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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 2, 2002

Commission File Number 000-27130

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

298 NORTH WIGET 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)

        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 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. o

        Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $23,414,665 as of December 31, 2002, based on the closing price of the Registrant's Common Stock on the Nasdaq National Market reported for that trading day. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of December 31, 2002, the Registrant had outstanding 15,972,498 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

        The following documents (or portions thereof) are incorporated herein by reference:

        Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2003 are incorporated herein by reference to this Form 10-K Report.

INDEX

WESTAFF, INC.

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PART I

ITEM 1. BUSINESS.

        The following Business Section contains forward-looking statements that involve risks and uncertainties regarding Westaff, Inc. (the "Company"). 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 10 below and elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K. This Form 10-K for the fiscal year ended November 2, 2002 contains service marks of the Company.

General

        The Company provides temporary staffing services primarily in suburban and rural markets ("secondary markets"), as well as in the downtown areas of certain major urban centers ("primary markets") in the United States and selected international markets. Through its network of Company-owned, franchise agent and licensed offices, the Company offers a wide range of temporary staffing solutions, including replacement, supplemental and on-site programs to businesses and government agencies. The Company's primary focus is on recruiting and placing temporary light industrial and clerical/administrative personnel. The Company has over 50 years of experience in the staffing industry and, as of November 2, 2002, operated through 299 offices in 45 states and five foreign countries. As of November 2, 2002, 72.6% of these offices were owned by the Company, 25.7% were operated by franchise agents and 1.7% were operated by licensees.

        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 298 North Wiget 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, which is the primary operating entity.

        During fiscal 1999, the Company sold its medical business, primarily operated through Western Medical Services, Inc., a wholly-owned subsidiary of the Company. As a result, the Company has classified its medical operations as discontinued operations in the Company's Consolidated Financial Statements and provides a separate discussion of the medical operations in this Business Section.

        References in this Form 10-K to (i) the "Company," the "Registrant" 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.

Services

        The Company's service offerings are focused primarily on placing temporary light industrial and clerical/administrative staffing personnel.

        Light Industrial Services.    Light industrial services personnel are placed for a variety of assignments including general factory and manufacturing work (including production, assembly and support workers, merchandise packers and machine operators), warehouse work (such as general laborers, stock clerks, material handlers, order pickers, forklift operators and shipping/receiving clerks), technical work (such as lab technicians, inspectors, quality control technicians and drafters) and general services (such as maintenance and repair personnel, janitors and food service workers).

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        Clerical/Administrative Services.    Clerical/administrative services personnel are placed for a broad range of general business positions including receptionists, administrative assistants, data entry operators, word processors, customer service representatives, telemarketers and various other general office, accounting, bookkeeping and clerical staff. Clerical/administrative positions also include call center agents, such as customer service, help desk and technical support staff.

        The Company believes that temporary light industrial and clerical/administrative staffing services are the foundation of the staffing industry and will remain a significant market for the foreseeable future. The Company also believes that employees performing temporary light industrial and clerical/administrative staffing functions are, and will remain, an integral part of the labor market in local, regional and national economies around the world.

        The Company also provides other services within the light industrial and clerical/administrative staffing market such as direct placement and temp-to-hire services, payrolling, on-site and on-location services, and other professional services including skills and behavioral assessments and coordination of drug testing and background checking:

•

Direct placement services are fee-based services to recruit and fill regular staff positions for customers.



•

Temp-to-hire services represent the placement of temporary staff with a customer with the option to convert the temporary staff to a regular customer employee at a later date.



•

Payrolling typically involves the transfer of a customer's short-term seasonal or special use employees to the Company's payroll for a designated period.



•

On-site programs provide administrative services for the Company's customers such as coordinating all temporary staffing services throughout a customer's location, including skills assessment and training.



•

On-location programs provide for an independent branch office located at the customer's facility. They are intended for large non-seasonal accounts with more than $500,000 in annual revenue. The branch office is staffed by at least one manager level employee.

        Both on-site and on-location 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 comparatively lower operating expenses and relatively longer customer relationships.

        In addition to these services, during fiscal 2002, the Company introduced two enhancements to its professional services programs. These service enhancements focus on increasing the pool of qualified candidates using advanced selection procedures for potential candidates (Talent Trak^SM) as well as technology based management services that allow clients to maximize workforce productivity (Time Trak^SM). The Company believes that these programs enhance its competitive edge and position it to more effectively pursue high growth market niches such as financial services, customer interaction centers and high end administrative placement.

        To ensure high quality placements for customers and employees, Westaff introduced Talent Trak^SM to strengthen the quality of its selection process. This comprehensive selection process includes flexible recruiting methods, interviewing and reference checking. Westaff conducts advanced skills and behavioral assessments using Talent Trak^SM, and also provides the option for both background and drug testing that can be customized to meet a customer's specific needs.

        Time Trak^SM was introduced to provide customers with a web-based management program system to assist in maximizing workforce productivity. Time Trak^SM is a flexible system allowing customers access to information to track a variety of performance measurements such as workforce hours, labor

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costs, attendance and staff performance. Time Trak^SM also includes features to automate time card and payroll processing.

Markets

        The Company provides temporary staffing services primarily in "secondary markets", as well as in the downtown areas of certain "primary markets" in the United States and selected international markets.

        The Company's strategy is to capitalize on its presence in secondary markets and to build market share by targeting small to medium-sized customers, including divisions of Fortune 500 companies. The Company believes that in many cases, such markets are less competitive and less costly to operate than in the more central areas of primary 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 augments this concentration on secondary markets by also focusing on national contracts with customers having a large presence in these marketplaces. Such accounts include large clients in multiple locations supported by a dedicated corporate-level business relationship manager. The Company currently has existing national accounts across many different business sectors such as manufacturing, government, financial services, technology and communications. During fiscal 2001, the Company established a professional sales team that services and leverages existing relationships to retain and grow these accounts. In addition, the Company is developing aggressive marketing programs to target and acquire additional clients that fit the Westaff branch system footprint. The Company believes that its geographic alignment allows it to effectively compete for some of these national contracts.

        The Company markets its temporary staffing and related services to local and regional customers through a network of Company-owned, franchise agent and licensed offices, as well as through its on-site and on-location service locations. The Company coordinates significant amounts of its sales and marketing efforts through its corporate headquarters in cooperation with branch and regional offices. New customers are obtained through consultative sales presentations, telemarketing, e-mail marketing, referrals from other customers and advertising in a variety of regional and local media.

Recruiting

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

Operations

        The Company operates each Company-owned office as a separate profit center and provides certain managers considerable operational autonomy and financial incentives and operates franchise agent offices in appropriate markets. Managers focus on business opportunities within markets and are provided centralized support to achieve success in those markets. The Company believes that this

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structure allows it to recruit and retain highly motivated managers who have demonstrated the ability to succeed in a competitive environment. This structure also allows managers and staff to focus on market development while relying on centralized services for support in back-office operations, such as risk management programs and unemployment insurance, credit, collections, accounting, advice on legal and regulatory matters, quality standards and marketing.

