice President, 1999 137,077 -- -- 3,702
General Counsel and Secretary 1998 125,769 60,000 15,000 976

Joseph R. Coute ............... 2000 103,461 -- -- 1,763
Vice President and Director 1999 97,923 -- -- 669
of Human Resources 1998 91,540 42,500 -- 194

Ronald C. Picco ............... 2000 140,948 -- -- 765
Senior Vice President, 1999 200,000 -- -- 1,026
Operations(10) 1998 178,462 82,500 18,750 1,323

Michael W. Ehresman ........... 2000 139,699 -- -- 3,644
Senior Vice President and 1999 150,000 -- -- 3,776
Treasurer(11) 1998 140,769 67,500 18,750 5,218

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

(1) Long-term compensation has not been included in the table because such
information is not applicable.

(2) Mr. Stover relinquished the Chief Executive Officer title effective
December 31, 1998. He assumed the title of interim President and Chief
Executive Officer effective May 3, 2000.

(3) Mr. Phippen became President and Chief Executive Officer on January 1,
1999. His resignation was accepted on May 3, 2000 and made effective that
date.

(4) Adjusted for a three-for-two stock split effected in the form of a stock
dividend on May 29, 1998 to shareholders of record on May 18, 1998 (the
"Stock Split").

(5) All other compensation for fiscal 1998 includes employer matching
contributions under the Westaff Deferred Savings Plan for fiscal 1998, the
first year in which such contributions were made. The matching
contributions for fiscal 1998 were 25% of the first ten percent of the
participant's contribution to the plan, and were equal to $6,010 for
Mr. Stover, $12,848 for Mr. Phippen, $7,495 for Mr. Norberg, $1,039 for
Mr. Sodestrom, $701 for Ms. Herman, zero for Mr. Coute, $1,297 for
Mr. Picco and $5,194 for Mr. Ehresman. Also includes employer's portion of
group term life insurance premium (per month) in the amount of $26 each for
Messrs. Stover, Phippen, Picco and Norberg, $24 each for Messrs. Sodestrom
and Ehresman, $23 for Ms. Herman and $16 for

Mr. Coute. Employer's portion was 17 cents per $1,000 of coverage and
allowed coverage was one times base salary up to a maximum of $150,000.

(6) All other compensation for fiscal 1999 includes employer matching
contributions under the Westaff Deferred Savings Plan for fiscal 1999, the
second year in which such contributions were made. The matching
contributions for fiscal 1999 again were 25% of the first ten percent of
the participant's contribution to the plan, and were equal to $2,615 for
Mr. Stover, $9,135 for Mr. Phippen, $5,375 for Mr. Norberg, $750 for
Mr. Sodestrom, $3,427 for Ms. Herman, $475 for Mr. Coute, $1,000 for
Mr. Picco and $3,750 for Mr. Ehresman. Also includes employer's portion of
group term life insurance premium (per month) in the amount of $4 for
Mr. Stover and $26 each for Messrs. Phippen, Norberg, Sodestrom, Picco and
Ehresman, $23 for Ms. Herman and $16 for Mr. Coute. Employer's portion was
17 cents per $1,000 of coverage and allowed coverage was one times base
salary up to a maximum of $150,000 except for Mr. Stover whose maximum was
$23,000.

(7) All other compensation for fiscal 2000 includes employer matching
contributions under the Westaff Deferred Savings Plan for fiscal 2000, the
third year in which such contributions were made. The matching
contributions for fiscal 2000 again were 25% of the first ten percent of
the participant's contribution to the plan, and were equal to $5,539 for
Mr. Stover, $4,796 for Mr. Phippen, $5,586 for Mr. Norberg, $792 for
Mr. Sodestrom, $3,544 for Ms. Herman, $1,552 for Mr. Coute, $577 for
Mr. Picco and $3,373 for Mr. Ehresman. Also includes employer's portion of
group term life insurance premium (per month) in the amount of $6 for
Mr. Stover, $26 each for Messrs. Phippen, Norberg, Sodestrom, Picco and
Ehresman, $23 for Ms. Herman, and $16 for Mr. Coute. Employer's portion was
17 cents per $1,000 of coverage and allowed coverage was one times base
salary up to a maximum of $150,000 except for Mr. Stover whose maximum was
$45,000.

(8) Mr. Norberg retired effective December 31, 2000.

(9) Mr. Sodestrom was named Chief Financial Officer effective January 1, 2001.

(10) Mr. Picco is no longer with the Company. His employment concluded on
May 25, 2000.

(11) Mr. Ehresman resigned effective September 7, 2000.

OPTION GRANTS IN LAST FISCAL YEAR

There were two stock option grants made during fiscal 2000 under the
Company's 1996 Stock Option/Stock Issuance Plan to the Named Officers. The table
below sets forth information with respect to such option grants. No stock
appreciation rights were granted to the Named Officers during such fiscal year.

INDIVIDUAL
GRANTS(1)(2) POTENTIAL REALIZABLE
----------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE PRICE OPTION TERM(5)
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR(%)(3) PRICE($/SH) DATE 5%($) 10%($)
- ---- ------------ ----------------- -------------- ---------- --------- ----------

Michael K. Phippen(4).......... 100,000 86.96% 9.3125 10/31/09 453,310 1,273,431
Dirk A. Sodestrom.............. 15,000 13.04% 3.750 08/31/10 35,375 89,648

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

(1) Granted after the Stock Split.

(2) Options granted under the Company's 1996 Stock Option/Stock Issuance Plan
have a maximum ten-year term measured from the date of grant. Such options
generally vest over a four-year period. Generally, they become exercisable
for 25% of the option shares commencing upon the

optionee's completion of one year of service measured from the vesting
commencement date and the balance in a series of 36 successive monthly
installments upon the optionee's completion of each additional month of
service over the 36-month period measured from the first anniversary of the
vesting commencement date. The exercise price per share generally is the
closing selling price of the Company's Common Stock on the date of grant.
The 1996 Stock Option/Stock Issuance Plan provides for the automatic
acceleration of vesting of all outstanding options (such that they become
exercisable in full) in the event of a "change of control", as defined in
the 1996 Stock Option/Stock Issuance Plan.

(3) Based on options to purchase an aggregate of 115,000 shares granted to
employees during fiscal 2000 under the 1996 Stock Option/Stock Issuance
Plan.

(4) Under this option grant to Mr. Phippen, the exercise price was the average
of the fair market value on the first and last trading days of the fiscal
year for which it was granted. The option was to have become exercisable on
October 30, 2002, but it has been cancelled due to Mr. Phippen's resignation
effective May 3, 2000.

(5) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rates shown (compounded annually) from the date of
grant until the end of the ten-year option term. These numbers are
calculated based on requirements promulgated by the SEC and do not reflect
the Company's estimate of its future stock price.

AGGREGATE OPTION EXERCISES AND FISCAL YEAR END VALUES

None of the Named Officers exercised an option during fiscal 2000. The table
below sets forth information with respect to the unexercised options held by the
Named Officers as of the end of fiscal 2000. No stock appreciation rights were
exercised during fiscal 2000, and no stock appreciation rights were outstanding
at the end of fiscal 2000.

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR
SHARES ACQUIRED ON VALUE (#)(1) END ($)(1)(2)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------------ -------- ----------- ------------- ----------- -------------

W. Robert Stover...... -- -- -- -- -- --
Michael K. Phippen.... -- -- -- -- -- --
Paul A. Norberg....... -- -- 100,937 4,063 -- --
Dirk A. Sodestrom..... -- -- 25,671 20,079 -- --
Robin A. Herman....... -- -- 22,937 4,063 -- --
Joseph R. Coute....... -- -- 6,406 1,094 -- --
Ronald C. Picco....... -- -- -- -- -- --
Michael W. Ehresman... -- -- 25,281 -- -- --

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

(1) Adjusted for the Stock Split or granted after the Stock Split. Options are
"in-the-money" if the fair market value of the underlying securities exceeds
the exercise price of the option. Options are "out-of-the-money" if the
exercise price of the option exceeds the fair market value of the underlying
securities.

(2) Calculated by determining the difference between the fair market value of
the securities underlying the in-the-money options at October 28, 2000
(based on the closing price of $3.4375 for the Company's Common Stock on
Nasdaq for October 27, 2000, the trading day immediately preceding the end
of fiscal 2000) and the exercise price of the options.

DIRECTORS' COMPENSATION

Non-employee Board members each received an annual fee of $15,000 for
service on the Board in fiscal 2000 and an additional fee of $1,000 for each
meeting attended in person and $500 for each telephonic meeting attended, if
called by the Chairman of the Board or an employee Board member. Non-employee
Board members also were reimbursed for their reasonable expenses incurred in
connection with attending Board meetings. The Company anticipates no increase in
such directors' compensation during fiscal 2001.

Members of the Special Negotiating Committee receive additional compensation
for their services. The Board set the compensation of the Special Negotiating
Committee at $40,000 per member, payable in a lump sum by the end of the first
week of January 2000. To the extent members spend in excess of 200 hours on
matters relating to the activities of the Special Committee, they were paid at
the rate of $200 per hour twice per month with respect to such time; however, no
such additional hourly compensation was requested nor paid to them in fiscal
2000.

In addition, non-employee Board members are eligible to receive periodic
option grants under the Automatic Option Grant Program in effect under the
Company's 1996 Stock Option/Stock Issuance Plan. Under the Automatic Option
Grant Program, each individual who subsequently joins the Board as a
non-employee director will receive at that time an option grant, provided such
individual has not previously been in the Company's employ. In addition, due to
the Stock Split, at each annual stockholders' meeting each individual who
continues to serve as a non-employee Board member presently is entitled to an
option grant for 3,000 shares with an exercise price equal to the fair market
value of the option shares on the grant date, provided such individual has
served as a Board member for at least six months. The employee Board members had
approved an increase to double the original number of such shares from 1,000 to
2,000 pre-split shares, beginning with the 1998 Annual Meeting, and this matter
was approved by the stockholders at that meeting.

Each automatic option grant will have a maximum term of ten years measured
from the grant date, subject to earlier termination following the optionee's
cessation of Board service. The option will become exercisable for all the
option shares upon the optionee's completion of one year of Board service
measured from the grant date. However, the option will become immediately
exercisable for all the option shares should the optionee cease Board service by
reason of death or disability or should the Company be acquired by merger or
asset sale during the period of the optionee's service on the Board.

