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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

For the quarterly period ended July 13, 2002

For the transition period from                              to                             

Commission file number 0-24990

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

301 Lennon Lane
Walnut Creek, California 94598-2453
(Address of registrant's principal executive offices, including zip code)

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

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  ý    No  o

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

WESTAFF, INC. AND SUBSIDIARIES

INDEX

Part I. Financial Information

Item 1. Financial Statements

Westaff, Inc.

Condensed Consolidated Balance Sheets (Unaudited)
(In thousands except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands except per share amounts)

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

See accompanying notes to condensed consolidated financial statements.

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Westaff, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands except per share amounts)

1.    Basis of Presentation

        The accompanying condensed consolidated financial statements of Westaff, Inc. and its domestic and foreign subsidiaries (together, the Company), as of and for the 12 and 36 week periods ended July 13, 2002 and July 7, 2001 are unaudited. Material intercompany accounts and transactions have been eliminated.

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

        Certain financial information which is normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended November 3, 2001.

        The Company's fiscal year is a 52 or 53 week period ending the Saturday nearest the end of October. For interim reporting purposes, the first three fiscal quarters comprise 12 weeks each while the fourth fiscal quarter consists of 16 or 17 weeks. The results of operations for the 12 and 36 week periods ended July 13, 2002 are not necessarily indicative of the results to be expected for the full fiscal year or for any future period.

        In November 1998, the Company announced its plan to sell its medical business, primarily operating through Western Medical Services, Inc. (Western Medical), a wholly-owned subsidiary. As a result of this decision, the medical operations are classified as discontinued operations and presented as such in these condensed consolidated financial statements and notes thereto.

        In January 2001 the Financial Accounting Standards Board (FASB) issued EITF Issue No. 01-14 (formerly EITF Abstracts, Topic No. D-103), "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred", which requires that revenues and expenses be reported gross of such "out-of-pocket" expenses. Application was effective for financial reporting periods beginning after December 15, 2001 with prior periods reclassified to comply with the guidance. Accordingly, sales of services and costs of services for the 12 and 36 weeks ended July 7, 2001 have been reclassified to conform with the presentation adopted for fiscal 2002.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The new standard supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The new standard also supercedes the provisions of Accounting Principles Board No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The provisions of SFAS No. 144 are effective on a prospective basis for financial statements with fiscal years beginning after December 15, 2001. The Company currently does not anticipate that SFAS No. 144 will have a material impact on its financial statements in the year of adoption.

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        In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liabiliity is incurred, as opposed to when the entity commits to an exit plan under EITF Issue No. 94-3. The Company is required to adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and currently does not anticipate that the provisions of the new statement will have a material impact on its financial statements in the year of adoption.

2.    Discontinued Operations

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

        In August 2000, Intrepid filed a demand for arbitration seeking compensatory and punitive damages alleging, among other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. In fiscal 2001, the arbitrator awarded Intrepid $1,085 mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and accounting fees of approximately $425. Primarily due to the unfavorable arbitration award, the Company recorded an after-tax loss from discontinued operations of $1,794, or $0.11 per share, in the second quarter of fiscal 2001. The after-tax loss included approximately $904 for the arbitration loss and expenses, $640 for losses on settlements of outstanding Medicare cost reports and other settlements and $250 in valuation allowances for medical operations' net operating loss carryforwards which the Company believes will expire unused over the next two fiscal years. Included in the current assets of discontinued operations at July 13, 2002 is a $631 receivable for recoveries on 1997 Medicare cost reports. The remaining $953 of net current liabilities at July 13, 2002 comprise estimated reserves for pending liability claims of former Western Medical franchise agents, licensees or employees.

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

3.    Restructuring Charges

        In January 2002, the Company implemented a restructuring plan designed to improve the Company's profitability. The restructuring plan resulted in a first quarter fiscal 2002 pretax charge to operations of $1,896. Of this amount, $993 was the result of abandoning front and back office management information systems that were under development in conjunction with two software vendors. One of these vendors chose to cease further development of its portion of the project and that caused the continued development of these systems to no longer be cost-effective for the Company. In conjunction with this abandonment, the Company recognized the historical fees paid to vendors, fees

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paid to consultants and certain in-house development costs as expenses, all of which had been previously capitalized awaiting the completion of the systems. An additional $629 resulted from severance and other employment termination costs due to the planned personnel reductions of 70 full time employees. Finally, as of the date the restructuring plan was finalized, the Company decided to close at least 18 offices within the United States and the resulting termination costs, including lease terminations, were estimated to be $274.

        The activity impacting the accrual for restructuring charges is summarized in the table below:

4.    Earnings Per Share

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

        Anti-dilutive weighted shares represent options to purchase shares of common stock which were outstanding but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares during the period, and therefore the effect would be anti-dilutive. For the 12 and 36 weeks ended July 13, 2002, dilutive securities have not been included in the weighted average shares used for the calculation of earnings per share because the effect of such securities would be anti-dilutive as a result of the loss from continuing operations.