        As of November 2, 2002, the Company operated through a network of 299 offices in 45 states and five foreign countries. In addition, the Company from time to time establishes recruiting offices both for recruiting potential temporary employees and for testing demand for its services in new market areas. The Company's operations are decentralized, with market, district, 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 offices in operation as of the dates indicated.

(1)

Excludes Company-owned recruiting offices.

        Company-Owned Offices.    Employees of each Company-owned office report to a branch or market manager who is responsible for day-to-day operations and the profitability of a market that consists of one to several offices. Branch or market managers generally report to district or regional managers. As of December 31, 2002, there were four zone managers, six regional managers and 12 district managers for the domestic Company-owned offices. The Company has a variety of incentive plans in place for its domestic and international offices. One or more of these plans may be offered to branch staff as well as market, district, regional and zone managers. These plans are designed to motivate employees to maximize the growth and profitability of their offices. The Company believes that its incentive-based compensation plans encourage employees in its Company-owned offices to increase sales and profits, resulting in a creative and committed team.

        Franchise Agent Offices.    The Company's franchise agents have the exclusive right by contract to sell certain of the Company's services and to use the Company's service marks, business names and systems in a specified geographic territory. The Company's franchise agent agreements generally allow franchise agents to open multiple offices within their exclusive territories. As of November 2, 2002, the Company's 38 franchise agents operated 77 franchise agent offices. 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 2000, 2001 and 2002 franchise agents sales represented 19.6%, 22.3% and 24.1% respectively, of the Company's sales of services.

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        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 assisting and cooperating with 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 and is responsible for 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.

        Franchise agents are required to follow the Company's operating procedures and standards in recruiting, screening, classifying and retaining temporary personnel.

        Licensed Offices.    As of November 2, 2002, the Company's two licensees operated five licensed offices. During fiscal 2002, one licensee converted to the Company's franchise agent program and the Company purchased the operations of one of its licensees. The Company is no longer offering the license program other than to the two remaining licensees.

        The licensee is the employer of the temporary employees and the owner of the customer accounts receivable. 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 Bank of America, N.A. plus two percentage points. Interest is charged on the borrowings only if the outstanding balance exceeds certain specified limits.

        Licensees are required to operate within the framework of the Company's policies and standards, but must obtain their own workers' compensation, liability, fidelity bonding and state unemployment insurance coverage, which determine their payroll costs.

        The Company's franchise agent and license agreements have an initial term of five years and are renewable for multiple five-year terms. The agreements generally 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 and license agreements. In the past five fiscal years, the Company has commenced two actions to enforce the non-competition covenants. Both of those actions were resolved in the Company's favor.

        The Company's sale of franchises and licenses is regulated by the Federal Trade Commission and by state business opportunity and franchise laws. The Company has either registered, or been exempted from registration, in 14 of the 15 states that require registration in order to offer franchises or licenses. In one of the 15 states, the Company has not yet sought registration and is therefore not currently authorized to offer franchise or license arrangements.

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 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

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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.

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 2002, no single customer of the Company accounted for more than 10.0% of the Company's sales of services. The Company's 10 highest volume customers in fiscal 2002, accounted for an aggregate of approximately 16.6% of the Company's sales of services and license fees.

Competition

        The temporary staffing industry is highly competitive with few barriers to entry. The Company believes that the majority of commercial temporary staffing companies are local, full-service or specialized operations with less than five offices. Within local markets, typically no single company has a dominant share of the market. The Company also competes for qualified temporary personnel and customers with larger, national full-service and specialized competitors in local, regional, national and international markets. The principal national competitors are Adecco SA, Spherion Corporation (commercial staffing segment), Kelly Services, Inc. (U.S. commercial staffing and international segments), Manpower Inc., RemedyTemp, Inc. (clerical and light industrial services) and Personnel Group of America, Inc. (commercial staffing services division). Many of the Company's principal competitors have greater financial, marketing and other resources than the Company. In addition, there are a number of medium-sized firms which compete with the Company in certain markets where they may have a stronger presence, such as regional or specialized markets.

        The Company believes that the competitive factors in obtaining and retaining customers include understanding customers' specific job requirements, providing qualified temporary personnel in a timely manner, monitoring quality of job performance and pricing of services. The Company believes that the primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and flexibility and responsiveness of work schedules. The Company believes that within its primary light industrial and clerical/administrative markets, timeliness of pay is also a key competitive factor.

Management Information Systems

        The Company's management information systems provide functionality to both our branch office locations and to the corporate back-office in support of the Company's operations. Branch office functionality includes a full-featured branch office tool, designed to assist in candidate search and recruiting, and order, customer service and sales management that also allows for the sharing of information between offices. In addition, branch offices use a billing and payroll application, which is designed to provide timely and accurate payment for temporary employees and billing to the Company's customers. Under this system, field offices capture and input customer, employee, billing and payroll information. This information is electronically transferred daily to centralized servers, where payroll, billing and financial information is processed overnight. These systems provide the Company with the ability to print checks at its branch offices within 24 hours after receipt of the time card. Invoices are also processed daily and distributed from the Company's centralized corporate offices. These systems also support branch office operations with daily, weekly, monthly and quarterly reports that provide information ranging from customer activity to office profitability.

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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 provides workers' compensation insurance covering its regular and temporary employees, with a deductible of $500,000 per occurrence, through a long-term relationship with Travelers Indemnity Company ("Travelers"). The Company is formally self-insured with a retention of $500,000 in the states of Ohio and Washington, and purchases fully insured workers' compensation coverage based upon actual payroll classifications in the monopolistic states of Wyoming, North Dakota and West Virginia.

        The Company is contractually required to collateralize its recorded obligations under these workers' compensation insurance contracts with Travelers through irrevocable letters of credit and surety bonds. As of November 2, 2002, the aggregate collateral requirements have been satisfied through $17.3 million of letters of credit and $11.8 million of surety bonds.

        The Company's nationwide risk management program is managed by the Risk Management Department consisting of risk management and workers' compensation professionals and administrators who monitor the disposition of all claims and oversee, through an on-line system, all workers' compensation claim activity. The department utilizes a variety of creative and aggressive workers' compensation loss prevention and loss control strategies. The risk management program includes claim strategy reviews with the carrier and third party administrator, post-accident drug testing, a return-to-work modified duty program, pre-placement customer safety evaluations and light industrial job approvals, the use of personal protective equipment, and the use of individual local office expense allocation formulas.

Employees

        As of November 2, 2002, the Company had approximately 29,000 temporary employees on assignment and employed 923 regular staff. The Company's employees are not covered by any collective bargaining agreements. The Company believes that its relationships with its employees are good.

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, including its primary Westaff® service marks. Federal and state service mark registrations may be renewed indefinitely as long as the underlying mark remains in use. The Company also has registered the service mark Westaff Wave® and has filed applications to register the service marks Learning Trak^SM, Talent Trak^SM and Time Trak^SM, all of which we believe are important to our current business strategy.

        The Company also owns other service marks, including Accountants USA®, College Greens®, The Essential Support Services Leader®, E Team®, Job Squad®, and On Location & Essential®, has pending applications for AUSA^SM and Staff for Business Jobs for People^SM and has service marks related to its former name "Western," including Western Staff Services®, Western Temporary Services®, Western Staff Services Office and Light Industrial Division®, Western Accounting Services®, Western Legal Services®, Western Marketing Services®, Western Permanent Services Agency® and Western Photo Service®.