Pursuant to the terms of the Automatic Option Grant Program,
Messrs. Sheffield and Samuelson, the two individuals serving as non-employee
Board members at the time of the Offering, each received an option grant for
1,500 shares with an exercise price of $9.33 per share (based on the original
$14.00 per share price at which the Common Stock was sold in the Offering and
adjusted for the Stock Split). As of the Company's first Annual Meeting on
April 15, 1997, Messrs. Sheffield and Samuelson each also received an automatic
option grant for 1,500 shares with an exercise price of $6.08 per share (based
on the closing selling price of the Company's Common Stock on that date and
adjusted for the Stock Split), due to their continuing service as non-employee
directors. In addition, as of the Company's second Annual Meeting on March 26,
1998, Messrs. Sheffield and Samuelson each also received an automatic option
grant for 3,000 shares with an exercise price of $16.17 per share (based on the
closing selling price of the Company's Common Stock on that date and adjusted
for the Stock Split). Moreover, as of the Company's third Annual Meeting on
March 30, 1999, Messrs. Sheffield and Samuelson each received an automatic
option grant for 3,000 shares with an exercise price of $6.00 per share, and as
of the Company's fourth Annual Meeting on June 20, 2000, they each received an
automatic option grant for 3,000 shares with an exercise price of $3.94 per
share (based on the closing selling price of the Company's Common Stock on those
dates).

In addition to the foregoing option grants, Messrs. Sheffield and Samuelson
were each granted special options on November 1, 1996 to purchase 2,250 option
shares with an exercise price of $9.50 per share (based on the closing selling
price of the Company's Common Stock on that date and adjusted for the Stock
Split). Each of these options has a maximum term of ten years measured from the
grant date, subject to earlier termination following the optionee's cessation of
Board service. The options became exercisable for all the option shares on
October 31, 1997 following the optionees' completion of one year of Board
service measured from the grant date.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN
CONTROL AGREEMENTS

The Company entered into an employment agreement with W. Robert Stover on
September 29, 1994 which provided for his continuing employment until he chose
to retire or until his death. In addition to base annual compensation, subject
to adjustment with the mutual agreement of the parties, the agreement provided
that Mr. Stover may be paid bonuses based on the Company's economic
circumstances and his extraordinary efforts and contributions. The agreement was
amended as of November 2, 1996 to eliminate the death benefits otherwise payable
to Mr. Stover's widow or estate upon his death during the employment term and to
maintain Mr. Stover's base salary at $250,000 for fiscal 1997. The agreement was
amended effective August 14, 1997 to reinstate such death benefits, which
provided for the payment of three times Mr. Stover's annual compensation then in
effect in equal monthly installments over a four-year period.

There was no change in Mr. Stover's base salary for fiscal 1998. However, in
view of his having voluntarily relinquished the Chief Executive Officer title as
of December 31, 1998, the Company entered into a new employment agreement with
Mr. Stover effective January 1, 1999 which replaced the amended agreement of
August 14, 1997. No consideration was paid to Mr. Stover for his having
relinquished the Chief Executive Officer's title. The new agreement contains a
renegotiated compensation package for Mr. Stover in his continuing role as
Chairman of the Board, including a lesser annual salary of $75,000.
Mr. Stover's annual salary was increased to $375,000 effective May 3, 2000 due
to his having assumed the position of interim President and Chief Executive
Officer.

Mr. Stover's compensation package otherwise remains the same as under the
1999 agreement and includes payment of office relocation expenses for suitable
offsite leased premises, payment of monthly office rent as well as all related
leasehold expenses including parking, utilities, janitorial services, and a pro
rata share of increases in operating expenses and real estate taxes over
calendar year 1999 under a two-year lease for such premises, payment of his
executive assistant's annual salary, continued participation by Mr. Stover and
his executive assistant in present and future employee benefit plans including
group health, life, supplemental life, long-term disability, accidental death
and dismemberment insurance, a 401(k) savings plan and a deferred savings plan,
and reimbursement for reasonable travel and other business expenses. Due to the
expiration of the lease, a search for suitable off-site office quarters is
pending and Mr. Stover and his assistant expect to relocate. In the interim,
they are temporarily utilizing offices at the Company's corporate headquarters.
Mr. Stover is not eligible for a bonus or other incentive compensation under the
1999 agreement or otherwise and he is not entitled to vacation pay. Except with
respect to Mr. Stover's salary, the 1999 agreement is of indefinite duration and
will continue until he chooses to retire or until his death; however, the
contractual obligations relating to compensation of his executive assistant will
terminate upon reassignment of the current assistant to other duties or upon
termination of Mr. Stover's employment, subject to negotiation of a different
arrangement at the discretion of the Compensation Committee of the Board.

The Company entered into a new employment agreement with Mr. Sodestrom as
Chief Financial Officer effective January 1, 2001 with a new annual salary of
$235,000 that contains a requirement for six-months' advance notice of
termination. Mr. Sodestrom will be eligible for the fiscal 2001 executive bonus
plan, when formulated.

The Company's employment agreements with Mr. Sodestrom and the other Named
Officers are at will, and the Company may terminate their employment at any time
at the discretion of the Board. However, the Plan Administrator of the 1996
Stock Option Plan/Stock Issuance has authority to provide for the accelerated
vesting of the shares of Common Stock subject to outstanding options held by the
Chief Executive Officer and the Company's other executive officers, whether
granted under that plan or any predecessor plan, in the event their employment
were to be terminated within a designated period (whether involuntarily or
through a forced resignation) following: (i) an acquisition of the Company by
merger or asset sale, or (ii) a hostile takeover of the Company effected through
a successful tender offer for more than 50% of the Company's outstanding Common
Stock or through a change in the majority of the Board as a result of one or
more contested elections for Board membership over a period of 36 consecutive
months. Mr. Stover, currently the interim Chief Executive Officer, holds no
option shares.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board established a Compensation Committee in March 1995. The
Compensation Committee currently consists of Messrs. Stover, Sheffield and
Samuelson. Messrs. Sheffield and Samuelson are members of the Primary Committee
of the Compensation Committee. They and Mr. Stover are members of the Secondary
Committee of the Compensation Committee. Except for Mr. Stover, no member of
such Committee was at any time during fiscal 2000 or at any other time an
officer or employee of the Company.

No executive officer of the Company served on the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.

For a description of transactions between the Company and members of the
Compensation Committee or their affiliates, see Item 13.

COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS EXECUTIVE COMPENSATION REPORT

The Compensation Committee was formed on March 9, 1995 in anticipation of
the Company's initial public offering on April 30, 1996. It consists of three
Board members, namely, W. Robert Stover, Gilbert L. Sheffield and Jack D.
Samuelson. Mr. Stover is Chairman of the Board, and he has served as interim
President and Chief Executive Officer since May 3, 2000, when the Company's then
President and Chief Executive Officer, Michael K. Phippen, resigned following
the termination of a recapitalization agreement that was a management-led buyout
transaction. Mr. Stover plans to serve as interim President and Chief Executive
Officer until a suitable successor is hired.

Messrs. Sheffield and Samuelson are not officers or employees of the
Company. Mr. Sheffield is presently the Chairman of the Compensation Committee.
The Compensation Committee retained Korn/Ferry International ("Korn/Ferry") in
October 2000 for the purpose of conducting the search for a new Chief Executive
Officer. Before engaging that executive search firm, the Compensation Committee
conducted the search.

It is the duty of the Compensation Committee to review and establish the
compensation of executive officers of the Company, including base salary,
participation in profit sharing, bonus and other cash incentive plans, subject
to ratification by the Board. During fiscal 2000, the Compensation Committee
also had the exclusive authority to administer the Company's 1996 Stock
Option/Stock Issuance Plan (the "Plan") under which grants may be made to such
officers. With respect to administration of the Plan, the Compensation Committee
has a Primary Committee and a Secondary Committee.

The Primary Committee consists of two (2) or more non-employee members of
the Board who have sole and exclusive authority to administer the Discretionary
Option Grant, the Automatic Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Section 16 Insiders are officers or directors of
the Company subject to the short-swing profit liabilities of Section 16 of the
1934 Act, as amended from time to time. The Primary Committee is constituted in
such a manner as to satisfy all applicable laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the 1934
Act in accordance with Rule 16b-3. Messrs. Sheffield and Samuelson serve on the
Primary Committee.

The Secondary Committee consists of two or more members of the Board who
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to eligible persons other than Section 16 Insiders. Messrs. Sheffield
and Samuelson serve with Mr. Stover on the Secondary Committee.

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

GENERAL COMPENSATION POLICY

The fundamental policy of the Compensation Committee is to offer the
Company's executive officers competitive compensation opportunities based upon
their personal performance and their contribution to the financial success of
the Company. To achieve this policy, a substantial portion of each executive
officer's total annual compensation is made contingent upon the achievement of
designated financial and performance goals. Accordingly, each executive
officer's compensation package is comprised of three elements: (i) base salary
which is designed primarily to be competitive with base salary levels in effect
both at companies within the temporary staffing industry that are of comparable
size to the Company and at companies outside of such industry with which the
Company competes for executive talent; (ii) annual bonuses payable in cash and
tied to the Company's attainment of financial milestones based on criteria
established by the Compensation Committee; and (iii) long-term stock-based
incentive awards which strengthen the mutuality of interests between the
executive officers and the Company's stockholders. As an employee's level of
responsibility and accountability within the Company increases over time, a
greater portion of his or her total compensation is intended to be dependent
upon the Company's performance and stock price appreciation rather than upon
base salary.

Factors. The principal factors considered by the Compensation Committee in
establishing the components of each executive officer's compensation package for
fiscal 2000 are summarized below. However, the Compensation Committee may in its
discretion apply entirely different factors, particularly different measures of
financial performance, in setting executive compensation for future fiscal
years.

Base Salary. The base salary for each executive officer is determined on the
basis of internal comparability considerations and the base salary levels in
effect for comparable positions at the Company's principal competitors, both
within and outside the temporary staffing industry. The base salary level for
executive officers is generally at a level determined for such individuals on
the basis of the external salary data of temporary staffing service companies
within the same geographic area and with small to medium market capitalization.
This group of companies is less inclusive than the temporary staffing index in
the performance graph included in the Company's Proxy Statement for purposes of
comparing the stock price performance of the Company's Common Stock. However,
the Company believes this smaller group of companies gives a more accurate
indication of the market for executive services in which the Company competes.
Salaries are reviewed on an annual basis, and discretionary adjustments to each
executive officer's base salary are based upon individual performance

and salary increases paid by the Company's competitors. The Compensation
Committee sets the base salaries of the Chairman of the Board and the Chief
Executive Officer and the committee reviews the salaries of the other corporate
officers who are members of the senior management team.