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5.    Comprehensive Income (Loss)

        Comprehensive income (loss) consists of the following:

6.    Short-term Borrowings and Loans Payable

        On May 17, 2002 the Company entered into agreements with GE Capital, as primary agent, to provide senior secured credit facilities totaling $65,000. The new credit facilities replace a credit facility that was to expire on March 31, 2003. The facilities comprise a five-year syndicated Multicurrency Credit Agreement consisting of a $50,000 US Revolving Loan Commitment, a £2,740 UK Revolving Loan Commitment (US dollar equivalent of approximately $4,000 at the date of the agreement), and a $5,000 term loan (the Term Loan). In addition, a five-year Australian dollar facility agreement (the A$ Facility Agreement) was executed on May 16, 2002, consisting of an A$12,000 revolving credit facility (US dollar equivalent of approximately $6,000 at the date of the agreement). Each Agreement includes a letter of credit sub-facility. Concurrent with the execution of these new credit facilities, the Company repaid all outstanding principal and interest under its 10-year senior secured notes, which totaled $30,999. In addition, $17,343 in letters of credit were issued under the new facility to replace $11,843 in outstanding letters of credit and $5,500 of cash on deposit with the Company's workers' compensation insurance carrier.

        The US Revolving Loan Commitment provides for an aggregate $50,000 commitment subject to a borrowing base calculation on eligible domestic accounts receivable. Direct advances are also limited by outstanding irrevocable standby letters of credit up to a maximum of $35,000. Interest on borrowings under the commitment is based either on an index rate equal to the higher of the bank prime loan rate or the Federal Funds Rate plus 0.50%, plus applicable margins ranging from 0.25% to 1.25%, or on LIBOR plus margins ranging from 2.50% to 3.50%. Borrowings outstanding under the US Revolving Loan Commitment at July 13, 2002 were $14,558 at a weighted average interest rate of 5.27%.

        The Term Loan bears interest at a variable index rate equal to the higher of the bank prime loan rate or the Federal Funds Rate plus 0.50%. Applicable margins above the index rate vary from 5.5% to 6.5%. The interest rate in effect at July 13, 2002 was 10.75%. The Term Loan is payable in nineteen consecutive quarterly installments of $250 each, beginning July 1, 2002. At July 13, 2002 borrowings of $4,750 were outstanding on the Term Loan.

        The UK Revolving Loan Commitment is subject to a borrowing base calculation on eligible Westaff (U.K.) accounts receivable. Interest on outstanding borrowings is based on the British prime rate plus applicable margins ranging from 0.25% to 1.25%. At July 13, 2002, borrowings of approximately US$703 were outstanding under the UK Revolving Loan Commitment at an interest rate of 4.75%.

        The Multicurrency Credit Agreement calls for a commitment fee, payable monthly in arrears, of 0.50% based on the average daily unused balance of the combined US/UK revolving loan commitment. Additionally, a variable margin ranging from 1.5% to 2.5% of the total outstanding letters of credits is payable monthly in arrears and the agreement requires an annual fee of 0.50% of the face amount of each letter of credit which is issued, renewed or extended. The margin in effect on outstanding letters of credits is 2.0% through July 1, 2003.

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        The A$ Facility Agreement is subject to a borrowing base calculation on eligible Westaff (Australia) accounts receivable. Direct advances are limited by outstanding letters of credit up to a maximum of A$500. Interest on borrowings is based on the Australian 90-day Bank Bill Swap Rate plus a margin of 2.5% to 3.5%. At July 13, 2002, borrowings of approximately US$960 were outstanding under the A$ Facility Agreement at an interest rate of 8.17%. The agreement calls for monthly fees, payable in arrears, of 0.50% of the average daily unused balance of the facility and from 1.5% to 2.5% of total outstanding letters of credit. The margin in effect on outstanding letters of credits is 2.0% through July 1, 2003.

        Applicable margins under both the Multicurrency Credit Agreement and the A$ Facility Agreement are subject to quarterly adjustments, on a prospective basis beginning July 1, 2003, based on the respective borrowers' fixed charge coverage ratio. Letters of credit under the agreements expire one year from date of issuance but are automatically renewed for one additional year unless written notice is given to or from the holder. At July 13, 2002 the Company had approximately $13,079 available under the credit facilities, with $17,343 in letters of credit outstanding.

        The credit facilities are secured by substantially all of the assets of the Company, including a deed of trust on the Company's corporate headquarters. GE Capital, in its role as primary agent under the credit facilities, has sole dominion and control over the Company's primary U.S., United Kingdom and Australia cash receipt accounts. Cash receipts into these accounts are applied against the Company's respective outstanding obligations under the facilities, with additional borrowings under the revolving facilities directed into the Company's disbursement accounts.

        The credit facilities contain covenants which, among other things, require the Company to maintain a minimum fixed charge coverage ratio and a minimum earnings before interest, taxes, depreciation and amortization (EBITDA). The covenants also 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 July 13, 2002, the Company was in compliance with these covenants; however, based on current projections, the Company's management believes there is a possibility that the Company may not be in compliance with the credit facility's EBITDA covenant on a prospective basis. The Company has notified its lenders of this possibility and negotiations to revise the covenant are currently in process. There can be no assurance that such negotiations will be completed in a manner satisfactory to the Company.

        In addition to its outstanding letters of credit, the Company has an outstanding financial guarantee bond in the amount of $11,842 that secures a portion of its workers' compensation premium and deductible obligations. The bond is renewable annually on November lst and 90-day advance written notice of non-renewal is required. The bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond on November 1, 2002. The Company anticipates issuance of additional letters of credit to replace the currently outstanding financial guarantee bond when it expires.