        The Company is no longer pursuing the marks, It's About Respect and Westaff People Matter and is not maintaining Westemp®, Western Information Network (WIN)® and 1-800-BE A TEMP®.

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Medical Services

        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 as well as due from licensee balances.

        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.

        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 and related legal costs, the Company recorded an after-tax loss from discontinued operations of $1.8 million or $0.11 per share, in fiscal 2001.

        As of November 2, 2002, the remaining net current liabilities of the discontinued operations of $0.6 million are primarily for pending legal and malpractice/liability claims. The Company believes it has adequately reserved for the reasonable outcome of future events; however, should actual costs differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods.

Availability of Reports

        Westaff makes its financial reports on Form 10-K, 10-Q or 8-K available free of charge on its web site at www.westaff.com as soon as practicable after filing. Furthermore, Westaff will provide electronic or paper copies of filings free of charge upon request to the Company's Chief Financial Officer or Investor Relations representative.

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.

        Westaff operates in highly competitive markets with low barriers to entry, potentially limiting its ability to maintain or increase its market share or margins.

        The temporary staffing industry is highly competitive with limited barriers to entry and in recent years has been undergoing significant consolidation. The Company competes in national, regional and local markets with full service agencies and with specialized temporary services agencies. Many competitors are smaller than the Company but may enjoy an advantage over the Company in discrete geographic markets because of their stronger local presence. Other competitors have greater marketing, financial and other resources than the Company, which among other things could enable them to attempt to maintain or increase their market share by reducing prices. Price competition in the staffing industry is intense and pricing pressures from both competitors and customers are increasing. Furthermore, there has been an increase in the number of customers consolidating their staffing services purchases with a single provider or with a small number of providers. The trend to consolidate staffing services purchases has in some cases made it more difficult for Westaff to obtain or retain

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business. The Company expects the level of competition to remain high in the future, and continued or increasing competitive pricing pressures may have an adverse effect on the Company's market share and operating margins.

        Any significant recurrent economic downturn could result in our customers using fewer temporary employees, which could materially adversely affect the Company.

        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. Frequently, customers 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 customers reduce their utilization of temporary employees before releasing full-time employees. Typically, the Company may experience less demand for its services and more competitive pricing pressure during periods of economic downturn. The recent domestic economic recession and continuing economic uncertainty has had a material adverse effect on the Company's business, results of operations, cash flows and financial condition. A recurrent recession or a significant lag in economic recovery would likely have a further material adverse effect on the Company's business, results of operations, cash flows or financial position.

        Westaff's borrowing availability under its debt facilities is dependent on an adequate level of receivables and on compliance with affirmative and negative covenants and is also subject to interest rate fluctuations.

        The amount Westaff is entitled to borrow under its working capital facility is dependent on the receivables generated from future operations, which are affected by financial, business, economic and other factors. If receivables drop significantly, additional borrowings may not be allowed under the facility and the Company would have to seek other sources of cash to fund its operations. In addition, the Company may be required to repay the loan in part or in full. The Company's receivables may not be adequate to allow for borrowings for other corporate purposes, such as capital expenditures or growth opportunities, and the Company would be less able to react to changes in the market or industry conditions. Failure to comply with the covenants under the facility could result in an event of default which, if not cured or waived, could trigger prepayment obligations. If we are forced to refinance borrowings under the current facility, and such refinancing is available, the terms could be less favorable and our results of operations and financial condition could be adversely affected by increased costs and rates.

        All of the debt outstanding under the Company's revolving credit facility is subject to variable interest rates, which makes Westaff vulnerable to future increases in interest rates and which could materially adversely affect the Company's results of operations.

        The cost of unemployment insurance premiums and workers' compensation costs for Westaff's temporary employees may rise and reduce Westaff's margins.

        Westaff is responsible for and pays unemployment insurance premiums and workers' compensation costs for its temporary employees. Recently, these costs have risen as a result of increased claims, general economic conditions and governmental regulation. There can be no assurance that Westaff will be able to increase the fees charged to its customers in the future to keep pace with increased costs. As noted previously, price competition in the staffing industry is intense. There can be no assurance that Westaff will be able to maintain or improve its margins, and if it does not, its results of operations, financial condition and liquidity could be adversely affected.

        Westaff retains a portion of the risk under its workers' compensation program (see "Business—Risk Management Programs"). The estimated remaining deductible liability for all existing and incurred but not reported claims is accrued based upon actuarial methods using current claims information, as well as prior experience, and may be subsequently revised each quarter based on new developments related to such claims. Changes in the estimates underlying the claims reserve are charged or credited

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to earnings in the period determined, and therefore large fluctuations in any given quarter could materially adversely affect earnings in that period.

        The Company is contractually required to collateralize its recorded obligations under these workers' compensation insurance contracts through irrevocable letters of credit and surety bonds. As of November 2, 2002, the Company's aggregate collateral requirements have been satisfied through $17.3 million of letters of credit and $11.8 million of surety bonds. For the fiscal 2003 workers' compensation policy year, Westaff changed its funding program such that Westaff will fully fund the 2003 policy year through monthly cash installments totaling $16.0 million for the year. Accordingly, during fiscal 2003, Westaff will not only fund the full 2003 policy year but will also make ongoing cash payments associated with claims paid for all prior policy years. This will increase the Company's cash flow requirements. This should also result in reduced collateral requirements in the future and the Company's insurance carrier has agreed to review and possibly reduce the collateral requirements after the end of the second quarter of fiscal 2003. In the event that cash flow and borrowing capacity under the existing credit facilities are insufficient to meet these cash and collateral obligations, the Company will be required to seek additional sources of funding to satisfy its liquidity needs which could have a material adverse effect on the Company's business.

        Westaff's success depends upon its ability to attract and retain qualified temporary personnel.

        Westaff depends upon its ability to attract and retain qualified temporary personnel who possess the skills and experience necessary to meet the staffing requirements of its customers. Westaff must continually evaluate and upgrade its base of available qualified personnel to keep pace with changing client 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 and accept regular staff employment with customers of the Company. Competition for individuals with proven skills remains intense, and demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be available to Westaff in sufficient numbers and on terms of employment acceptable to the Company. The failure to recruit, train and retain qualified temporary employees could materially adversely affect the Company's business.

        Westaff may be exposed to employment-related claims and costs that could materially adversely affect its business.

        Westaff is in the business of employing people and placing them in the workplace of other businesses. Attendant risks of these activities include:

•

possible claims by customers of employee misconduct or negligence,



•

claims by employees of discrimination or harassment (including claims relating to actions of Westaff's customers),



•

fines and costs related to the inadvertent employment of illegal aliens,



•

payment of workers' compensation claims and other similar claims,



•

violations of wage and hour requirements,



•

errors and omissions of our temporary employees, and



•

claims by our customers relating to our employees' misuse of customer propriety information, misappropriation of funds, other criminal activity or torts or similar claims.