Annual Incentive Compensation. An annual bonus may be earned by selected
executive officers, except the Chairman of the Board, based upon their
participating interest in a bonus pool tied to Company performance. Each
officer's participating interest is determined by the Compensation Committee at
the start of the fiscal year and may vary from year to year. The bonus pool for
fiscal 2000 was based on the Company Stock Value Increase. For such purpose, the
Company Stock Value Increase was defined as the percentage increase in the
average closing price of the Company's Common Stock for the month of
October 2000 compared to the average closing price of the Company's Common Stock
for the month of October 1999. The average closing price was determined by
adding the actual closing price of the Company's Common Stock for each day the
stock traded during the month of October and dividing that total by the number
of days the stock traded in October.

For fiscal 2000, the terms and conditions of the executive bonus plan were
the same as in the fiscal 1999 executive bonus plan. All bonus payments under
the fiscal 2000 executive bonus plan were to be included as an expense in
determining net income. For all participants selected by the Compensation
Committee, if the Company Stock Value Increase was at least 30%, the bonus would
be 10% of base salary at the start of the fiscal 2000; if the Company Stock
Value Increase was at least 45%, the bonus would be 25% of base salary at the
start of the fiscal 2000; and if the Company Stock Value Increase was at least
60%, the bonus would be 50% of base salary at the start of the fiscal 2000. For
fiscal 2000, no specific personal performance goals were established for the
executive officers as a condition to their participation in the bonus pool;
however, no bonus payout was to be made to any officer unless his or her
performance for the fiscal year was considered to be at a satisfactory level.
Executive officers of the Company who were no longer employed by the Company at
the end of fiscal 2000 were not eligible for a bonus under the executive bonus
plan. Typically, the Compensation Committee reviews the performance of the
President and Chief Executive Officer, and the President and Chief Executive
Officer reviews the performance of the officers who report to him, including the
Chief Financial Officer, and makes his recommendations to the Compensation
Committee. The Compensation Committee delegates to those senior executive
officers the authority to review the performances of the other corporate
officers and key employees who report to them directly. However, Mr. Stover did
not request, nor did the Compensation Committee offer him, an opportunity to
participate in the fiscal 2000 executive bonus plan when he assumed the position
of interim President and Chief Executive Officer. Following the termination of
the recapitalization agreement, Mr. Stover reviewed the performance of the
Executive Vice President and Chief Financial Officer, eliminated the position of
one executive officer and reviewed the performance of the remaining executive
officers. Salary increases for such executive officers in fiscal 2000 were
authorized at Mr. Stover's discretion under the circumstances. For fiscal 2000,
no executive bonuses were paid.

For fiscal 2001, the Compensation Committee discussed whether, and on what
terms and conditions, to establish an executive bonus plan and the Compensation
Committee's consensus was to defer its deliberations, pending the search for the
successor Chief Executive Officer. The Compensation Committee will resume its
discussion at its discretion, will determine whether or not to establish an
executive bonus program for fiscal 2001, to designate the executive officers
eligible to participate in the program, to specify what percentage of the bonus
pool each of the participants may earn, and to determine the eligibility
criteria for participation.

Long-Term Incentive Compensation. Option grants are intended to align the
interests of each executive officer with those of the Company's stockholders and
to provide each individual with a significant incentive to manage the Company
from the perspective of an owner with an equity stake in the business. The
Compensation Committee has the discretion to set the option exercise price and
the

vesting schedule for option grants. The Compensation Committee determines the
size of the option grant according to each executive's position within the
Company and sets a level it considers appropriate to create a meaningful
opportunity for stock ownership. In addition, the Compensation Committee takes
into account an individual's level of responsibility and opportunity to
influence the Company's financial results, comparable awards made to individuals
in similar positions within the industry, and the number of unvested options
held by each individual at the time of the new grant. The relative weight given
to each of these factors varies among individuals and is at the Compensation
Committee's discretion.

Each option grant allows the officer to acquire shares of the Company's
Common Stock at a fixed price per share (typically the closing market price on
the date of grant) over a specified period of time (up to ten years). The
options generally vest in installments over a four-year period, contingent upon
the executive officer's continued employment with the Company. The options
generally become exercisable with respect to twenty-five percent (25%) of the
option shares upon the optionee's completion of one year of service measured
from the vesting commencement date and the balance in 36 successive monthly
installments upon the optionee's completion of each month of service over the
36-month period measured from the first anniversary of the vesting commencement
date. Accordingly, the option will provide a return to the executive officer
only if the executive officer remains employed by the Company for one or more
years during which the option vests, and then only if the market price of the
underlying shares appreciates over the option term.

Tax Limitation. As a result of federal tax legislation enacted in 1993, a
publicly-held company such as Westaff, Inc. will not be allowed a federal income
tax deduction for compensation paid to the executive officers named in the
Summary Compensation Table to the extent that compensation exceeds one million
dollars ($1,000,000) per officer unless it qualifies for an exemption. The
compensation paid to the Company's executive officers for fiscal 2000 did not
exceed the one million dollar limit per officer, nor is the compensation to be
paid to the Company's executive officers for fiscal 2001 expected to reach that
level. Nevertheless, if the compensation payable to any of the Company executive
officers were to reach the one million dollar limitation in fiscal 2001 or
future fiscal years, the Company will continue to enjoy an exemption because the
Plan was amended and restated with shareholder approval as of the Annual Meeting
held on June 20, 2000 with respect to option grants, stock appreciation rights
or direct stock issuances that are intended to qualify as performance-based
compensation to any covered employee under Section 162(m)(3) of the Internal
Revenue Code of 1986, as amended. Unless otherwise required by law, the
Compensation Committee therefore will not be required to limit or restructure
the elements of compensation payable to the Company's executive officer in the
foreseeable future.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

Mr. Stover's annual salary was increased to $375,000 effective May 3, 2000
due to his having assumed the position of interim President and Chief Executive
Officer as of that date in addition to his continuing role as Chairman of the
Board. Otherwise, the employment agreement he entered into with the Company
effective January 1, 1999 remains in effect, including payment of office
relocation expenses for suitable offsite leased premises, payment of monthly
office rent as well as all related expenses. The Compensation Committee did not
award a cash bonus to Mr. Stover for fiscal 2000, despite his efforts and
contributions to the continuing operations of the Company. The Committee granted
no option shares to Mr. Stover during fiscal 2000 since he is a principal
shareholder of the Company.

Compensation Committee

Gilbert L. Sheffield,
Chairman of Compensation Committee

Jack D. Samuelson
Member of Compensation Committee

W. Robert Stover
Member of Compensation Committee

COMPARISON OF STOCKHOLDER RETURN

The graph depicted below reflects a comparison of the cumulative total
return (change in stock price plus reinvestment dividends) of the Company's
Common Stock with the cumulative total returns of the Standard and Poor's 500
Index and peer issuers in the temporary staffing industry (the "Peer Group
Index") (1). The graph covers the period from April 30, 1996, the date of the
Offering, through the last trading day of fiscal 2000.

The graph assumes that $100 was invested on April 30, 1996 in the Company's
Common Stock and in each index and that all dividends were reinvested. A special
cash dividend of $0.30 per share of Common Stock was paid on July 18, 2000 to
shareholders of record as of July 5, 2000.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
WESTAFF, S&P 500 INDEX AND PEER GROUP INDEX

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

S&P 500 PEER GROUP WESTAFF

4/30/96 100 100 100
11/1/96 107.58 83.62 89.74
10/31/97 139.81 108.81 90.93
10/30/98 167.95 80.36 81.47
10/29/99 208.34 86.56 80.29
10/27/00 210.89 66.98 34.52

04/30/1996 11/01/1996 10/31/1997 10/30/1998 10/29/1999 10/27/00
------ ------ ------ ------ ------ ------

S&P 500 100.00 107.58 139.81 167.95 208.34 210.89
Peer Group 100.00 83.62 108.81 80.36 86.56 66.98
Westaff 100.00 89.74 90.93 81.47 80.29 34.52

The Company's stock was first traded publicly on April 30, 1996. The graph
depicts cumulative returns calculated on an annual basis on $100 invested in
Westaff stock, the S&P 500 Index and the Peer Group Index comparing Kelly
Services Inc., Spherion (formerly Interim Services Inc.), Manpower Inc. and
Personnel Group of America Inc. The Peer Group Index in this Form 10-K/A
contains one change from the Peer Group Index in last year's proxy. The Company
removed Olsten

Corporation from the Peer Group Index because Olsten Corporation was acquired by
another company and is no longer publicly traded.

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

(1) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.

The undersigned Registrant hereby supplements Part III, Item 12 of the
Form 10-K as follows:

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

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock for (i) all persons who are beneficial
owners of five percent (5%) or more of the outstanding shares of the Company's
Common Stock, (ii) each director of the Company, (iii) the Company's Chief
Executive Officer and the four other most highly paid executive officers as of
the fiscal year ended October 28, 2000, and (iv) all current executive officers
and directors of the Company as a group. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws, where applicable. The
information set forth in the table below is as of December 31, 2000, except for
Messrs. Phippen, Picco and Ehresman, who were not employed by the Company on
that date and for whom the information is provided as of the most recent
practicable date.

NAME NUMBER OF SHARES(#)(1) PERCENT(%)(2)
- ---- ---------------------- -------------

W. Robert Stover(3)......................................... 7,034,466 44.47
Joan C. Stover(4)........................................... 2,069,248 13.08
c/o Westaff, Inc.
301 Lennon Lane
Walnut Creek, CA 94598
Michael K. Phippen(5)....................................... 58,165 +
Paul A. Norberg(6).......................................... 114,693 *
Dirk A. Sodestrom(7)........................................ 46,895 *
Jack D. Samuelson(8)........................................ 32,250 *
Gilbert L. Sheffield(9)..................................... 19,250 *
Joseph R. Coute(10)......................................... 8,877 *
Robin A. Herman(11)......................................... 24,187 *
Ronald C. Picco(12)......................................... 3,731 +
Michael W. Ehresman(13)..................................... -- +
All executive officer and directors as a group
(7 persons)(14)............................................. 7,280,618 46.02

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

* Less than one percent (1%)

+ Not applicable as of December 31, 2000 due to cessation of employment.

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

(2) Based on 15,819,199 shares of Common Stock outstanding at December 31,
2000. Shares of Common Stock subject to options, warrants and convertible
notes and other purchase rights currently exercisable or convertible, or
exercisable or convertible within 60 days of December 31, 2000 are deemed
outstanding for computing the percentage of the person or entity holding
such securities but are not deemed outstanding for computing the percentage
of any other person or entity.