7.    Related Party Transactions

        On April 1, 2002 the Company executed an unsecured subordinated promissory note payable to its principal stockholder and Chairman of the Board of Directors in the amount of $2,000. The initial term of the note was one year, with an interest rate of 12% per annum, payable monthly on the last business day of each calendar month. On May 17, 2002 the note was amended and restated to extend the maturity date to August 18, 2007. Additionally, the interest rate and payment schedule were amended to a rate equal to the US Index Rate as calculated under the Company's Multicurrency Credit Agreement (see Note 6) plus seven percent, compounded monthly and payable 60 calendar days after the end of each of the Company's fiscal quarters. The interest rate in effect on July 13, 2002 was

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11.75%. Payment of interest is contingent on the Company meeting minimum availability requirements under the new credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the Multicurrency Credit Agreement or A$ Facility Agreement.

        On May 17, 2002 the Company executed an unsecured subordinated promissory note payable to its President and Chief Executive Officer (CEO) in the amount of $1,000 with a maturity date of August 18, 2007. The note bears interest at a rate equal to the US Index Rate plus the Applicable Term Loan Index Margin as calculated under the Company's Multicurrency Credit Agreement (see Note 6), payable 45 calendar days after the end of each of the Company's fiscal periods. The interest rate in effect on July 13, 2002 was 10.75%. Pursuant to a provision of the promissory note, the Company paid its President and CEO a note fee of $30. Payment of interest is contingent on the Company meeting minimum availability requirements under the new credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the Multicurrency Credit Agreement or A$ Facility Agreement.

8.    Operating Segments

(1)

U.S. GAAP adjustments to international operations

9.    Commitments and Contingencies

        In the ordinary course of its business, the company is periodically threatened with or named as a defendant in various lawsuits. The principal risks that the Company insures against are workers' compensation, general liability, property damage, errors and omissions, fiduciary liability and fidelity losses.

        In March 2000, Synergy Staffing, Inc. filed a complaint against the Company, all members of its then current Board of Directors and one of the executive officers alleging, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. under a July 1998 asset purchase agreement. Under arbitration proceedings, on January 9, 2002 the arbitration panel rendered an interim award in favor of the claimant for compensatory damages of $2,224, plus interest from the date of the award, as well as reasonable attorneys' fees and other costs incurred in the proceeding, subject to an application process. On February 11, 2002, an Order Modifying Interim Award was issued crediting the Company $800 paid to the claimant in January 2000

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under a price protection clause in the asset purchase agreement, thereby reducing the award for compensatory damages to $1,424. In the fourth quarter of fiscal 2001, the Company recorded a pretax charge of $3,600 for the estimated cost of settling this case, which included interest and related fees.

        On April 22, 2002 a Final Award was issued under which the Company paid an additional $567 in fees and expenses. Primarily as a result of the Final Award, $693 of the remaining liability was recorded as a reduction to selling and administrative expense in the second fiscal quarter of 2002. Of the initial $3,600 pretax charge, approximately $817 of unpaid costs remain and are reflected in the balance sheet at July 13, 2002 as an accrued liability.

        On July 26, 2002 the claimant filed a motion in Los Angeles Superior Court to correct and confirm the interim award, seeking to have the arbitrators' factual findings affirmed, while having its damages, interest and attorneys' fees determinations contained in the findings set aside and increased in their favor. On August 21, 2002 the Superior Court denied the claimant's motion. The Company believes that any further claims or actions that may be brought by the claimant in this case are without merit and that the outcome of such would not have a material adverse effect on its financial statements.

        The Company is subject to claims and other actions arising in the ordinary course of business, some of which have resulted in lawsuits where the Company is a defendant, including countersuits brought by former franchise agents or licensees, and administrative claims and lawsuits brought by employees or former employees. Management currently believes that the ultimate obligations, if any, which may result from unfavorable outcomes of such lawsuits will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

        The Company is not currently a party to any material litigation, except as disclosed above.

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

        The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the results of operations and financial condition of Westaff, Inc., together with its consolidated subsidiaries. This discussion and analysis should be read in conjunction with the Company's unaudited Condensed Consolidated Financial Statements and Notes thereto included herein and with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended November 3, 2001.

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

        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: possible adverse effects of fluctuations in the general economy, reliance on executive management, uncertain ability to continue and manage growth, control by a significant shareholder, reliance on management information systems, risks related to international operations, variability of employee-related costs, risks related to customers, variability of operating results and the seasonality of the business cycle, ability to attract and retain the services of qualified temporary personnel, a highly competitive market, reliance on field management, employer liability risks, risks related to franchise agent and licensed operations, and risks related to acquisitions. Due to the foregoing factors, it is possible that in some future period the Company's results of operations may be below the expectations of public market analysts and investors. In addition, the Company's results of operations have historically been subject to quarterly and seasonal fluctuations. Demand for temporary staffing is historically highest in the fourth fiscal quarter, due largely to the planning cycles of many of the Company's customers, and typically lower in the first fiscal quarter, due, in part, to national holidays as well as to plant shutdowns during and after the holiday season. These and other risks and uncertainties related to the Company's business are described in detail in the "Factors Affecting Future Operating Results" section of the Company's Annual Report on Form 10-K for the fiscal year ended November 3, 2001.