        In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management team as well as costly and therefore could have a negative effect on our business. In some instances, we have agreed to indemnify our customers against some or all of these types of

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liabilities. Westaff has policies and guidelines in place to help reduce its exposure to these risks and has purchased insurance policies against certain risks in amounts that it believes to be adequate. However, there can be no assurance that our insurance will be sufficient in amount or scope to cover these types of risks in the future. Furthermore, there can be no assurance that Westaff will not experience these problems in the future or that Westaff will not incur fines or other losses or negative publicity with respect to these problems that could have a material adverse effect on Westaff's business.

        Westaff's Founder and Chairman controls more than 50% of the Company's outstanding stock thus allowing him to exert significant influence on the Company's management and affairs.

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

Westaff's business may suffer if it loses its key personnel.

        Westaff's operations are dependent on the continued efforts of its executive officers and senior management. Additionally, Westaff is dependent on the performance and productivity of its local managers and field personnel. Westaff's ability to attract and retain business is significantly affected by local relationships and the quality of service rendered. The loss of those key executive officers and senior management who have acquired experience in operating a staffing service company may cause a significant disruption to Westaff's business. Moreover, the loss of Westaff's key local managers and field personnel may jeopardize existing customer relationships with businesses that continue to use Westaff's staffing services based upon past direct relationships with these local managers and field personnel. Either of these types of losses could adversely affect Westaff's operations, including Westaff's ability to establish and maintain customer relationships.

        The Company experienced turnover in the position of Chief Executive Officer in fiscal 2000, 2001 and 2002 during which time four individuals served as Chief Executive Officer. Dwight S. Pedersen has now served as President and Chief Executive Officer since January 14, 2002, and has been a member of the Board of Directors since May 1, 2001.

        Westaff derives a significant portion of its sales of services and license fees from affiliate (franchise agent and licensed) operations.

        Affiliate operations comprise a significant portion of the Company's sales of services and license fees. For fiscal 2002, 24.2% of the Company's total sales of services and license fees were derived from affiliate operations. In addition, the Company's ten largest franchise agents for fiscal 2002 (based on sales volume) accounted for 13.5% of the Company's sales of services. The loss of one or more of the Company's franchise agents and any associated loss of customers and sales, could have a material adverse effect on the Company's results of operations.

Westaff is subject to business risks associated with international operations.

        The Company presently has operations in the United Kingdom, Australia, New Zealand, Norway and Denmark, which comprised 16.9% of the Company's sales of services and license fees during fiscal 2002. Operations in foreign markets are inherently subject to certain risks, including, in particular, different cultures and business practices, overlapping or differing tax structures, economic and political uncertainties, compliance issues associated with accounting and reporting requirements and changing, complex or ambiguous foreign laws and regulations, particularly as they relate to employment. All of the Company's sales outside of the United States are denominated in local currencies and, accordingly, the Company is subject to risks associated with fluctuations in exchange rates which could cause a

13

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.

        Westaff is a defendant in a variety of litigation and other actions from time to time, which may have a material adverse effect on our business, financial condition and results of operations.

        Westaff is regularly involved in a variety of litigation arising out of our business. We do not have insurance for some of these claims and there can be no assurance that the insurance coverage we have will cover all claims that may be asserted against us. Should the ultimate judgments or settlements not be covered by insurance or exceed our insurance coverage, they could have a material adverse effect on our results of operations, financial position and cash flows. There can also be no assurance that we will be able to obtain appropriate and sufficient types or levels of insurance in the future or that adequate replacement policies will be available on acceptable terms, if at all.

ITEM 2. PROPERTIES.

        The Company currently owns one building located in Walnut Creek, California, consisting of approximately 16,000 square feet, where the executive offices are presently located. This building is subject to a trust deed held by its lenders. On December 12, 2002, the Company sold the three buildings located in Walnut Creek, California, which house its administrative offices, to 1705 Sabre Associates, a California Limited Partnership, which then assigned the lease to Wiget Properties, LLC, a Delaware Limited Liability Company. The Company has leased back all three of these buildings, consisting of approximately 50,000 square feet, for a term of 7 years commencing on December 12, 2002, with an additional 5-year option to renew. The Company is planning to relocate its executive offices to these buildings at the end of January or beginning of February 2003.

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

ITEM 3. LEGAL PROCEEDINGS.

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

        On March 9, 2000, Synergy Staffing, Inc. filed a complaint in the Superior Court of the State of California for the County of Los Angeles, Central District. The defendants named in the case were Westaff, Inc. and several corporate officers. The complaint alleged, among other things, that the defendants fraudulently induced the plaintiff to sell the assets of The Personnel Connection, Inc. The Company's petition for an order compelling arbitration was granted, the Superior Court lawsuit was stayed, and a demand for arbitration was made that asserted the legal theories of interference with prospective economic advantage and fraud. The Company's earlier motion for partial summary judgment was granted at the outset of the hearing, resulting in the dismissal of all the individual defendants except Paul Norberg. The majority of the arbitrators on the panel rendered an interim award on January 9, 2002, in favor of the claimant and against the Company and Mr. Norberg on the fraud theory. The interim award was for the principal amount of $2,224,327 plus interest. The Company moved to modify the principal amount of the award. The panel granted the Company's motion and issued an Order Modifying Interim Award on February 11, 2002, crediting the respondents for $800,000 previously paid under a price protection clause in the asset purchase agreement and thereby reducing the principal amount of the award to $1,424,327. The Company has paid the principal plus interest as

14

well as the claimant's attorney fees and reimbursement of litigation costs. The claimant thereafter asked the Los Angeles Superior Court to correct and confirm the interim award. On September 25, 2002, the Court denied the plaintiff's motion. The claimant has since filed an appeal of the denial with the Court of Appeal, Second Appellate District. The parties have yet to submit briefs.

        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 litigation brought by former franchisees or licensees, and administrative claims and lawsuits brought by employees or former employees. Management believes the resolution of these matters will not have a material adverse effect on the Company's financial statements.

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

        Not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT^*.

        The executive officers of the Company and their respective ages as of January 30, 2003 are set forth below.

^*

Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

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

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

15

        William M. Herbster.    Mr. Herbster was hired in December 2001, as Senior Vice President, Product Development. He has an extensive background in the temporary staffing industry, most recently in 2001 as Executive Vice President of Select Personnel Services. From 1994 to 2001, he was employed by RemedyTemp, Inc. as Vice President, Sales and Marketing. From 1984 to 1994, he was employed by Manpower Inc. where his most recent title was U.S. Field Marketing Director. His other work experience includes approximately three years as Field Consultant with Runzheimer and Company, two years as Territory Manager with Economic Laboratory, and approximately three years as Zone Sales Manager with Motorola Communications and Electronics Division.

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

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

        Richard G. Gross.    Mr. Gross was hired on October 7, 2002, as Senior Vice President, Director of Strategic Business Solutions. He was previously employed by Spherion as Group Vice President from 2000 to 2002. From 1997 to 2000, he was employed by Tandem Staffing for Industry as District Sales Manager and then promoted to Director of Sales Operations and Personnel. From 1996 to 1997, he was employed by Professional Detailing Network as District Sales Manager. From 1994 to 1996, he was employed by The Advantage Medical Group, Inc. as Chief Operating Officer. From 1991 to 1994, he was self-employed as a sales and marketing consultant. He was employed from 1978 to 1991 by Allergan Pharmaceuticals and most recently was its Senior Product Manager.