(3) Includes 2,069,248 shares of Common Stock held by W. Robert Stover and Joan
C. Stover as Co-Trustees of the Stover Revocable Trust dated 11/16/88, as
amended, the beneficial ownership of which may be attributable to each of
Mr. Stover and Mrs. Stover. Includes 65,000 shares of Common Stock
contributed to the Stover Charitable Remainder Unitrust dated 11/1/94 of
which Mr. Stover is a Co-Trustee. Includes 4,351,220 shares of Common Stock
contributed to the Stover 1999 Charitable Remainder Unitrust dated 4/21/99
of which Mr. Stover is Co-Trustee. Includes 548,998 shares of Common Stock
contributed to the Stover Charitable Lead Annuity Trust as to which
Mr. Stover has voting power, but has disclaimed beneficial ownership. Does
not include 2,574,741 shares of Common Stock owned by the Stover
Foundation, a California nonprofit religious corporation (the "Foundation")
as to which Mr. Stover has shared voting power.

(4) Includes 2,069,248 shares of Common Stock held by W. Robert Stover and Joan
C. Stover as Co-Trustees of the Stover Revocable Trust dated 11/16/88, as
amended, the beneficial ownership of which may be attributable to each of
Mr. Stover and Mrs. Stover.

(5) Includes shares of Common Stock held by Mr. Phippen as of the date of his
employment termination on May 3, 2000. Does not include options to purchase
196,875 shares of Common Stock held by Mr. Phippen under the 1996 Stock
Option/Stock Issuance Plan, which were cancelled as of August 3, 2000.

(6) Includes options to purchase 102,187 shares of Common Stock held by
Mr. Norberg, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan. These option shares will be cancelled if they
are not exercised by March 31, 2001.

(7) Includes options to purchase 27,234 shares of Common Stock held by
Mr. Sodestrom, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.

(8) Includes options to purchase 11,250 shares of Common Stock held by
Mr. Samuelson, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.

(9) Includes options to purchase 11,250 shares of Common Stock held by
Mr. Sheffield, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.

(10) Includes option to purchase 7,031 shares of Common Stock held by Mr. Coute
under the 1996 Stock Option/Stock Issuance Plan.

(11) Includes options to purchase 24,187 shares of Common Stock held by
Ms. Herman, which are immediately exercisable under the 1996 Stock
Option/Stock Issuance Plan.

(12) Includes shares of Common Stock held by Mr. Picco as of the date of his
employment termination on May 25, 2000. Does not include options to
purchase 19,218 shares of Common Stock held by Mr. Picco under the 1996
Stock Option/Stock Issuance Plan, which were cancelled as of August 25,
2000.

(13) Mr. Ehresman owned no shares of Common Stock as of the date of his
employment termination on September 7, 2000. Does not include options to
purchase 25,281 shares of Common Stock held by Mr. Ehresman under the 1996
Stock Option/Stock Issuance Plan, which were cancelled as of December 7,
2000.

(14) Includes options to purchase 183,139 shares of Common Stock which are
immediately exercisable under the 1996 Stock Option/Stock Issuance Plan.
Does not include Messrs. Phippen, Picco and Ehresman due to cessation of
employment.

The undersigned Registrant hereby supplements Part III, Item 13 of the
Form 10-K as follows:

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Before fiscal 2000, the Company had a management services contract with
Western Video Images, Inc. ("WVI"), a corporation wholly owned by Mr. Stover,
the principal stockholder of the Company. The Company is no longer providing
management services to WVI and the Company did not provide any financing to WVI
in fiscal 2000. Management fees charged to WVI for fiscal 2000 and fiscal 1999
were zero and $52,000, respectively. The Company provides accounting, tax,
legal, administrative and management support and services to WVI for a fee based
generally upon the gross sales of WVI, adjusted for actual services rendered.

In addition, the Company no longer is the lessee of the principal facilities
in which WVI operates. The Company subleased the facilities to WVI until
October 31, 2000, the termination date of the lease obligation.

During October 1995, the Company purchased the operations of one of its
franchise agents, Michael K. Phippen, now a former President and Chief Executive
Officer of the Company, for a total price of $5.9 million. The Company paid
$1.5 million in cash and agreed to make installment payments for the balance at
an interest rate of 6.50%. Installments of $973,000 in fiscal 1998, $973,000 in
fiscal 1997 and $1.5 million in fiscal 1996 were paid and the final installment
of $972,000 was paid in fiscal 1999. No installment payments were made in fiscal
2000 and there are no further payment obligations to Mr. Phippen.

Any future transactions between the Company and its officers, directors, and
affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties. Such transactions with such persons
will be subject to approval by a majority of the Company's outside directors or
will be consistent with policies approved by such outside directors.

PART IV

The undersigned Registrant hereby supplements Part IV, Item 14 of the
Form 10-K as follows:

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

(a) The following documents have been filed as a part of this Annual Report
on Form 10-K, Amendment No. 1.

1. Financial Statements

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

Report of Former Independent Accountants.................... F-2

Consolidated Balance Sheets--As of the Fiscal Year Ended
October 28, 2000 and the Fiscal Year Ended October 30,
1999...................................................... F-3

Consolidated Statements of Operations--For the Three-Year
Period Ended October 28, 2000............................. F-4

Consolidated Statements of Stockholders' Equity--For the
Three-Year Period Ended October 28, 2000.................. F-5

Consolidated Statements of Cash Flows--For the Three-Year
Period Ended October 28, 2000............................. F-6

Notes to Consolidated Financial Statements.................. F-8

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

Schedule II: Valuation and Qualifying Accounts (included at page IV-1)

All other schedules are omitted because they are not applicable or not
required or because the required information is included in the
Consolidated Financial Statements or the Notes thereto.

3. Exhibits. The following exhibits are incorporated by reference into this
report:

EXHIBIT
NUMBER DESCRIPTION
------- -----------

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

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

3.1.1 Certificate of Amendment of the Company's Third Amended and
Restated Certificate of Incorporation.(10)

3.2 The Company's Restated Bylaws.(1)

3.2.1 Amendment of the Amended and Restated Bylaws, dated as of
March 26, 1998.(10)

3.2.2 Amendment of the Amended and Restated Bylaws, effective
September 24, 1998.(10)

3.2.3 Third Amendment of the Amended and Restated Bylaws,
effective March 30, 1999.(13)

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

4.1.1 Form of New Specimen Certificate for the Company's Common
Stock.(10)

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

EXHIBIT
NUMBER DESCRIPTION
------- -----------

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

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

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

10.3.2 Second Amendment to the Employment Agreement between the
Company and W. Robert Stover.(5)

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

10.3.4 Employment Agreement with W. Robert Stover.(10)

10.3.5 Employment Contract between the Company and Dirk A.
Sodestrom.(15)

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

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

10.7 Westaff, Inc. 1996 Stock Option/Stock Issuance Plan.(9)

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

10.7.2 Form of Stock Option Agreement.(9)

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

10.7.4 Form of Notice of Grant of Automatic Stock Option.(2)

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

10.7.6. Form of Stock Issuance Agreement.(2)

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

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

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

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

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

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

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

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

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

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

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

10.8.11 First Amendment to Note Purchase Agreement dated as of
November 16, 1998.(10)

10.8.12 Third Amendment to Credit Agreement dated as of January 22,
1999.(11)

10.8.13 Second Amendment to Note Purchase Agreement and Transaction
Documents.(12)

10.8.14 Consent to Asset Sale and Release of Liens.(12)

10.8.15 Fourth Amendment to Credit Agreement dated as of December
15, 1999.(13)

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.8.16 Fifth Amendment to Credit Agreement dated as of November 7,
2000.(15)

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

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

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

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

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

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

10.11.2 Form of Enrollment/Change Form for 1996 Employee Stock
Purchase Plan.(2)

10.11.3 International Employee Stock Purchase Plan.(2)

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

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

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

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

10.16 Mutual Termination and Release Agreement dated as of May 3,
2000 by and between Westaff Acquisition Corp., Westaff,
Inc., The Stover Revocable Trust, The Stover 1999 Charitable
Remainder Unitrust, The Stover Foundation, Cornerstone
Equity Investors IV, L.P. and Centre Capital Investors III,
L.P.(14)

21.1 Subsidiaries of the Company.(15)

23.1 Consent of Arthur Andersen LLP, current independent public
accountants.(15)

23.2 Consent of PricewaterhouseCoopers LLP, former independent
accountants.(15)

24.1 Power of Attorney (see page IV-3).(15)

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

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

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

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

(4) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
July 12, 1997.

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

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

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

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

(9) Incorporated herein by reference to Exhibit A to the Company's Proxy
Statement for its 2000 Annual Meeting of Stockholders.

(10) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1998.

(11) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
January 23, 1999.

(12) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
July 10, 1999.

(13) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Annual Report on Form 10-K for the fiscal year ended
October 30, 1999.

(14) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
April 15, 2000.

(15) Incorporated herein by reference to the exhibit with the same number filed
with the Company's Annual Report on Form 10-K for the fiscal year ended
October 28, 2000.

(b) Reports on Form 8-K

No reports on Form 8-K were filed in or for the sixteen-week period ended
October 28, 2000.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Westaff, Inc.
and its subsidiaries as of October 28, 2000 and October 30, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements and the schedules referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules based on our
audits. The financial statements of Westaff, Inc. for the year ended
October 31, 1998 were audited by other auditors whose report dated January 22,
1999 expressed an unqualified opinion on those statements.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Westaff, Inc. and its
subsidiaries as of October 28, 2000 and October 30, 1999, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

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

/s/ Arthur Andersen LLP
- --------------------------
ARTHUR ANDERSEN LLP
San Francisco, California
December 19, 2000

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1 on page 36 present fairly, in all material respects,
the results of operations and cash flows of Westaff, Inc. and its subsidiaries
for the year ended October 31, 1998 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under
Item 14(a)2 on page 36 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Westaff, Inc. for any period
subsequent to October 31, 1998.

/s/ PRICEWATERHOUSECOOPERS LLP

San Francisco, California
January 22, 1999

F-2

WESTAFF, INC.