Overview

        The Company provides staffing services to, and employment opportunities at, competitive businesses in global markets. Through its network of Company-owned, franchise agent and licensed offices, the Company offers a wide range of staffing solutions, including temporary, direct hire, replacement, supplemental and on-site programs to businesses and government agencies. The Company has over 50 years of experience in the staffing industry and operates over 310 business services offices in 45 states, the District of Columbia and five foreign countries.

        The Company differentiates itself from other large temporary staffing companies by primarily focusing on recruiting and placing support personnel in secondary markets. These support personnel often fill clerical, light industrial and light technical positions such as word processing, data entry,

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reception, customer service and telemarketing, warehouse labor, manufacturing and assembly. These assignments support either core or non-core functions of the customer's business.

        The general level of economic activity and unemployment in the United States and the countries in which the Company operates significantly affects demand for the Company's staffing services. Companies generally use temporary staffing services to manage personnel costs and staffing needs. As economic activity slows, many companies reduce their utilization of temporary employees before releasing full-time employees. Consequently, the Company experienced less demand for its services and more competitive pricing pressure during the recent economic recession. A recurrence of a recessionary economy could have a material adverse effect on the Company's business, results of operations, cash flows or financial condition. 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 significantly harmed.

Recent Developments

        On May 17, 2002 the Company entered into agreements with GE Capital, as primary agent, to provide senior secured credit facilities totaling $65.0 million, replacing the Company's credit facility that was to expire in March 2003. Proceeds from the new credit facilities were used to repay all outstanding principal and interest under the Company's senior secured notes, which totaled $31.0 million. In addition, $17.3 million in letters of credit were issued under the new facility to replace $11.8 million in outstanding letters of credit and $5.5 million of cash on deposit with the Company's insurance carrier. See "Liquidity and Capital Resources" for further information on these recent developments.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The new standard supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The new standard also supercedes the provisions of Accounting Principles Board No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and will require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The provisions of SFAS No. 144 are effective on a prospective basis for financial statements with fiscal years beginning after December 15, 2001. The Company currently does not anticipate that SFAS No. 144 will have a material impact on its financial statements in the year of adoption.

        In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF Issue No. 94-3. The Company is required to adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and currently does not anticipate that the provisions of the new statement will have a material impact on its financial statements in the year of adoption.

Discontinued Operations

        During fiscal 1999, the Company sold certain of its franchise agent and Company-owned medical offices and entered into a termination agreement with one of its medical licensees. During the fourth quarter of fiscal 1999 the Company completed the sale of the remaining medical business to Intrepid

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U.S.A. Inc. (Intrepid) under an asset purchase agreement. Under the terms of the sale, the Company retained the trade and Medicare accounts receivable balances as well as the due from licensee balances.

        During fiscal 2000, the Company recorded after-tax losses relating to discontinued operations of $0.8 million or $0.05 per share. This charge was primarily due to lower than expected settlements of Medicare cost reports. During fiscal 2002, the Company was notified that appeals on two of its 1997 Medicare cost reports were successful, with anticipated recovery of $0.6 million, net of costs. The result of appeal on a 1996 cost report is pending, and the Company hopes to recover additional funds; however, there can be no assurance that the Company will be successful in this appeal.

        In August 2000, Intrepid filed a demand for arbitration seeking compensatory and punitive damages alleging, among other things, that the Company made misrepresentations and otherwise breached the asset purchase agreement. In fiscal 2001, the arbitrator awarded Intrepid $1.1 million mainly for breaches of certain representations, warranties and covenants in the asset purchase agreement, plus arbitration expenses and legal and accounting fees of approximately $0.4 million. Primarily due to the unfavorable arbitration award, the Company recorded an after-tax loss from discontinued operations of $1.8 million, or $0.11 per share, in the second quarter of fiscal 2001. The after-tax loss included approximately $0.9 million for the arbitration loss and expenses, $0.6 million for losses on settlements of outstanding Medicare cost reports and other settlements and $0.3 million in valuation allowances for medical operations' net operating loss carryforwards which the Company believes will expire unused over the next two fiscal years.

        Recorded estimated losses on the disposal of the medical operations are based on a number of assumptions. These include the estimated costs and write-offs required to collect the remaining Medicare accounts receivable and due from licensee balances, and estimated costs to be incurred in filing and settling all remaining Medicare cost reports and other estimated legal and incidental costs. Currently, the Company believes it has adequately reserved for the reasonable outcome of future events, as evidenced by the net liability position existing at July 13, 2002. However, 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

Fiscal Quarter Ended July 13, 2002 compared to Fiscal Quarter Ended July 7, 2001

        Sales of Services and License Fees.    Sales of services decreased $4.9 million, or 4.0%, for the fiscal quarter ended July 13, 2002 as compared to the fiscal quarter ended July 7, 2001. Average billing rates per hour increased 4.6% while billed hours declined 7.8%. Sales for domestic business services decreased 5.7% for the current fiscal quarter when compared to the same fiscal quarter of 2001, as the U.S. economic recovery from the recent recession continues to lag. Sales for international operations increased 5.3% for the fiscal 2002 quarter as compared to the fiscal 2001 quarter, primarily due to favorable currency translation rates. Excluding the effect of these rate fluctuations, international sales of services declined 2.1% for the current fiscal quarter as compared to the fiscal 2001 quarter, primarily due to slowing worldwide economies.