        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, Information Services in January 2001.

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PART II

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

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

        On December 31, 2002, the last reported sales price on Nasdaq for the Common Stock was $2.50 per share. As of December 31, 2002, there were approximately 993 beneficial owners of the Common Stock.

        There were no equity securities of the Company issued during the fourth fiscal quarter that were not registered under the Securities Act of 1933, as amended (the "Securities Act").

        The Company did not declare or pay dividends during fiscal 2001 and fiscal 2002. Further, the Company's current credit facilities prohibit payment of dividends so the Company is not currently contemplating a dividend declaration.

        The following table sets forth securities authorized for issuance under equity compensation plans as of November 2, 2002. All applicable equity compensation plans were previously approved by security holders.

Equity Compensation Plan Information

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ITEM 6.    SELECTED FINANCIAL DATA.

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

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

        In addition to historical information, this discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. This notice is intended to take advantage of the "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding credit facilities, liquidity 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 are made based on information available 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 appear in Item 1, "Factors Affecting Future Operating Results." Due to those factors, it is possible that in some future

18

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.

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.

        At November 2, 2002, the Company had $24.2 million of outstanding borrowings under these credit facilities and maintained the $17.3 million of letters of credit. Subsequent to the fiscal year end, the Company completed a sale and leaseback of the buildings which house its administrative offices, which provided $6.9 million of cash. All of these proceeds were used to repay outstanding borrowings. See "Liquidity and Capital Resources" for further information on these recent developments.

Discontinued Operations

        During fiscal 1999, the Company sold certain of its franchise agent and Company-owned medical offices and entered into a termination agreement with one of its medical licensees. During the fourth quarter of fiscal 1999 the Company completed the sale of the remaining medical business to Intrepid U.S.A. Inc. (Intrepid) under an asset purchase agreement. Under the terms of the sale, the Company 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. During fiscal 2000, the Company recorded additional after-tax losses relating to discontinued operations of $0.8 million or $0.05 per share, primarily resulting from lower than expected settlements of Medicare cost reports. During fiscal 2001, the Company recorded additional after-tax losses relating to discontinued operations of $1.8 million or $0.11 per share, primarily due to an unfavorable arbitration award between the Company and Intrepid. Currently, the Company believes it has adequate reserves for estimated liabilities related to the medical business, which primarily relate to pending legal or malpractice liability claims. However, if actual resolution costs differ materially from those estimated by management, the Company would record additional losses (or gains) in future periods.

Critical Accounting Policies

        The preparation of the Company's Consolidated Financial Statements and Notes thereto requires management to make estimates and assumptions affecting the amounts and disclosures reported within the Financial Statements. These estimates are evaluated on an ongoing basis by management and generally affect revenue recognition, collectibility of accounts receivable, workers' compensation costs, recoverability of intangible assets, income taxes and contingencies and litigation. Management's estimates and assumptions are based on historical experiences and other factors believed to be reasonable under the circumstances. However, actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the Financial Statements.

        The Company believes the following critical accounting policies are important to the understanding of its business operations and results from operations.

        Revenue Recognition.    The Company accounts for revenues and the related direct costs in accordance with Emerging Issues Task Force No. 99-19, "Reporting Revenue Gross versus Net as an

19

Agent." 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. Franchise agents' sales represented 19.6%, 22.3% and 24.1% of the Company's sales of services for fiscal 2000, 2001 and 2002, respectively. 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. 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. As at November 2, 2002, only two licensees were in operation and the Company is not currently considering granting any future licenses.

        Collectibility of Accounts Receivable.    The Company maintains an allowance for doubtful accounts on its accounts receivable balances for estimated losses projected to result from customers' inability to make required payments. These allowances, which are $1.3 million at November 2, 2002 and November 3, 2001, are largely determined based on customers' financial conditions, the Company's historical experiences, interactions with customers and industry trends. If the financial condition of these customers were to deteriorate to the point it would impair their ability to make the required payments, additional allowances may be required, which could materially adversely affect the financial condition of the Company.

        Workers' Compensation Costs.    The Company self-insures the deductible amount related to workers' compensation claims, which is $0.5 million per claim, and maintains reserves for these obligations. These reserves amounted to $18.8 million and $18.9 million at November 2, 2002, and November 3, 2001, respectively. The Company accrues the estimated costs of these claims based upon the expected loss rates incurred within the various temporary employment categories provided by the Company. Annually, the Company obtains an independent actuarially determined calculation of the estimated costs of claims actually made to date, as well as claims incurred but not yet reported. The resulting calculation is partially based on the Company's historical loss development trends as well as overall industry trends. This annual evaluation is updated twice during the subsequent fiscal year, at times resulting in revisions to recorded liabilities due to developments relating to estimates and assumptions made in the annual evaluation. Whereas management believes the recorded liabilities are adequate, there are inherent limitations in the estimation process whereby future actual loss rates may exceed projected loss rates, which could materially adversely affect the financial condition of the Company.

        Recoverability of Intangible Assets.    Management of the Company assesses the recoverability of its long-lived assets, including goodwill and other intangible assets, by determining whether the amortization of the asset's carrying value over its remaining life can be recovered through projected undiscounted future cash flows from the asset's operations. This analysis is performed at least annually, or when there is evidence that recent events have made a recovery of an asset's carrying value unlikely. When such estimate of the future undiscounted cash flows is less than the carrying amount of the asset, an impairment exists and an impairment loss is recorded in the financial statements. The Company recognized impairment losses of $0.1 million and $19.1 million in the fiscal years ended November 2, 2002, and November 3, 2001, respectively.

        The Company is required to adopt Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" effective at the beginning of the fiscal year 2003. With the adoption of SFAS No. 142, individual goodwill and intangible assets that have indefinite useful lives will no longer be amortized but instead will be evaluated for impairment by applying a fair-value-based test upon initial adoption of the Statement with impaired assets written down to fair value. Fair-value based

20

tests will then be conducted at least annually thereafter. Intangible assets with finite useful lives will continue to be amortized over their useful lives. The Company is currently in the process of completing the initial valuation required within the first six months of SFAS No. 142's adoption and is not currently able to estimate if adoption will have a material effect on its financial position or results of operations. It is possible that an additional impairment charge could be recorded based on the results of the fair-value approach under the new standard.

        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. A valuation allowance is established when management determines it is more likely than not that a deferred tax asset is not realizable in the foreseeable future on an entity by entity tax basis. At November 3, 2001, substantially all of the Company's net deferred tax assets were offset with a valuation allowance which amounted to $19.2 million. The allowance was recorded against net operating loss carryforwards on federal, state and foreign taxes because the Company assessed it was unlikely that these net operating losses would be realized in future years. A valuation allowance equivalent to 100% of the Company's deferred tax assets was maintained at November 2, 2002.