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

OCTOBER 28, OCTOBER 30,
2000 1999
----------- -----------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,208 $ 3,048
Trade accounts receivable, less allowance for doubtful
accounts of $1,634 and $1,654........................... 93,437 92,414
Due from licensees........................................ 4,387 4,993
Deferred income taxes..................................... 7,453 9,826
Net assets of discontinued operations..................... 2,304 4,234
Other current assets...................................... 9,310 8,658
-------- --------
Total current assets.................................... 122,099 123,173

Property, plant and equipment, net.......................... 20,977 23,671
Deferred income taxes....................................... 4,108 4,434
Intangible assets, net of accumulated amortization of $9,209
and $10,187............................................... 34,531 37,238
Other long-term assets...................................... 1,357 2,314
-------- --------
$183,072 $190,830
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 10,000 $ 11,000
Current portion of loans payable.......................... 3,250 3,100
Accounts payable and accrued expenses..................... 46,704 48,917
Income taxes payable...................................... 378 303
-------- --------
Total current liabilities............................... 60,332 63,320

Loans payable............................................... 37,250 41,608
Other long-term liabilities................................. 12,324 10,961
-------- --------
Total liabilities....................................... 109,906 115,889
-------- --------
Commitments and contingencies (Notes 2, 13 and 15)
Stockholders' equity:
Preferred stock, $.01 par value; authorized and unissued:
1,000 shares............................................
Common stock, $.01 par value; authorized: 25,000 shares;
issued: 15,948 shares at October 28, 2000 and
October 30, 1999........................................ 159 159
Additional paid-in-capital................................ 36,582 37,382
Retained earnings......................................... 40,343 38,795
Accumulated other comprehensive income.................... (3,306) (900)
-------- --------
73,778 75,436
Less treasury stock at cost, 129 shares at October 28,
2000 and 72 shares at October 30, 1999.................. 612 495
-------- --------
Total stockholders' equity.............................. 73,166 74,941
-------- --------
$183,072 $190,830
======== ========

See accompanying notes to consolidated financial statements.

F-3

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

Sales of services........................................... $659,871 $647,469 $597,614
License fees................................................ 3,084 3,283 2,095
-------- -------- --------
Total sales of services and license fees.................... 662,955 650,752 599,709

Costs of services........................................... 526,492 512,790 472,783
-------- -------- --------
Gross profit................................................ 136,463 137,962 126,926

Franchise agents' share of gross profit..................... 17,901 17,079 16,709
Selling and administrative expenses......................... 95,152 87,367 79,245
Depreciation and amortization............................... 8,617 8,166 6,952
-------- -------- --------

Operating income from continuing operations................. 14,793 25,350 24,020

Interest expense............................................ 3,164 2,524 1,563
Interest income............................................. (333) (330) (457)
-------- -------- --------
Income from continuing operations before income taxes....... 11,962 23,156 22,914
Provision for income taxes.................................. 4,727 9,149 9,166
-------- -------- --------
Income from continuing operations........................... 7,235 14,007 13,748
-------- -------- --------
Discontinued operations:

Loss from discontinued operations, net of income taxes...... (6,275)
Loss on disposal, net of income taxes....................... (784) (6,611) (3,543)
-------- -------- --------
Total discontinued operations, net of income taxes.......... (784) (6,611) (9,818)
-------- -------- --------
Net income.................................................. $ 6,451 $ 7,396 $ 3,930
======== ======== ========
Earnings (loss) per share:

Continuing operations:
Basic................................................... $ 0.46 $ 0.88 $ 0.88
======== ======== ========
Diluted................................................. $ 0.46 $ 0.88 $ 0.87
======== ======== ========
Discontinued operations:
Basic................................................... $ (0.05) $ (0.42) $ (0.63)
======== ======== ========
Diluted................................................. $ (0.05) $ (0.42) $ (0.62)
======== ======== ========
Net income:
Basic................................................... $ 0.41 $ 0.47 $ 0.25
======== ======== ========
Diluted................................................. $ 0.41 $ 0.47 $ 0.25
======== ======== ========
Weighted average shares outstanding--basic.................. 15,854 15,862 15,569
======== ======== ========
Weighted average shares outstanding--diluted................ 15,856 15,863 15,774
======== ======== ========

See accompanying notes to consolidated financial statements.

F-4

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)

COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK
------------------- PAID-IN RETAINED CURRENCY -------------------
SHARES AMOUNT CAPITAL EARNINGS TRANSLATION SHARES AMOUNT TOTAL
-------- -------- ---------- -------- ----------- -------- -------- --------

Balance at November 1, 1997... 15,507 $103 $29,073 $28,994 $ (89) 114 $ (785) $ 57,296
Comprehensive income:
Net income................ 3,930
Currency translation
adjustments............. (685)
Total comprehensive
income.................... 3,245
Three-for-two common stock
split..................... 52 (52)
Purchase of treasury
stock..................... 180 (3,026) (3,026)
Stock issued under
employees' stock purchase
and option plans.......... 20 169 (245) (186) 1,889 1,813
Stock issued in connection
with acquisitions......... 421 4 7,996 8,000
Other....................... 155 155
------- ---- ------- ------- ------- ------ ------- --------
Balance at October 31, 1998... 15,948 159 37,341 32,679 (774) 108 (1,922) 67,483
Comprehensive income:
Net income................ 7,396
Currency translation
adjustments............. (126)
Total comprehensive
income.................... 7,270
Purchase of treasury
stock..................... 100 (675) (675)
Stock issued under
employees' stock purchase
and option plans.......... (1,280) (136) 2,102 822
Other....................... 41 41
------- ---- ------- ------- ------- ------ ------- --------
Balance at October 30, 1999... 15,948 159 37,382 38,795 (900) 72 (495) 74,941
Comprehensive income:
Net income................ 6,451
Currency translation
adjustments............. (2,406)
Total comprehensive
income.................... 4,045
Cash dividends.............. (4,732) (4,732)
Payment for stock
acquisition contingency... (800) (800)
Purchase of treasury
stock..................... 150 (712) (712)
Stock issued under
employees' stock purchase
and option plans.......... (171) (93) 595 424
------- ---- ------- ------- ------- ------ ------- --------
Balance at October 28, 2000... 15,948 $159 $36,582 $40,343 $(3,306) 129 $ (612) $ 73,166
======= ==== ======= ======= ======= ====== ======= ========

See accompanying notes to consolidated financial statements.

F-5

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 6,451 $ 7,396 $ 3,930
Adjustments to reconcile net income to net cash from
operating activities:
Loss from discontinued operations..................... 784 6,611 9,818
Depreciation.......................................... 6,201 5,729 5,241
Amortization of intangible assets..................... 2,416 2,437 1,711
Provision for losses on doubtful accounts............. 4,000 2,458 1,094
Deferred income taxes................................. 2,679 (3,552) (8,451)
Gain on sale of assets................................ (211)
Other non-cash charges................................ 153
Changes in assets and liabilities:
Trade accounts receivable........................... (7,054) (7,502) (9,086)
Due from licensees.................................. 606 (1,759) (1,192)
Other assets........................................ (584) (3,201) (2,451)
Accounts payable and accrued expenses............... (1,181) (3,680) 13,100
Income taxes payable................................ 132 (378) (4,160)
Other long-term liabilities......................... 1,346 (72) 905
-------- -------- --------
Net cash provided by continuing operations.................. 15,585 4,487 10,612
Net cash provided by (used in) discontinued operations...... 1,115 10,935 (6,185)
-------- -------- --------
Net cash provided by operating activities................... 16,700 15,422 4,427
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (4,370) (8,205) (8,946)
Decrease (increase) in notes receivable................... 140 72 (2,080)
Payments for intangibles and other investments............ (136) (1,660) (15,386)
Investing activities of discontinued operations........... 31 1,675 (2,645)
Sale of assets and investments............................ 1,057
Other, net................................................ 472 724
-------- -------- --------
Net cash used in investing activities....................... (3,278) (7,646) (28,333)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under line of credit agreement............. (1,000) (4,600) (4,100)
Repayments of note to related party....................... (972) (973)
Proceeds from issuance of loans payable................... 50,900
Principal payments on loans payable....................... (4,208) (3,847) (20,824)
Issuance of common stock.................................. 424 822 1,813
Repurchase of common stock................................ (712) (675) (3,026)
Payment for stock acquisition contingency................. (800)
Distributions to stockholders............................. (4,732)
-------- -------- --------
Net cash (used in) provided by financing activities......... (11,028) (9,272) 23,790
-------- -------- --------
Effect of exchange rate on cash............................. (234) (107) (29)
-------- -------- --------
Net change in cash and cash equivalents..................... 2,160 (1,603) (145)
Cash and cash equivalents at beginning of year.............. 3,048 4,651 4,796
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 5,208 $ 3,048 $ 4,651
======== ======== ========

See accompanying notes to consolidated financial statements.

F-6

WESTAFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(AMOUNTS IN THOUSANDS)

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................ $3,135 $ 4,266 $ 2,478
Income taxes (net of refunds)........................... 2,057 12,429 15,373
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued for acquisitions...................... $ $ $ 8,000

See accompanying notes to consolidated financial statements.

F-7

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

1. BASIS OF PRESENTATION

BASIS OF PRESENTATION

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

DISCONTINUED OPERATIONS

In November 1998, the Company announced its plan to sell its medical
business, primarily operating through Western Medical Services, Inc. (Western
Medical), a wholly owned subsidiary of the Company (see Note 3). As a result of
this decision, the Company has classified its medical operations as discontinued
operations and, accordingly, has segregated the net assets of the discontinued
operations in the Consolidated Financial Statements and notes thereto.

COMMON STOCK SPLIT

On May 7, 1998, the Board of Directors declared a three-for-two common stock
split effected in the form of a stock dividend paid on May 29, 1998 to
shareholders of record at the close of business on May 18, 1998. All share and
per share data for fiscal 1998 have been retroactively adjusted for the stock
split.

Certain amounts in the October 30, 1999 Notes to Consolidated Financial
Statements have been reclassified to conform to the presentation adopted for
October 28, 2000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING ESTIMATES

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

FISCAL YEAR

The Company's fiscal year is a 52 or 53 week period ending the Saturday
nearest the end of October. Fiscal years 2000, 1999 and 1998 each included 52
weeks. For interim reporting purposes, the first three fiscal quarters comprise
12 weeks each while the fourth fiscal quarter consists of 16 or 17 weeks.

CASH AND CASH EQUIVALENTS

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

F-8

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK

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

REVENUE RECOGNITION

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

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

The Company also has a licensing program in which the licensee has the
direct contractual relationships with the customers, holds title to the related
customer receivables and is the legal employer of the temporary employees.
Accordingly, sales and costs of services generated by the license operation are
not included in the Company's consolidated financial statements. The Company
advances funds to the licensee for payroll, payroll taxes, insurance and other
related items. Fees are paid to the Company based either on a percentage of
sales or of gross profit generated by the licensee and such license fees are
recorded by the Company as license fees. Due from licensees represents advances
made under these financing agreements. These advances are secured by a pledge of
the licensee's trade receivables, tangible and intangible assets and the license
agreement. Advances due from licensees bear interest at prime plus two percent
but only to the extent the aggregate advances exceed the amount of qualified
trade receivables securing the outstanding advances. Under the terms of a
lockbox arrangement between the Company and the licensee, the advances are
reduced as remittances are received related to the licensee trade accounts
receivable. Licensees have pledged trade receivables of $4,579 and $5,713 at
October 28, 2000 and October 30, 1999, respectively, as collateral for such
advances. Sales generated by license offices were $42,024, $42,843 and $29,567
for fiscal 2000, 1999, and 1998, respectively. The Company continues to support
its current licensees, but is no longer offering license agreements to new
prospects.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets, which are twenty-five to thirty-one years for buildings and three to ten
years for furniture and equipment. Major improvements to leased office space are
capitalized and amortized over the shorter of their useful lives or the terms of
the leases. The Company capitalizes internal and external costs incurred in
connection with developing or obtaining

F-9

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
internal use software in accordance with Statement of Position (SOP) 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."