        License fees are charged to licensed offices based either on a percentage of sales or a percentage of gross profit generated by the license offices. License fees decreased $0.1 million or 49.7%, for the fiscal quarter ended July 13, 2002 as compared to the fiscal quarter ended July 7, 2001. In the second quarter of fiscal 2001, two licensees purchased the Company's interest in their licensed operations and license fee income from these operations ceased. In the fourth quarter of fiscal 2001 one of the remaining licensees converted to the Company's franchise agent program. Additionally, in the first quarter of fiscal 2002 the Company purchased the operations of one of its three remaining licensees and is no longer selling or granting additional licenses. Consequently, the Company expects license fee revenue in fiscal 2002 periods to be considerably lower than comparable fiscal 2001 periods.

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        Costs of Services.    Costs of services include hourly wages of temporary employees, employer payroll taxes, state unemployment and workers' compensation insurance and other employee-related costs. Costs of services decreased $1.7 million, or 1.7%, for the fiscal quarter ended July 13, 2002 as compared to the fiscal quarter ended July 7, 2001. Gross margin decreased from 20.4% in the third quarter of fiscal 2001 to 18.5% in the third quarter of fiscal 2002 reflecting margin declines in both international and domestic operations. The decrease is primarily due to a growth in pay rates outpacing the Company's ability to increase bill rates, increased workers' compensation costs, a decrease in permanent placement fees and increased costs of benefits for the temporary workforce. The Company strives to improve gross margin where feasible; however, with the recent U.S. recession and resulting competitive pressures on prices, current opportunities available to increase gross margin may be limited.

        Workers' compensation costs were 4.1% of direct labor for the third quarter of fiscal 2002 and 3.7% for the third quarter of fiscal 2001. These costs tend to vary depending upon the mix of business between clerical staffing and light industrial staffing. Though the Company reviews interim actuarial estimates and monitors accrual rates to ensure that they remain appropriate in light of loss trends, businesses in the United States are generally experiencing an increase in the cost of workers' compensation insurance. The Company currently anticipates that workers' compensation costs will range from 4.3% to 4.6% of direct labor for the remainder of the fiscal year. There can be no assurance that the Company's programs to control workers' compensation costs will be effective or that rising insurance costs will not require additional increases in workers' compensation accruals in future periods.

        Franchise Agents' Share of Gross Profit.    Franchise agents' share of gross profit represents the net distribution paid to franchise agents based either on a percentage of sales or of gross profit generated by the franchise agents' operation. Franchise agents' share of gross profit decreased $0.5 million, or 13.7%, for the third quarter of fiscal 2002 as compared to the third quarter of fiscal 2001. As a percentage of sales of services and license fees, franchise agents' share of gross profit decreased from 3.2% during the fiscal 2001 quarter to 2.9% for the fiscal 2002 quarter, reflecting a decrease in franchise sales as a percentage of total sales of services.

        Selling and Administrative Expenses (Including Depreciation and Amortization).    Selling and administrative expenses decreased $2.6 million, or 12.4% for the third quarter of fiscal 2002 as compared to the third quarter of fiscal 2001. As a percent of sales of services and license fees, selling and administrative expenses decreased from 16.8% in the third quarter of fiscal 2001 quarter to 15.3% in the third quarter of fiscal 2002, primarily due to cost savings realized from personnel reductions and office closures during the first half of fiscal 2002. The Company continues to closely monitor its variable costs and evaluate the performance of field offices. If warranted, additional under-performing offices may be closed or consolidated in future periods and additional cost saving measures may be implemented.

        Interest Expense.    Interest expense increased $0.1 million, or 11.7%, for the third quarter of fiscal 2002 as compared to the third quarter of fiscal 2001, despite slightly lower debt levels, due to an increase in the overall effective interest rate for the fiscal 2002 quarter.

        Provision for Income Taxes.    For the third quarter of fiscal 2002, the Company recorded an income tax provision of $0.5 million on a pre-tax loss of $59,000 due to a decrease in the estimated federal effective income tax rate for the year. At the end of the second quarter of fiscal 2002, the Company estimated its effective rate for the year to be 39%. However, at the end of the third fiscal quarter the Company estimates its federal rate for the year to be 34%. The effective income tax rate on pre-tax income from continuing operations was 40.0% for the third quarter of fiscal 2001.

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36 Weeks Ended July 13, 2002 compared to 36 Weeks Ended July 7, 2001

        Sales of Services and License Fees.    Sales of services decreased $52.1 million, or 13.4%, for the 36 week period ended July 13, 2002 as compared to the 36 week period ended July 7, 2001. Average billing rates per hour increased 5.7% for the fiscal 2002 period as compared to the fiscal 2001 period, while billed hours declined 17.6%. Sales of services decreased 16.1% for domestic business services while reported sales of the Company's international services increased 2.0%. Absent the effect of currency translation fluctuations, international sales declined slightly by 0.1%. During the first quarter of fiscal 2002, the Company implemented a restructuring plan designed to improve the Company's profitability (see "Restructuring Charges" below). As a part of the restructuring plan, the Company closed 18 under-performing domestic offices and has continued to close additional under-performing offices through the third quarter of fiscal 2002. These closures are intended to improve the Company's future profitability, but may negatively affect reported sales through at least the first quarter of fiscal 2003.