        Contingencies and Litigation.    In the ordinary course of its business, the Company is periodically threatened with or named as a defendant in various lawsuits, claims and pending actions. The principal risks that the Company insures against are workers' compensation, general liability, automobile liability, property damage, alternative staffing errors and omissions, fiduciary liability and fidelity losses. If a potential loss arising from these lawsuits, claims and actions is probable and reasonably estimable, the Company records the estimated liability based on circumstances and assumptions existing at the time. Whereas management believes the recorded liabilities are adequate, there are inherent limitations in the estimation process whereby future actual losses may exceed projected losses, which could materially adversely affect the financial condition of the Company.

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Results of Continuing Operations

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

*

less than 0.1%

Fiscal 2002 compared to Fiscal 2001

        Sales of Services and License Fees.    Total sales of services decreased $56.4 million, or 9.9% for fiscal 2002 as compared to fiscal 2001. Average bill rates increased 5.4% in fiscal 2002, primarily due to minor inflationary effects in the geographical areas the Company operates, but billed hours declined 14.5%. Fiscal 2002 contained fifty-two weeks while fiscal 2001 contained fifty-three; after eliminating the effect of this extra week, billed hours declined 12.8% as compared to fiscal 2001. Sales of services declined 11.9% domestically, increased 0.3% in the United Kingdom and increased 2.3% in the Company's other international operations. The domestic decline in sales is largely attributable to the United States' recent economic recession, which resulted in decreased demand for staffing services across the majority of the Company's domestic locations. Domestic pricing pressures which commenced in the latter portion of fiscal 2001 continued throughout fiscal 2002, negatively affecting domestic sales of services. Through the first two periods of fiscal 2003, the Company has noted an increase in billable hours and an increase in year-over-year domestic sales of services. However, no assurances can be made that such continued growth in sales of services will be maintained throughout the remainder of fiscal 2003 and beyond.

        Sales of services in the United Kingdom increased primarily due to favorable exchange rates and an increase in average bill rates of 7.1%, which was largely offset by a decrease in billable hours of 9.1%. Similarly, other international sales of services increased due to changes in exchange rates and an increase in average bill rates of 3.2%, offset by a decrease in billable hours of 4.9%.

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        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 $0.9 million or 71.1%, for fiscal 2002 as compared to fiscal 2001, primarily due to a decrease in the number of licensees. 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. Prospectively, the Company currently expects license fee revenue in fiscal 2003 to be lower than the amounts recognized in fiscal 2002, due to the decreased number of licensees and the fact the Company is not seeking to enter into any new license arrangements.

        Cost of Services.    Costs of services include hourly wages of temporary employees, employer payroll taxes, state unemployment and workers' compensation insurance and other employee-related costs. Costs of services decreased $37.3 million, or 8.2%, in fiscal 2002 as compared to fiscal 2001. Gross margin declined from 20.1% in fiscal 2001 to 18.5% in fiscal 2002. The decrease in gross margin for fiscal 2002 is primarily due to the overall effects of the recent domestic recession, which caused significant pricing pressures throughout fiscal 2002. Additionally, a decrease in direct placement revenues of $1.1 million and a decrease in license fees of $0.9 million caused a $2.0 million decrease in gross profit. The Company strives to improve gross margin where feasible; however, with the lag in the domestic recession recovery and continued competitive pressures on prices, the opportunities available to increase gross margin are limited. The Company currently estimates that year over year decreases in gross margin will continue through at least the first quarter of fiscal 2003, and possibly beyond.

        Workers' compensation costs were $14.7 million, or 4.1% of direct labor for fiscal 2002 and $15.6 million, or 4.0% of direct labor fiscal 2001. Recent upward trends in the Company's actuarially estimated ultimate costs for all open policy years have resulted in an increase in the Company's workers' compensation accruals for these estimated costs. These costs tend to vary depending upon the mix of business between clerical/administrative staffing and light industrial staffing. The Company currently estimates that the accrual rates for workers' compensation costs will be in the range of 4.4% to 4.8% of direct labor for fiscal 2003, as a result of increased workers' compensation costs across the industry. The Company reviews interim actuarial estimates and monitors accrual rates to ensure that they remain appropriate in light of loss trends; however, there can be no assurance that the Company's programs to control workers' compensation costs will be effective or that loss development trends will not require additional increases in workers' compensation accruals in future periods.

        Franchise Agents' Share of Gross Profit.    Franchise agents' share of gross profit represents the net distribution paid to franchise agents based either on a percentage of sales or of gross profit generated by the franchise agents' operation. Franchise agents' share of gross profit decreased $1.7 million, or 10.0%, for fiscal 2002 as compared to fiscal 2001. As a percentage of total sales of services and license fees, franchise agents' share of gross profit was 3.0% for both fiscal 2002 and 2001. All of the Company's franchise operations are located within the United States and the gross profit generated from these operations experienced a similar decline as the overall decline in the Company's gross profit during fiscal 2002. This decline in gross profit from franchise agents caused the franchise's agents share of gross profit to decline accordingly.

        Selling and Administrative Expenses (Including Depreciation and Amortization).    Selling and administrative expenses decreased $13.9 million, or 14.5% for fiscal 2002 as compared to fiscal 2001. As a percent of sales of services and license fees, selling and administrative expenses, exclusive of depreciation and amortization, decreased from 15.5% in fiscal 2001 to 14.7% fiscal 2002. These decreases are primarily due to cost savings realized from personnel reductions and office closures implemented early in 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.

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However, there can be no assurance that the cost savings implemented from such actions, if enacted, would be sufficient to offset the declining margins.

        Sales of Affiliate Operations.    The income on sale of affiliate operations decreased $1.9 million, or 90.5% in fiscal 2002 as compared to fiscal 2001. During fiscal 2002, the Company sold its interest in one domestic operation to a franchisor. This operation had been previously developed and operated as a Company-owned location. In fiscal 2001, the Company sold its interests in two larger affiliate operations to the respective licensors, generating much larger comparative income. Currently, no dispositions of affiliate operations are contemplated. However, there can be no assurance that none will occur during fiscal 2003 and, if they do, that there will be income from such a disposition.

        Arbitration Award.    During fiscal 2001, the Company recorded an accrued liability and related pretax charge of $3.6 million for the estimated cost of an unfavorable arbitration award, plus other related expenses. This estimate was based on management's assumptions as to the ultimate outcome of certain future events surrounding the arbitration. During fiscal 2002, a favorable ruling reduced the arbitration award by $0.7 million. Currently, the Company does not anticipate future, material gains or losses from the ultimate resolution of this arbitration.

        Restructuring Charges.    During the first quarter of fiscal 2002, the Company implemented a restructuring plan designed to improve the Company's profitability. This restructuring plan resulted in a fiscal 2002 first quarter pre-tax charge of $1.9 million. The plan included costs associated with the abandonment of certain management information systems which were under development of $1.0 million, severance and other termination costs of $0.6 million and lease termination costs of $0.3 million, related to the Company's announced layoffs and office closures. Although the Company does continually monitor its financial performance and future cost savings measures may be implemented, it is not currently considering a similar restructuring plan for fiscal 2003.

        Interest.    Interest expense decreased $0.2 million, or 7.4%, for fiscal 2002 as compared to fiscal 2001 primarily due to lower debt levels. Interest income decreased $0.4 million or 49.4% during the same period as a result of reduced cash levels.