ACQUISITION AND AMORTIZATION

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

During fiscal years 2000, 1999 and 1998 the Company consummated acquisitions
with total purchase prices of $125, $887 and $25,724, respectively. Tangible
assets and specifically identifiable intangible assets associated with these
acquisitions amounted to $13 for fiscal 2000 and $118 for fiscal 1999. The
remaining purchase prices for these acquisitions were allocated to goodwill.
Specifically identifiable intangible assets consist primarily of covenants not
to compete and are amortized on a straight-line basis over the stated term of
the agreement. Net goodwill ($33,295 and $35,152 at October 28, 2000 and
October 30, 1999, respectively) is amortized over the useful life of the
specific acquired entity and ranges from 20 to 40 years. Certain of these
acquisitions included additional consideration contingent on sales, gross
profits or pre-tax income of the acquired businesses in future periods. When
such contingencies are earned, the additional cost is added to the affected
intangible assets and amortized over the remaining life of the asset.
Contingencies earned during fiscal 2000 and 1999 on acquisitions consummated in
prior years totaled $12 and $1,018, respectively. Unaudited pro forma
information regarding revenues and net income has not been provided since the
effect of these acquisitions was not material.

IMPAIRMENT OF LONG-LIVED ASSETS

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

WORKERS' COMPENSATION

The Company self-insures the deductible amount related to workers'
compensation claims under its paid loss retrospective program. The deductible
amount was $500 per claim for policy years 2000, 1999 and 1998. The Company
accrues the estimated costs of workers' compensation claims based upon the
expected loss rates incurred within the various temporary employment categories
provided by the Company. At least annually, the Company obtains an independent
actuarially determined calculation of the estimated costs of claims incurred and
reported and claims incurred but not reported, based on the Company's historical
loss development trends. The amounts calculated may be subsequently revised by
the actuary based on developments relating to such claims. In order to give
recognition to obligations

F-10

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
associated with the Company's workers' compensation program which are not
expected to be paid in the following fiscal year, the Company has included
$11,600 and $10,600 in other long-term liabilities at October 28, 2000 and
October 30, 1999, respectively.

INCOME TAXES

The Company records income taxes using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax law or rates.

ACCOUNTING FOR STOCK BASED COMPENSATION

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

TRANSLATION OF FOREIGN CURRENCIES

The functional currency for each of the Company's foreign operations is the
applicable local currency. All assets and liabilities that are denominated in
foreign currencies are translated into U.S. dollars at year-end exchange rates
and all revenue and expense accounts are translated using weighted average
exchange rates. Translation adjustments and gains or losses on intercompany
foreign currency transactions that are of a long-term investment nature are
included as a separate component of stockholders' equity.

COMPREHENSIVE INCOME

Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 requires presentation of comprehensive income (net income plus all
other changes in net assets from nonowner sources) and its components in the
financial statements. The Company has changed the format of its consolidated
statements of stockholders' equity to present comprehensive income. Accumulated
other comprehensive income shown in the Consolidated Balance Sheets at
October 28, 2000 and October 30, 1999 is solely comprised of cumulative foreign
currency translations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards requiring companies to record all derivatives on the
balance sheet as either assets or liabilities and measure those instruments at
fair value. The manner in which companies are to record gains or losses
resulting from changes in the values of those derivatives depends on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 is
effective for both interim and annual periods ending after June 15, 2000. The

F-11

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company does not expect the adoption of SFAS 133 to have a material effect on
its financial statements.

3. DISCONTINUED OPERATIONS

In November 1998, the Company announced its plan to sell Western Medical. As
a result of this decision, the Company has classified its medical operations as
discontinued operations and, accordingly, has segregated the net assets of the
discontinued operations in the accompanying Consolidated Financial Statements
and Notes thereto. In connection with the decision to discontinue the medical
operations, the Company recorded an after-tax loss in fiscal 1998 of $6,275.
This loss was related primarily to reduced revenues in connection with
Medicare's Interim Payment System enacted as part of the Balanced Budget Act of
1997, reduced revenues as a result of settlement of a prior year Medicare audit,
additional reserves for Medicare accounts receivable, increases in allowances
for doubtful accounts and other charges. In addition, during fiscal 1998 the
Company recorded an after-tax charge on the planned disposal of its medical
operations of $3,543 which included an estimated charge for the write down of
assets to estimated net realizable value, estimated costs to be incurred in
selling the operations and estimated operating losses to be incurred during the
disposal period.

During fiscal 1999, the Company sold certain of its franchise agent and
Company-owned medical offices and entered into a termination agreement with one
of its medical licensees. During the fourth quarter of fiscal 1999 the Company
completed the sale of the remaining medical business. Under the terms of the
sale, the Company retained the trade and Medicare accounts receivable balances
as well as the due from licensee balances. In fiscal 1999, the Company recorded
after-tax losses relating to discontinued operations of $6,611. These losses
primarily represented reserves for trade and Medicare accounts receivable and
due from licensee balances, and also included additional operating losses
resulting from the extended period required to close the sale and a reduction in
the estimated proceeds from the sale.

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

As of October 28, 2000 the Company has received $1,735 in cash proceeds from
the sale of its medical operations with an additional $1,000 due on the balance
of the purchase price. The $1,000 balance due, plus interest thereon, is owed to
the Company under a guaranteed promissory note which is in default. (See
Note 15.)

F-12

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

3. DISCONTINUED OPERATIONS (CONTINUED)
Summarized information on the discontinued operations is as follows:

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

Income statement data:
Revenues.................................................. $ 54,904
Costs and expenses........................................ 65,268
--------
Operating loss............................................ (10,364)
Income tax benefit........................................ (4,089)
--------
Loss from discontinued operations, net of income taxes.... (6,275)
--------
Estimated loss on disposal................................ $(1,300) $(10,987) (6,000)
Income tax benefit........................................ (516) (4,376) (2,457)
------- -------- --------
Estimated loss on disposal, net of income taxes........... (784) (6,611) (3,543)
------- -------- --------
Total discontinued operations............................. $ (784) $ (6,611) $ (9,818)
======= ======== ========

Balance sheet data:
Current assets (primarily receivables).................... $ 2,944 $ 5,588 $ 21,675
Property, plant and equipment, net........................ 2,085
Intangible assets, net.................................... 5,712
Other assets.............................................. 108 285
Current liabilities....................................... (639) (1,449) (5,930)
Noncurrent liabilities.................................... (1) (13) (74)
------- -------- --------
Net assets of discontinued operations..................... $ 2,304 $ 4,234 $ 23,753
======= ======== ========

4. TERMINATION OF RECAPITALIZATION AGREEMENT

On May 3, 2000 the Company announced that a recapitalization agreement
signed on March 7, 2000 was terminated by mutual consent of all parties. In
connection with the termination, Michael K. Phippen, then President and Chief
Executive Officer, resigned and W. Robert Stover, Chairman of the Board of
Directors, assumed the position of interim President and Chief Executive
Officer. As a result of the recapitalization termination, the Company incurred
$638 in pre-tax charges during the second quarter of fiscal 2000 and recorded
additional pre-tax charges of $1,266 in the third fiscal quarter ended July 8,
2000.

F-13

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

5. EARNINGS PER SHARE

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

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

Income from continuing operations........................... $ 7,235 $14,007 $13,748
------- ------- -------
Denominator for basic earnings per share--
weighted average shares................................... 15,854 15,862 15,569
Effect of dilutive securities:
Stock options............................................. 2 1 205
------- ------- -------
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversions........... 15,856 15,863 15,774
======= ======= =======
Basic earnings per share.................................... $ 0.46 $ 0.88 $ 0.88
======= ======= =======
Diluted earnings per share.................................. $ 0.46 $ 0.88 $ 0.87
======= ======= =======
Antidilutive weighted shares excluded from diluted earnings
per share................................................. 641 742
------- ------- -------

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

6. TRANSACTIONS WITH RELATED PARTIES

Prior to fiscal 2000, the Company had a management agreement with Western
Video Images, Inc. (WVI), a company wholly owned by the Chairman of the Board
and principal stockholder of the Parent, whereby the Company provided certain
accounting, tax, legal, administrative and management services to WVI and
charged a fee based upon the gross sales of WVI. Management fees charged to WVI
were $52 and $149, respectively, for fiscal 1999 and 1998. The Company is no
longer providing management services to WVI.

During October 1995, the Company bought the operations of one of its
franchise agents for a total purchase price of $5,913. Of this purchase price,
$5,793 was allocated to goodwill, $25 was allocated to covenants not to compete
and $95 was allocated to property, plant and equipment. This franchise agent
became an employee of the Company as a result of this transaction. The Company
paid $1,500 in cash on the closing date and paid an additional $4,413 through
fiscal 1999.

F-14

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

OCTOBER 28, OCTOBER 30,
2000 1999
----------- -----------

Land................................................... $ 1,183 $ 1,366
Buildings.............................................. 6,705 7,610
Equipment, furniture and fixtures...................... 44,593 41,459
-------- --------
52,481 50,435

Less accumulated depreciation and amortization......... (31,504) (26,764)
-------- --------
$ 20,977 $ 23,671
======== ========

8. SHORT-TERM BORROWINGS AND LOANS PAYABLE

As of March 4, 1998, the Company entered into an agreement with its existing
syndicated bank group to provide senior secured credit facilities totaling
$108,000. The facilities consist of a $90,000 five-year revolving credit
agreement and an $18,000 six-year term loan to provide working capital needs and
for 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 of $20,000. Total advances
are also limited under formulas based on total debt to total capitalization and
on earnings before interest, taxes, depreciation and amortization (EBITDA).

Short-term borrowings outstanding at October 28, 2000 and October 30, 1999
under the revolving credit agreement were $10,000 and $11,000, respectively,
with weighted average interest rates of 7.5% at October 28, 2000 and 6.8% at
October 30, 1999. At October 28, 2000, the Company had irrevocable standby
letters of credit totaling $9,550 outstanding as collateral to support its
workers' compensation program. These letters of credit expire one year from date
of issuance, but are automatically renewed for one additional year unless
written notice is given to the holder. As of October 28, 2000, the Company had
$7,279 available under its revolving credit facility.