        License fees decreased $0.8 million or 76.2%, for the fiscal period ended July 13, 2002 as compared to the fiscal period ended July 7, 2001 due to the significant decrease in the number of licensees as noted in the fiscal quarter discussion above.

        Costs of Services.    Costs of services decreased $36.8 million, or 11.9%, for the 36 weeks ended July 13, 2002 as compared to the 36 weeks ended July 7, 2001. Gross margin decreased from 20.3% in the fiscal 2001 period to 18.7% in fiscal 2002, primarily due to growth in pay rates outpacing the Company's ability to increase bill rates, the increased cost of benefits for the temporary workforce and lower license fees. Workers' compensation costs were 3.9% of payroll for the 36 week period ended July 13, 2002 and 4.0% for the 36 week period ended July 7, 2001.

        Franchise Agents' Share of Gross Profit.    Franchise agents' share of gross profit decreased $1.3 million, or 11.6%, for the fiscal 2002 period as compared to the same period in fiscal 2001. As a percentage of sales of services and license fees, franchise agents' share of gross profit was 2.9% for both fiscal periods.

        Selling and Administrative Expenses (Including Depreciation and Amortization).    Selling and administrative expenses decreased $7.9 million, or 12.3% for the 36 weeks ended July 13, 2002 as compared to the 36 weeks ended July 7, 2001. As noted in the quarterly discussion above, two licensees purchased the Company's interest in their licensed operations in the second quarter of fiscal 2001. Included in the fiscal 2001 selling and administrative expenses is a $2.1 million one-time gain on the sale these operations. Absent this, selling and administrative expenses decreased $10.0 million, primarily due to cost savings realized from personnel reductions and office closures.

        The Company continues to seek viable ways to reduce costs where possible; however, there can be no assurance that material cost savings which have been, or will be, identified or implemented will be adequate to improve operating income levels in future periods.

        Restructuring Charges.    In January 2002, the Company implemented a restructuring plan designed to improve the Company's profitability. The restructuring plan resulted in a first quarter fiscal 2002 pretax charge to operations of $1.9 million. Of this amount, $1.0 million was the result of abandoning front and back office management information systems that were under development in conjunction with two software vendors. One of these vendors chose to cease further development of its portion of the project and that caused the continued development of these systems to no longer be cost-effective for the Company. In conjunction with this abandonment, the Company recognized the historical fees paid to vendors, fees paid to consultants and certain in-house development costs as expenses, all of which had been previously capitalized awaiting the completion of the systems. An additional $0.6 million resulted from severance and other employment termination costs due to the planned personnel reductions of 70 full time employees. Finally, as of the date the restructuring plan was finalized, the Company decided to close at least 18 offices within the United States and the resulting termination costs, including lease terminations, were estimated to be $0.3 million.

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        Interest Expense.    Interest expense decreased $0.5 million, or 27.2%, for the 36 week period of fiscal 2002 as compared to the same period of fiscal 2001. During the second quarter of fiscal 2001 the Company repaid all amounts outstanding on a term loan under the Company's former credit facility.

        Provision for Income Taxes.    For the 36 weeks ended July 13, 2002, the Company recorded an income tax benefit of $2.6 million on a pre-tax loss of $6.4 million. The benefit is primarily attributable to a projected Federal tax loss carryback. During fiscal 2001, the Company established a deferred tax valuation allowance of $19.2 million as future income was not assured to recognize a tax benefit for all deferred tax assets existing at November 3, 2001 and the Company had recognized all available net operating loss carryback refunds. As a result of the extended net operating loss carryback provisions signed into law during the Company's second quarter, the Company will be able to realize a tax benefit for certain of these deferred tax assets and for the loss incurred during 2002. Excluding the effect of the change in the valuation allowance, the Company estimates its effective federal income tax rate for the year to be 34%. The Company has not recorded a benefit associated with state income taxes.

Liquidity and Capital Resources

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

        Net cash provided by operating activities was $5.9 million for the 36 weeks ended July 13, 2002, a decrease of $18.3 million from net cash provided by operating activities for the same period in fiscal 2001. The decrease is primarily the result of changes in working capital items.

        Cash used for capital expenditures, which are primarily for management information systems initiatives and office furniture and equipment, totaled $1.7 million and $3.1 million for the 36 weeks ended July 13, 2002 and July 7, 2001, respectively. During the first fiscal quarter of 2002, the Company ceased further development on its integrated front-to-back office system as a part of the restructuring plan noted above in "Restructuring Charges." Currently, the Company anticipates that fiscal 2002 cash outflows for management information systems and other capital expenditures will be slightly lower than fiscal 2001 levels.

        In the second quarter of fiscal 2001, two licensees purchased the Company's interest in their licensed operations. Of the $2.1 million pre-tax gain from the sale of these operations, the Company received $0.7 million in cash proceeds through fiscal year ended November 3, 2001 and additional cash proceeds of $0.7 million through July 13, 2002, with the balance represented by notes receivable due in installments through the first quarter of fiscal 2003.