        Provision (Benefit) for Income Taxes.    The Company recorded an income tax benefit of $4.1 million on a pre-tax loss of $5.5 million during fiscal 2002. This income tax benefit was primarily the result of the reversal of $2.4 million of the deferred tax valuation allowance. The valuation allowance was reversed because of a change in the tax law that extended the net operating loss carryback period from to two to five years. This change allowed the Company to carry losses back to earlier tax years resulting in additional tax refunds. Additionally, a tax benefit on the current year pre-tax loss was recognized due to the ability to carry this loss back, at the federal statutory rate of 35%, resulting in a tax benefit of $1.9 million. Partially offsetting these two benefits were certain state and international income tax provisions amounting to $0.2 million. At November 2, 2002, the Company has maintained valuation allowances equivalent to 100% of its outstanding net deferred tax assets, which amount to $18.1 million. Whereas it is possible that these deferred tax assets may be realized in the future, there is currently insufficient evidence to support reversing all or a portion of the valuation allowance.

Fiscal 2001 compared to Fiscal 2000

        Sales of Services and License Fees.    Sales of services decreased $94.8 million, or 14.2%, for fiscal 2001 as compared to fiscal 2000. While average bill rates increased 4.2% in fiscal 2001 as compared to fiscal 2000, billed hours declined 17.7%. Fiscal 2001 included fifty-three weeks while fiscal 2000 included fifty-two weeks. After eliminating the effect of the extra week in fiscal 2001, billed hours declined 19.2%. Sales of services decreased 14.6% for domestic business services and 12.0% for international business services. The decline in domestic business services reflected the economic slowdown during the year and the resulting recession, which decreased demand for staffing services

24

across the majority of the Company's geographic regions. In the latter portion of fiscal 2001, the economic environment placed strong competitive pressures on pricing which negatively affected sales of services. Global economic conditions and declines in foreign currency exchange rates negatively impacted the international results. Excluding the effect of rate fluctuations, fiscal 2001 international sales of services decreased 1.8% as compared to fiscal 2000.

        License fees are charged to licensed offices based either on a percentage of sales or a percentage of gross profit generated by the license offices. License fees decreased $1.8 million or 57.7%, for fiscal 2001 as compared to fiscal 2000, primarily due to a decrease in licensees. During the fourth quarter of fiscal 2000, the Company purchased the operations of one of its licensees, two licensees converted to the Company's franchise agent program, and two licensees closed operations. In the second quarter of fiscal 2001, two licensees purchased the Company's interest in their licensed operations.

        Cost of Services.    Costs of services include hourly wages of temporary employees, employer payroll taxes, state unemployment and workers' compensation insurance and other employee-related costs. Costs of services decreased $75.5 million, or 14.2%, for fiscal 2001 as compared to fiscal 2000. Gross margin declined from 20.4% in fiscal 2000 to 20.1% in fiscal 2001; however, during the fourth quarter of fiscal 2000, the Company recorded an additional charge for workers' compensation costs of $2.1 million. The effective decrease in gross margin for fiscal 2001 is primarily due to lower license fees and the overall effects of the domestic recession.

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

        Selling and Administrative Expenses (Including Depreciation and Amortization).    Selling and administrative expenses decreased $7.5 million, or 7.2%, for fiscal 2001 as compared to fiscal 2000. As a percentage of sales of services and license fees, selling and administrative expenses increased from 15.5% for fiscal 2000 to 16.8% for fiscal 2001. Fiscal 2000 includes $1.9 million in pre-tax charges as a result of the Company's terminated recapitalization. The fiscal 2001 increase is primarily the result of declining sales outpacing the extent of reductions in selling and administrative expenditures.

        Sales of Affiliate Operations.    The Company recognized $2.1 million of income on the sale of two licensed operations during fiscal 2001. No similar sales occurred during fiscal 2000.

        Loss on Impairment of Intangible Assets.    Management assessed the recoverability of its long-lived assets, including goodwill and other intangible assets, by determining whether the amortization of the asset's carrying value over its remaining life could be recovered through projected undiscounted future cash flows from operations. During fiscal 2001, a number of businesses the Company acquired over the past several years were negatively impacted by the economic recession. Based on management's assessment of projected undiscounted future cash flows and estimates of market value based on industry specific multiples, it was determined that the carrying amount of goodwill and other intangibles related to specific acquisitions had been permanently impaired in the fourth quarter of fiscal 2001. As a result, the Company recorded a pre-tax charge of $19.1 million to write down these assets to estimated current net realizable values. No similar impairment existed during fiscal 2000.

        Arbitration Award.    During fiscal 2001, the Company recorded an accrued liability and related pretax charge of $3.6 million for the estimated cost of an unfavorable arbitration award, plus other

25

related expenses. This estimate was based on management's assumptions as to the ultimate outcome of certain future events surrounding the arbitration.

        Interest.    Interest expense decreased $0.6 million, or 20.1%, for fiscal 2001 as compared to fiscal 2000 due to lower debt levels under the Company's senior secured credit facilities. Interest income increased $0.4 million or 129.7% during the same period as a result of the short-term investment of excess cash from operations.

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

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

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. The Company's principal use of cash is for financing of accounts receivable, particularly during periods of economic upswings and growth and during periods where sales are seasonally high throughout the year. 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 $4.5 million, $25.6 million and $16.7 million for fiscal 2002, fiscal 2001 and fiscal 2000, respectively. During fiscal 2002, the Company generated cash from operations in spite of a net loss primarily because a number of expenses were non-cash charges, including depreciation, amortization and the provisions for doubtful accounts. Cash generated from operations decreased $21.1 million as compared fiscal 2001 primarily because fiscal 2001 included an overall decrease in accounts receivable of $21.6 million. During fiscal 2001, collection of outstanding receivables outpaced the growth of receivables generated by declining sales levels, which is largely attributable to the domestic recession.

        Cash used for capital expenditures, which are primarily for management information systems initiatives, other software, computers and peripherals, and office furniture and equipment, totaled $2.1 million, $4.6 million and $4.4 million for fiscal 2002, fiscal 2001 and fiscal 2000, respectively. The decrease in fiscal 2002 is primarily due to the Company's cessation of further development on an integrated front-to-back office system, which occurred in the first quarter. Currently, the Company anticipates that fiscal 2003 cash outflows for management information systems and other capital expenditures will be above fiscal 2002 levels, with the bulk of the expenditures related to improvements on its existing management information systems.

26

        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 income from the sale of these operations, the Company received $1.2 million and $0.7 million in cash proceeds during fiscal 2002 and fiscal 2001, respectively.

        The Company used $4.8 million of cash for financing activities during fiscal 2002. 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. 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 $50.0 million US Revolving Loan Commitment, a £2.7 million UK Revolving Loan Commitment (US dollar equivalent of approximately $4.0 million at 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. 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 $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 workers' compensation insurance carrier.

        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 Term Loan is payable in nineteen consecutive quarterly installments of $0.25 million each, beginning July 1, 2002, with voluntary prepayment without penalty. The UK Revolving Loan Commitment is subject to a borrowing base calculation on eligible Westaff (U.K.) accounts receivable. The A$ 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. Overall, 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 credit 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 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 US, UK 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. Additionally, 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 payment of dividends, capital expenditures, disposition of assets, incurrence of debt, mergers and acquisitions, loans to affiliates and purchases of investments. On October 31, 2002, the First Amendment to the Multicurrency Credit Agreement was executed, which revised the minimum EBITDA covenants, among other things.