Effective November 1, 2000, the Company obtained an $11,842 financial
guarantee bond, expiring November 1, 2001, to secure a portion of its workers'
compensation premium and deductible obligations. Additionally, in December 2000
the Company increased its outstanding irrevocable standby letters of credit to
$11,842.

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. At October 28,
2000, the Company was in compliance with these covenants.

Based on current projections, the Company's management believes there is a
possibility that the Company may be out of compliance with one of its credit
facility's financial covenants in the first quarter of fiscal 2001. The Company
has been out of compliance with one or more covenants in the past and has
received waivers and amendments with respect to such covenants from its bank
lenders. Management believes that in the event the Company is out of compliance
with the covenant, it will be able to obtain a waiver or amendment; however,
there can be no assurance that the Company's bank

F-15

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

8. SHORT-TERM BORROWINGS AND LOANS PAYABLE (CONTINUED)
lenders would grant one. If the Company were unable to obtain the waiver or
amendment, management believes that alternative sources of financing for amounts
outstanding under its credit facility could be obtained, however, there can be
no assurance that such alternative sources of financing could be obtained.

On May 20, 1998, the Company completed a private placement of 10-year senior
secured notes totaling $30,000 payable in equal annual installments beginning in
the year 2002. Proceeds from the notes were used to repay outstanding borrowings
of $22,600 under the revolving credit agreement, with the remainder used for
working capital and general corporate purposes. Under the senior secured notes
payable, the Company is required to comply with certain financial and other
covenants, the most restrictive of which is a maximum total debt to
capitalization ratio of 55%. The Company was in compliance with these covenants
as of October 28, 2000.

Loans payable consist of the following:

OCTOBER 28, OCTOBER 30,
2000 1999
------------ ------------

Variable rate term loan issued under a senior secured credit
facility, collateralized by the assets of the Company,
interest 7.5% at October 28, 2000 and 6.6% at
October 30, 1999.......................................... $10,500 $13,250
Senior secured notes payable, collateralized by the assets
of the Company with semi-annual interest payments at 6.8%
per annum................................................. 30,000 30,000
Variable and fixed rate note payable, collateralized by
deeds of trust, interest 7.3% at October 30, 1999......... 1,458
------- -------
40,500 44,708
Less current portion........................................ (3,250) (3,100)
------- -------
$37,250 $41,608
======= =======

The fair value of the loans payable approximates the carrying value as of
October 28, 2000 based on current rates available to the Company for debt with
similar terms. Maturities of loans payable for each of the next five fiscal
years are as follows: 2001--$3,250; 2002--$7,286; 2003--$7,286; 2004--$5,536;
2005--$4,286; and thereafter; $12,856.

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

OCTOBER 28, OCTOBER 30,
2000 1999
------------ ------------

Accounts payable............................................ $ 3,434 $ 2,899
Checks outstanding in excess of bank balances............... 6,194 8,665
Accrued payroll and payroll taxes........................... 18,010 20,463
Accrued insurance/workers' compensation..................... 11,360 9,928
Other....................................................... 7,706 6,962
------- -------
$46,704 $48,917
======= =======

F-16

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

10. INCOME TAXES

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

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

Domestic.................................................... $10,985 $22,722 $21,400
Foreign..................................................... 977 434 1,514
------- ------- -------
Income from continuing operations before income taxes....... $11,962 $23,156 $22,914
======= ======= =======

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

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

CURRENT:
State and local........................................... $1,033 $ 2,946 $ 3,190
Federal................................................... 3,628 10,041 13,811
Foreign................................................... 599 649 836
------ ------- -------
5,260 13,636 17,837
------ ------- -------
DEFERRED:
State and local........................................... (662) (1,219) (1,379)
Federal................................................... 329 (2,742) (7,181)
Foreign................................................... (200) (526) (111)
------ ------- -------
(533) (4,487) (8,671)
------ ------- -------
$4,727 $ 9,149 $ 9,166
====== ======= =======

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

FISCAL YEAR ENDED
---------------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 31,
2000 1999 1998
----------- ----------- -----------

Federal statutory income tax rate........................... 35% 35% 35%
Tax on income of foreign subsidiaries....................... 1
State taxes, net of federal income tax benefit.............. 4 6 5
Other....................................................... 1 (1) (1)
-- -- --
Effective income tax rate................................... 40% 40% 40%
== == ==

F-17

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

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

FISCAL YEAR ENDED
-------------------------
OCTOBER 28, OCTOBER 30,
2000 1999
----------- -----------

Workers' compensation....................................... $ 9,866 $ 8,628
Accruals relating to discontinued operations................ 178 3,443
Other liabilities and accruals.............................. 1,455 1,833
State and foreign net operating loss carryforwards.......... 1,782 1,443
------- -------
Gross deferred tax assets................................. 13,281 15,347
------- -------

Depreciation and amortization............................... 1,127 724
Other....................................................... 593 363
------- -------
Gross deferred tax liabilities............................ 1,720 1,087
------- -------
Net deferred tax asset...................................... $11,561 $14,260
======= =======

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

At October 28, 2000, the Parent had cumulative undistributed earnings from
foreign subsidiaries of approximately $2,680. Income taxes have not been
provided on the undistributed earnings because they have been permanently
reinvested in the foreign subsidiaries. These earnings could become subject to
additional tax if they were remitted as dividends, or if foreign earnings were
lent to the Company. However, such income taxes would not be material to the
Company's financial position or results of operations.

11. SAVINGS PLANS

The Company has a nonqualified deferred savings plan for highly compensated
employees and a 401(k) savings plan for eligible employees. Under both the
deferred and 401(k) savings plans, employees may elect to contribute up to 15%
of their eligible annual compensation, with the Company matching 25% of
participant contributions up to the first 10%. Contributions for continuing
operations were $333, $297 and $249 for fiscal 2000, 1999 and 1998,
respectively.

12. STOCKHOLDERS' EQUITY

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

In July 1998 the Company acquired substantially all of the assets of The
Personnel Connection, Inc. Consideration for the acquisition consisted of cash
and common stock, with a

F-18

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

12. STOCKHOLDERS' EQUITY (CONTINUED)
contingent obligation to issue up to an additional 100 shares of common stock
dependent on the fair market value of the Company's stock subsequent to the
acquisition. On January 27, 2000 the Company paid the selling parties $800 in
lieu of issuing additional shares, with an offsetting reduction in additional
paid-in-capital.

TREASURY STOCK

During fiscal 2000, the Company repurchased 150 shares of common stock on
the open market for aggregate cash consideration of $712. The repurchased shares
may be used for reissuance under the Company's stock option and employee stock
purchase plans. During fiscal 2000, the Company reissued 93 shares with
aggregate cash proceeds of $424. When treasury shares are reissued, any excess
of the proceeds over the acquisition cost of the shares is credited to
additional paid-in-capital. Excess acquisition cost over the proceeds from
reissuance, determined on a first-in first-out basis, is charged to additional
paid-in-capital to the extent of previous net "gains", and then to retained
earnings.

STOCK OPTION PLANS

The 1989/1990 Stock Option Plan provided for the granting of nonqualified
options to executives and key employees to purchase the Company's common stock.
The options vested during fiscal 1994 and fiscal 1995 and are exercisable at
$6.40 per share for options granted in fiscal 1989 and $7.01 per share for
options granted in fiscal 1990. Options to purchase 10 shares are outstanding at
October 28, 2000. Based on plan provisions, as of November 4, 2000 all options
outstanding under this plan have been cancelled. No further grants may be made
under the 1989/1990 plan.

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

The Company applies APB 25 and related interpretations in accounting for the
Plans. Accordingly, compensation cost is not recognized for incentive and
nonqualified stock options. Pro forma information regarding net income and
earnings per common share is required by Statement of Financial Accounting
Standards No. 123 (SFAS 123) as if the Company had accounted for its employee
stock options under the fair value method rather than the intrinsic value method
under APB 25. If compensation cost had been determined under SFAS 123, the
Company's net income would have been reduced by $170, $1,002 and $965 for fiscal
2000, 1999 and 1998, respectively, and earnings per share for those years would
have been reduced by $0.01, $0.06 and $0.06, respectively. Because stock options
generally become exercisable over several years and additional grants are likely
to be made in future years, the pro forma amounts for compensation cost may not
be indicative of the effects on net income and earnings per share for future
years.

F-19

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

12. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option included in the following table is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for options granted in fiscal 2000, 1999
and 1998, respectively: zero dividend yield, expected volatility of 76.0%, 74.0%
and 69.0%, expected lives of 6 years; and risk-free interest rates of 6.1%, 5.4%
and 5.7%.

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

OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 31, 1998
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------

Options outstanding, beginning of year.... 746 $ 9.93 786 $9.91 648 $ 9.13
Granted at market value................. 29 3.87 11 6.18 295 11.16
Granted in excess of market value....... 106 9.01
Exercised............................... (11) 6.41 (127) 9.19
Cancelled............................... (514) 10.25 (40) 9.38 (30) 8.34
----- ------ ----- ----- ---- ------
Options outstanding, end of year.......... 367 $ 8.74 746 $9.93 786 $ 9.91
===== ====== ===== ===== ==== ======
Options exercisable, end of year.......... 290 $ 9.25 457 $9.39 288 $ 9.09
===== ====== ===== ===== ==== ======
Options available for grant, end of
year.................................... 1,066 687 658
===== ===== ====
Weighted average fair value of options
granted during the year:
At market value....................... $ 2.73 $4.27 $ 7.42
====== ===== ======
In excess of market value............. $ 5.70
======

The following table summarizes information about stock options outstanding
at October 28, 2000:

OPTIONS OUTSTANDING
---------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ---------------------------
RANGE OF REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------- -------- ---------------- ---------------- -------- ----------------

$ 3.75-- 4.00 35 9.79 $ 3.88
$ 6.00-- 8.50 37 5.42 7.04 31 $ 6.82
$ 9.33-- 9.50 227 5.51 9.34 204 9.34
$ 9.58--16.17 68 7.05 10.16 55 10.30
------------------- --- ---- ------ --- ------
$ 3.75--16.17 367 6.20 $ 8.74 290 $ 9.25
=================== === ==== ====== === ======

EMPLOYEE STOCK PURCHASE PLAN

Under the Company's 1996 Employee Stock Purchase Plan, eligible employees
may authorize payroll deductions of up to 10% of eligible compensation for the
purchase of stock during each semi-annual purchase period. The purchase price
will equal the lower of 85% of the fair market value at the beginning of the
purchase period or on the last day of the purchase period. The plan provides for
the issuance of up to 750 shares of the Company's common stock. As of
October 28, 2000 shares

F-20

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

12. STOCKHOLDERS' EQUITY (CONTINUED)
issued under the plan totaled 360. The effect of this plan on the pro forma
disclosures under SFAS 123 has not been included as the impact on net income and
earnings per share is not material.