        During the first quarter of fiscal 2002, the Company acquired the interests of one of its remaining three licensed operations for a net cash payment of $0.2 million. The Company intends to focus on internal operations and currently has no plans to make significant acquisitions at this time, but may continue to acquire certain of its franchise or licensed operations and convert these to company-owned offices. In the future, the Company may again pursue opportunities for growth through strategic external acquisitions.

        On May 17, 2002 the Company entered into agreements with GE Capital, as primary agent, to provide senior secured credit facilities totaling $65.0 million, which replaced the Company's credit facility which was to expire in March 2003. The new facilities comprise a five-year syndicated Multicurrency Credit Agreement consisting of a $50.0 million US Revolving Loan Commitment, a £2.7 million UK Revolving Loan Commitment (US dollar equivalent of approximately $4.0 million at

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the date of the agreement) and a $5.0 million term loan (the Term Loan). In addition, a five-year Australian dollar facility agreement (the A$ Facility Agreement) was executed on May 16, 2002, consisting of an A$12.0 million revolving credit facility (US dollar equivalent of approximately $6.0 million at the date of the agreement). Each Agreement includes a letter of credit sub-facility. Proceeds from the new credit facilities were used to repay all outstanding principal and interest under the Company's senior secured notes, which totaled $31.0 million. In addition, $17.3 million in letters of credit were issued under the new facility to replace $11.8 million in outstanding letters of credit and $5.5 million of cash on deposit with the Company's insurance carrier. Additional borrowings under the new facilities provide for working capital needs, repayment of certain intercompany debt and general corporate purposes of the Company and its consolidated subsidiaries.

        The US Revolving Loan Commitment provides for an aggregate $50.0 million commitment subject to a borrowing base calculation on eligible domestic accounts receivable. Direct advances are also limited by outstanding irrevocable standby letters of credit up to a maximum of $35.0 million. The UK Revolving Loan Commitment is subject to a borrowing base calculation on eligible Westaff (U.K.) accounts receivable. The Term Loan is payable in nineteen consecutive quarterly installments of $0.25 million each, beginning July 1, 2002.

        The Multicurrency Credit Agreement calls for a commitment fee, payable monthly in arrears, of 0.50% based on the average daily unused balance of the combined US/UK revolving loan commitment. Additionally, a variable margin ranging from 1.5% to 2.5% of the total outstanding letters of credits is payable monthly in arrears and the agreement requires an annual fee of 0.50% of the face amount of each letter of credit which is issued, renewed or extended.

        The A$ Facility Agreement is subject to a borrowing base calculation on eligible Westaff (Australia) accounts receivable. Direct advances are limited by outstanding letters of credit up to a maximum of A$0.5 million. The agreement calls for monthly fees, payable in arrears, of 0.50% of the average daily unused balance of the facility and from 1.5% to 2.5% of total outstanding letters of credit.

        Applicable margins under both the Multicurrency Credit Agreement and the A$ Facility Agreement are subject to quarterly adjustments, on a prospective basis beginning July 1, 2003, based on the respective borrowers' fixed charge coverage ratio. Letters of credit under the agreements expire one year from date of issuance, but are automatically renewed for one additional year unless written notice is given to or from the holder.

        The credit facilities are secured by substantially all of the assets of the Company, including a deed of trust on the Company's corporate headquarters. GE Capital, in its role as primary agent under the credit facilities, has sole dominion and control over the Company's primary U.S., United Kingdom and Australia cash receipt accounts. Cash receipts into these accounts are applied against the Company's respective outstanding obligations under the facilities, with additional borrowings under the revolving facilities directed into the Company's disbursement accounts.

        The credit facilities contain covenants which, among other things, require the Company to maintain a minimum fixed charge coverage ratio and a minimum earnings before interest, taxes, depreciation and amortization (EBITDA). The covenants also 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 July 13, 2002, the Company was in compliance with these covenants; however, based on current projections, the Company's management believes there is a possibility that the Company may not be in compliance with the credit facility's EBITDA covenant on a prospective basis. The Company has notified its lenders of this possibility and negotiations to revise the covenant are currently in process. There can be no assurance that such negotiations will be completed in a manner satisfactory to the Company.

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        At July 13, 2002 the Company had approximately $13.1 million available under the credit facility with $14.6 million in direct advances under the US Revolving Loan Commitment, $4.8 million under the Term Loan, approximately $0.7 million under the UK Revolving Loan Commitment and approximately $0.9 million under the A$ Facility Agreement. Letters of credit outstanding as of that date totaled $17.3 million. In connection with the execution of the new credit facilities, the Company has incurred approximately $1.9 million in fees and expenses.

        In addition to its outstanding letters of credit, the Company has an outstanding financial guarantee bond in the amount of $11.8 million that secures a portion of its workers' compensation premium and deductible obligations. The bond is renewable annually on November lst and 90-day advance written notice of non-renewal is required. The bondholder has expressed its intent to exit the surety bond market and, consequently, not renew the bond on November 1, 2002. The Company anticipates issuance of additional letters of credit to replace the currently outstanding financial guarantee bond when it expires.