        In addition to the credit facilities, the Company executed two unsecured promissory notes to related parties during fiscal 2002. A $2.0 million note was issued to the Company's principal stockholder and Chairman of the Board of Directors, with a maturity date of August 18, 2007, and bearing interest at the US Index Rate calculated under the credit facilities, plus seven percent. Payment of interest is contingent on the Company meeting minimum availability requirements under the credit facilities. Additionally, a $1.0 million note was issued to the Company's President and Chief Executive

27

Officer, with a maturity date of August 18, 2007. Payment of interest is contingent on the Company meeting minimum availability requirements under the credit facilities. Payment of principal prior to maturity is required upon the sale of the Company's administrative offices.

        The Company also 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 was renewed for one additional year on November 1, 2002, and a 90-day advance written notice of non-renewal is required. The Company is required to fund the entire estimated costs of policy year 2003 by November 1, 2003. Of this, $3.0 million was paid during fiscal 2002 with the remaining $13.0 million scheduled for payment during fiscal 2003. Due to this change in premium funding, the Company does not currently anticipate renewal of the bond at its expiration.

        During fiscal 2002, the Company executed net borrowings of $24.6 million under the credit facilities, with $5.0 million of these borrowings having been made under the Term Loan. At November 2, 2002, the Company had approximately $11.9 million available under the credit facilities, with $17.3 million in letters of credit outstanding. Additionally, $3.0 million was provided upon the execution of the two related-party unsecured promissory notes. On December 12, 2002, the Company completed a sale leaseback of its administrative offices, which generated $6.9 million in cash. Accordingly, the prepayment option on the Term Loan was exercised and the outstanding balance was paid in its entirety. Further, the unsecured $1 million promissory note held by the Company's President and Chief Executive Officer was also paid in its entirety. The remainder was utilized to pay down outstanding borrowings under the US Revolving Loan Commitment.

        During fiscal 2000, the Company's Board of Directors declared a special cash dividend of $0.30 per share or a total of $4.7 million that was paid in July 2000. The Company currently does not anticipate declaring or paying any cash dividends on its common stock in the foreseeable future.

        The Company believes that cash reserves, cash generated 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.

        The following summarizes the Company's contractual cash obligations in future fiscal years (in millions):

*

Paid in December 2002 following the sale-leaseback of the Company's administrative offices located in Walnut Creek, CA. Operating lease obligations include the lease payment obligations related to the sale-leaseback.

28

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        The Company's exposure to market risk for changes in interest rates is not significant with respect to interest income, as its investment portfolio is not material to its consolidated balance sheet. Further, the Company currently has no plans to include derivative financial instruments in its investment portfolio. The Company implemented new credit facilities and two unsecured promissory notes during fiscal 2002, which are described in Item 7, "Liquidity and Capital Resources." The Company's outstanding liabilities under these debt instruments is $27.2 million at November 2, 2002. Interest rates on borrowings under these facilities are based on varying items dependent on the specific debt instrument, which include the Federal Funds Rate, the bank's prime rate, LIBOR, the British prime rate and the Australian 90-day Bank Bill Swap Rate and are variable contingent on changes in these. Based on the outstanding debt at November 2, 2002, a change of 1% in the interest rate would cause a change in interest expense of approximately $0.3 million on an annual basis.

        For the fiscal year ended November 2, 2002, the Company's international operations comprised 16.9% of its sales of services and, as of the end of that period, 17.7% 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 UK 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 US dollar. The Company does not currently hold any market risk sensitive instruments entered into for hedging transaction risks related to foreign currencies.

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 15(a).

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

        Not applicable. For the Company's fiscal years ended November 3, 2001, and November 2, 2002, there were no disagreements with its accountants on accounting and financial disclosure.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

        The information included in the Company's Proxy Statement under the caption "Business Experience of Directors" is incorporated herein by reference. Information required by this item as to the executive officers of the Company is included as Item 4A of Part I of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K.

        Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act) requires the Company's directors and certain of its officers and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission. Such persons are further required to furnish the Company with copies of all such forms they file. Based solely on the Company's review of the copies of such forms it has received, the Company believes all Section 16(a) filing requirements were satisfied by the Company's directors and executive officers for the fiscal year ended November 2, 2002.

ITEM 11.    EXECUTIVE COMPENSATION.

        The information included in the Company's Proxy Statement under the captions "Directors' Compensation", "Executive Compensation Report" and "Executive Compensation" is incorporated herein by reference.

29

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

        The information included in the Company's Proxy Statement under the captions "Ownership of Securities" and "Executive Compensation" is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        See Note 7 of "Notes to Consolidated Financial Statements" under Item 15 of this Form 10-K. In addition, the information included in the Company's Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference.

ITEM 14.    CONTROLS AND PROCEDURES.

        Within the 90 days prior to the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation.

30

PART IV

ITEM 15.    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.



1.

Financial Statements

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 and Reserves (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:

31

10.8.24		Parent Guaranty dated as of May 17, 2002. (6)
10.8.25		Subsidiary Guaranty dated as of May 17, 2002. (6)
10.8.26		Amended and Restated Unsecured Subordinated Note dated May 17, 2002. (6)
10.11		Westaff, Inc. Employee Stock Purchase Plan. (4)
10.11.3		International Employee Stock Purchase Plan. (4)
10.13		Form of Employment Contract with certain Named Executive Officers. (4)
21.1		Subsidiaries of the Company.
23.1		Consent of Deloitte & Touche LLP, independent auditors.
24.1		Power of Attorney (see page IV-3).

(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 October 31, 1998.

(3)

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.

(4)

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 3, 2001.

(5)

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 26, 2002.

(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 April 20, 2002.

(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 July 13, 2002.

(b)

Reports on Form 8-K

        Current Report on Form 8-K was filed with the Securities and Exchange Commission on September 3, 2002.

32

INDEPENDENT AUDITORS' REPORT

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

        We have audited the accompanying consolidated balance sheet of Westaff, Inc. and subsidiaries (the Company) as of November 2, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Westaff, Inc. and subsidiaries as of November 3, 2001 and for each of the years in the two-year period then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated December 19, 2001 (February 11, 2002 with respect to a subsequent event), which report included an explanatory paragraph regarding the Company's ability to continue as a going concern.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Westaff, Inc. and subsidiaries as of November 2, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Oakland, California
January 10, 2003

F-1

        This is a copy of a report previously issued by Arthur Andersen LLP. The report has not been reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

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

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

ARTHUR ANDERSEN LLP

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

F-2

Westaff, Inc.

Consolidated Balance Sheets

(Amounts in thousands except per share amounts)

See accompanying notes to consolidated financial statements

F-3

Westaff, Inc.

Consolidated Statements of Operations

(Amounts in thousands except per share amounts)

See accompanying notes to consolidated financial statements.

F-4

Westaff, Inc.

Consolidated Statements of Stockholders' Equity

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

F-5

Westaff, Inc.

Consolidated Statements of Cash Flows

(Amounts in thousands)