13. LEASES

The Company leases real and personal property under operating leases which
expire on various dates. Some of these leases have renewal options for periods
ranging from one to five years and contain provisions for escalation based on
increases in certain costs incurred by the landlord and on Consumer Price Index
adjustments. U.S. rental expense from continuing operations amounted to $5,035
in fiscal 2000, $4,880 in fiscal 1999 and $4,337 in fiscal 1998. Rental expense
for foreign subsidiaries was $1,416 in fiscal 2000, $1,222 in fiscal 1999 and
$1,080 in fiscal 1998. The Company also receives rental income from owned
property and subleases which expire on various dates. Sublease income was not
material to the Company's results of operations for any periods presented.

Future minimum lease payments for all leases at October 28, 2000 are as
follows:

FISCAL YEAR
- -----------

2001........................................................ $ 4,976
2002........................................................ 3,186
2003........................................................ 1,773
2004........................................................ 790
2005........................................................ 330
Thereafter.................................................. 252
-------
Total minimum lease payments................................ $11,307
=======

14. OPERATING SEGMENTS

The Company has three reportable segments: domestic business services,
international business services and medical services. Domestic business services
provides temporary staffing services in clerical, light industrial and light
technical positions through a network of company-owned, franchise agent and
licensed offices. The segment consists of 17 geographically diverse company
regions under the direction of regional/zone managers and one combined franchise
region, each identified as an operating segment. Revenues from domestic business
services are derived wholly from the United States and its territories. The
domestic operating segments meet the aggregation criteria specified under
SFAS 131 for reporting purposes. International business services comprise
company-owned offices providing clerical and light industrial temporary staffing
services in Australia, New Zealand, Norway, Denmark and the United Kingdom. The
Company employs a managing director for each country who oversees all operations
in that country. Revenues are attributed to each country based on the location
of the respective country's principal offices. International operations have
been combined into one reportable segment under the provisions of SFAS 131 as
they share a majority of the aggregation criteria and are not individually
reportable. The Company has discontinued the operations of its medical services
segment (see Notes 1 and 3).

The Company evaluates the performance of and allocates resources to the
reportable segments based on operating income. The accounting policies of the
segments are the same as those described in Note 2. Certain operating expenses
of the Company's corporate headquarters, which are included in

F-21

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

14. OPERATING SEGMENTS (CONTINUED)
domestic business services, are charged to international business services in
the form of royalties. Domestic assets relating to the generation of the
royalties, primarily property, plant and equipment, have not been allocated due
to impracticality and are not considered material for purposes of assessing
performance and making operating decisions.

The following summarizes reporting segment data for fiscal years 2000, 1999
and 1998:

FISCAL YEAR ENDED OCTOBER 28, 2000
--------------------------------------------------------
DOMESTIC INTERNATIONAL ADJUSTMENTS(1) CONSOLIDATED
-------- ------------- -------------- ------------

Total sales of services and license fees...... $565,580 $97,375 $662,955
Operating income from continuing operations... 13,305 1,488 14,793
Depreciation and amortization................. 7,712 905 8,617
Expenditures for puchases of fixed assets..... 3,137 1,233 4,370
Payments for intangibles and other............ 136 136
-------- ------- --------
Total expenditures for long lived assets...... $ 3,273 $ 1,233 $ 4,506
======== ======= ========
Total long lived assets....................... $ 51,501 $ 4,007 $ 55,508
======== ======= ========
Total assets.................................. $163,858 $22,524 $ (3,310) $183,072
======== ======= ======== ========

FISCAL YEAR ENDED OCTOBER 30, 1999
--------------------------------------------------------
DOMESTIC INTERNATIONAL ADJUSTMENTS(1) CONSOLIDATED
-------- ------------- -------------- ------------

Total sales of services and license fees...... $558,314 $92,438 $650,752
Operating income from continuing operations... 24,700 650 25,350
Depreciation and amortization................. 7,524 642 8,166
Expenditures for puchases of fixed assets..... 6,762 1,443 8,205
Payments for intangibles and other............ 1,609 51 1,660
-------- ------- --------
Total expenditures for long lived assets...... $ 8,371 $ 1,494 $ 9,865
======== ======= ========
Total long lived assets....................... $ 56,426 $ 4,483 $ 60,909
======== ======= ========
Total assets.................................. $168,028 $21,808 $ 994 $190,830
======== ======= ======== ========

FISCAL YEAR ENDED OCTOBER 31, 1998
--------------------------------------------------------
DOMESTIC INTERNATIONAL ADJUSTMENTS(1) CONSOLIDATED
-------- ------------- -------------- ------------

Total sales of services and license fees...... $522,217 $77,492 $599,709
Operating income from continuing operations... 22,428 1,592 24,020
Depreciation and amortization................. 6,348 604 6,952
Expenditures for puchases of fixed assets..... 8,441 505 8,946
Payments for intangibles and other............ 13,953 1,433 15,386
-------- ------- --------
Total expenditures for long lived assets...... $ 22,394 $ 1,938 $ 24,332
======== ======= ========

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

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

F-22

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

15. COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and other actions arising in the ordinary
course of business. Some of these claims and actions have resulted in lawsuits
where the Company is a defendant. Major contingencies are discussed below.

On March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior
Court of the State of California for the County of Los Angeles. Included among
the defendants named in the case are the Company, all members of its Board of
Directors and one of the executive officers. The complaint alleges, among other
things, that the defendants fraudulently induced plaintiffs to sell the assets
of The Personnel Connection, Inc. The plaintiff sought to have the court grant a
jury trial and award the plaintiff compensatory and punitive damages and
attorneys' fees and other costs. The Company's petition for an order compelling
arbitration was granted, the Superior Court lawsuit was stayed and an
arbitration proceeding is pending.

In August 1999, the Company sold substantially all of the assets of its
medical business. (See Note 3.) The $1,000 balance of the purchase price, with
interest thereon, is owed to the Company under a guaranteed promissory note. The
purchaser has defaulted on the obligation and has demanded arbitration
contending, among other things, that the Company made misrepresentations and
otherwise breached the asset purchase agreement. The Company has denied all
liability and is counterclaiming for the balance of the purchase price and other
charges due. Discovery proceedings are underway and an arbitration hearing has
been scheduled.

The Company believes these claims and actions are without merit and that the
outcome of the proceedings will not have a material adverse effect on its
financial position, results of operations or cash flows.

F-23

WESTAFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly financial information
for the fiscal years ended October 28, 2000 and October 30, 1999. The fourth
quarter of fiscal years 2000 and 1999 consist of 16 weeks while all other
quarters consist of 12 weeks.

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------

FISCAL YEAR ENDED OCTOBER 28, 2000
Sales of services and license fees.................. $147,463 $149,357 $149,879 $216,256
Gross profit........................................ 30,437 31,817 30,953 43,256

Income from continuing operations................... 2,057 1,757 296 3,125
Loss from discontinued operations................... (784)
-------- -------- -------- --------
Net income.......................................... $ 2,057 $ 1,757 $ 296 $ 2,341
======== ======== ======== ========
Basic and diluted income (loss) per common share
Income from continuing operations................. $ 0.13 $ 0.11 $ 0.02 $ 0.20
======== ======== ======== ========
Loss from discontinued operations................. $ $ $ $ (0.05)
======== ======== ======== ========
Net income........................................ $ 0.13 $ 0.11 $ 0.02 $ 0.15
======== ======== ======== ========
FISCAL YEAR ENDED OCTOBER 30, 1999
Sales of services and license fees.................. $137,082 $142,649 $150,044 $220,977
Gross profit........................................ 28,738 30,164 32,191 46,869

Income from continuing operations................... 2,340 2,866 3,514 5,287
Loss from discontinued operations................... (1,315) (2,820) (2,476)
-------- -------- -------- --------
Net income.......................................... $ 2,340 $ 1,551 $ 694 $ 2,811
======== ======== ======== ========
Basic and diluted income (loss) per common share
Income from continuing operations................. $ 0.15 $ 0.18 $ 0.22 $ 0.33
======== ======== ======== ========
Loss from discontinued operations................. $ $ (0.08) $ (0.18) $ (0.16)
======== ======== ======== ========
Net income........................................ $ 0.15 $ 0.10 $ 0.04 $ 0.18
======== ======== ======== ========

F-24

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

SCHEDULE II
(AMOUNTS IN THOUSANDS)

ADDITIONS
------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ---------- ---------- ---------- ----------

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

Fiscal Year Ended October 30, 1999
Allowance for doubtful accounts.............. $ 786 $2,458 $ 0 $1,590 $1,654
Reserve on notes receivable.................. 254 0 0 80 174
Allowance for doubtful accounts--discontinued
operations................................. 1,888 5,713 0 0 7,601
Disposal of discontinued operations.......... 6,000 5,274 0 10,397 877

Fiscal Year Ended October 28, 2000
Allowance for doubtful accounts.............. $1,654 $4,264 $ 0 $4,284 $1,634
Reserve on notes receivable.................. 174 150 0 0 324
Allowance for doubtful accounts--discontinued
operations................................. 7,601 1,043 0 8,537 107
Disposal of discontinued operations.......... 877 257 0 663 471

IV-1

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized.

WESTAFF, INC.

By: /s/ W. ROBERT STOVER
---------------------------------
W. Robert Stover
CHAIRMAN OF THE BOARD,
INTERIM PRESIDENT AND
CHIEF EXECUTIVE OFFICER

Date: February 22, 2001

IV-2

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

That the undersigned officers and directors of Westaff, Inc., a Delaware
corporation, do hereby constitute and appoint Dirk A. Sodestrom the lawful
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any amendments to this report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorney-in-fact or his substitute or substitutes may do or cause
to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

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

SIGNATURE TITLE DATE
--------- ----- ----

* Chairman of the Board, interim February 22, 2001
--------------------------------- President and Chief Executive
W. Robert Stover Officer

* Senior Vice President and Chief February 22, 2001
--------------------------------- Financial Officer (interim Principal
Dirk A. Sodestrom Accounting Officer)

* Director February 22, 2001
---------------------------------
Gilbert L. Sheffield

* Director February 22, 2001
---------------------------------
Jack D. Samuelson

*By: /s/ DIRK A. SODESTROM
--------------------------------------
Dirk A. Sodestrom, Attorney-In-Fact

IV-3