        On May 17, 2002 the Company executed a $1.0 million unsecured subordinated promissory note payable to its President and Chief Executive Officer with a maturity date of August 18, 2007. Pursuant to a provision of the promissory note, the Company paid its President and CEO a note fee of $30,000. Payment of interest is contingent upon the Company meeting minimum availability requirements under the new credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the Multicurrency Credit Agreement or A$ Facility Agreement.

        On May 17, 2002, the Company amended and restated a one-year unsecured subordinated promissory note dated April 1, 2002 to its principal stockholder and Chairman of the Board of Directors in the amount of $2.0 million. The amended note has a maturity date of August 18, 2007. Payment of interest is contingent upon the Company meeting minimum availability requirements under the new credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the Multicurrency Credit Agreement or A$ Facility Agreement.

        In March 2000, Synergy Staffing, Inc. filed a complaint against the Company, all members of its then current Board of Directors and one of the executive officers alleging, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. under a July 1998 asset purchase agreement. Under arbitration proceedings, on January 9, 2002 the arbitration panel rendered an interim award in favor of the claimant for compensatory damages of $2.2 million, plus interest from the date of the award, as well as reasonable attorneys' fees and other costs incurred in the proceeding, subject to an application process. On February 11, 2002, an Order Modifying Interim Award was issued crediting the Company $0.8 million paid to the claimant in January 2000 under a price protection clause in the asset purchase agreement, thereby reducing the award for compensatory damages to $1.4 million. In the fourth quarter of fiscal 2001, the Company recorded a pretax charge of $3.6 million for the estimated cost of settling this case.

        On April 22, 2002 a Final Award was issued under which the Company paid an additional $0.6 million in fees and expenses. Primarily as a result of the Final Award $0.7 million of the remaining liability was recorded as a reduction to selling and administrative expenses in the second fiscal quarter of 2002.

        On July 26, 2002 the claimant filed a motion in Los Angeles Superior Court to correct and confirm the interim award, seeking to have the arbitrators' factual findings affirmed, while having its damages, interest and attorneys' fees determinations contained in the findings set aside and increased in their favor. On August 21, 2002 the Superior Court denied the claimant's motion. The Company believes that any further claims or actions that may be brought by the claimant in this case are without merit and that the outcome of such would not have a material adverse effect on its financial statements.

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

        During the 36 weeks ended July 13, 2002 the Company's international operations comprised 17.3% of its sales of services and, as of the end of that period, 18.6% of its total assets. The Company is exposed to foreign currency risk primarily due to its investments in foreign subsidiaries. The Company's new multicurrency credit facility, which allows the Company's Australia and United Kingdom subsidiaries to borrow in local currencies, partially mitigates the exchange rate risk resulting from foreign currency denominated net investments in these subsidiaries fluctuating in relation to the U.S. dollar. The Company does not currently hold any market risk sensitive instruments entered into for hedging transaction risks related to foreign currencies.

        The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risk exposure relates to interest rate risk. At July 13, 2002, the Company's outstanding debt under variable-rate interest borrowings was approximately $24.0 million. A change of 2% in the interest rates would cause a change in interest expense of approximately $0.5 million on an annual basis.

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Part II. Other Information

Item 1. LEGAL PROCEEDINGS

        Except as disclosed above in Part I, Item 2, the Company is not currently a party to any material litigation. However, from time to time the Company has been threatened with, or named as a defendant in, lawsuits, including countersuits brought by former franchise agents or licensees, and administrative claims and lawsuits brought by employees or former employees.

Item 2. CHANGES IN SECURITIES

        Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

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

(a)

At the annual Meeting of Stockholders on May 22, 2002 (the "2002 Annual Meeting"), W. Robert Stover was elected as Class III Director to serve for a three-year term and until his successor is elected. The voting was as follows:

The terms of Dwight S. Pedersen and Walter W. Macauley as Class II directors will continue until the Company's 2004 annual meeting, and the terms of Jack D. Samuelson and Ronald D. Stevens as Class I directors will continue until the Company's 2003 annual meeting.

(b)

At the 2002 Annual Meeting, the stockholder proposal to amend the Company's Certificate of Incorporation and Bylaws to provide that stockholder approval of all matters requires the affirmative vote of at least 51% of the shares of capital stock issued and outstanding and entitled to vote at any regular or special meeting of stockholders, unless otherwise required by statue was voted upon and passed as follows:

Item 5. OTHER INFORMATION

        Not applicable.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

3.1.2    Fourth Amended and Restated Certificate of Incorporation
3.2.4    Amended and Restated Bylaws, effective May 22, 2002

(b)

Reports on Form 8-K

Current Report on Form 8-K dated June 6, 2002 filed with the Securities and Exchange Commission on June 6, 2002.

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SIGNATURES

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

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CERTIFICATION

        I, Dirk A. Sodestrom, Senior Vice President and Chief Financial Officer of Westaff, Inc., certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Westaff, Inc.;



2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and



3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

        Date: September 3, 2002

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CERTIFICATION

        I, Dwight S. Pedersen, President and Chief Executive Officer of Westaff, Inc., certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Westaff, Inc.;



2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and



3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

        Date: September 3, 2002

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Exhibit Index

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QuickLinks

Part I. Financial Information
Item 1. Financial Statements
Westaff, Inc. Condensed Consolidated Balance Sheets (Unaudited) (In thousands except per share amounts)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES
Item 3. DEFAULTS UPON SENIOR SECURITIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K