10-K

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

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 1, 2008
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                to

Commission File Number 000-24990

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

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

298 NORTH WIGET LANE, WALNUT CREEK, CA 94598-2453
(Address of principal executive offices, including zip code)

(925) 930-5300
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share

Title of class	Name of each exchange on which registered
Common Stock. $0.01 par value per share	NASDAQ Stock Market LLC (NASDAQ Global Market)

         Securities registered pursuant to Section 12(g) of the Act:
None

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

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

         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. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company ý

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

         As of April 19, 2008, which was the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $34,228,871 based on the closing sale price as reported on the NASDAQ Global Market.

         As of February 11, 2009, the Registrant had outstanding 16,702,651 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 its 2009 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, in either case to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant's fiscal year ended November 1, 2008, are incorporated herein by reference into Part III of this Annual Report on Form 10-K.

INDEX
WESTAFF, INC.

		PAGE NO
PART I
ITEM 1.	BUSINESS	3
ITEM 1A.	RISK FACTORS	12
ITEM 1B.	UNRESOLVED STAFF COMMENTS	22
ITEM 2.	PROPERTIES	22
ITEM 3.	LEGAL PROCEEDINGS	22
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	22
PART II
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	23
ITEM 6.	SELECTED FINANCIAL DATA	24
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	44
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	44
ITEM 9A(T).	CONTROLS AND PROCEDURES	44
ITEM 9B.	OTHER INFORMATION	45
PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	46
ITEM 11.	EXECUTIVE COMPENSATION	46
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	46
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	46
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	46
PART IV
ITEM 15.	EXHIBITS FINANCIAL STATEMENT SCHEDULES	47
	SIGNATURES	IV-1
	POWER OF ATTORNEY	IV-1

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PART I

Cautionary Note

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,as amended (the "Exchange Act") which are subject to a number of risks and uncertainties. All statements that are not historical facts are forward-looking statements, including statements about our business strategy, the timing of the introduction of our services, the effect of Generally Accepted Accounting Principles ("GAAP") pronouncements, uncertainty regarding our future operating results and our profitability, anticipated sources of funds and all plans, objectives, expectations and intentions and the statements regarding revenue, expected domestic revenue growth rates for fiscal 2009, gross margins and our prospects for fiscal 2009. These statements appear in a number of places and can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "future," "intend," or "certain" or the negative of these terms or other variations or comparable terminology, or by discussions of strategy.

Actual results may vary materially from those in such forward-looking statements as a result of various factors that are identified in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations," "Item 1A.—Risk Factors" and elsewhere in this document. No assurance can be given that the risk factors described in this Annual Report on Form 10-K are all of the factors that could cause actual results to vary materially from the forward-looking statements. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Readers should not place undue reliance on these forward- looking statements and are cautioned that any such forward-looking statements are not guarantees of future performance. We assume no obligation to update any forward-looking statements.

References in this Annual Report on Form 10-K to (i) the "Company," the "Registrant," "Westaff," "we," "our," and "us" 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 assisting with collection matters upon request, but otherwise refer to the Company's franchisees in their roles as independent contractors of the Company.

This Annual Report on Form 10-K includes service marks of Westaff, Inc. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners. Investors and security holders may obtain a free copy of the Annual Report on Form 10-K and other documents filed by Westaff with the Securities and Exchange Commission ("SEC") at the SEC's website at http://www.sec.gov. Free copies of the Annual Report on Form 10-K and other documents filed by Westaff with the SEC may also be obtained from Westaff by directing a request to Westaff, Attention: Chief Financial Officer, 298 North Wiget Lane, Walnut Creek, CA 94598-2453, (925) 930-5300.

ITEM 1.    BUSINESS.

General

        We provide 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 ("US"). On March 31, 2008, the Company sold its former United Kingdom operations and related subsidiary, and subsequent to year end, on November 10, 2008, the Company sold its former Australia and New Zealand subsidiaries pursuant to a definitive agreement that was previously entered into on September 27, 2008. Through our network of Company-owned and franchise agent offices, we offer a wide range of staffing solutions, including permanent placement, replacement, supplemental and on-site temporary programs to businesses and government agencies. Our primary focus is on recruiting and

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placing clerical/administrative and light industrial personnel. We have almost 60 years of experience in the staffing industry and, currently operate through 157 offices in 42 states. As of February 11, 2009, 62% of these offices were Company-owned and operated and 38% were operated by franchise agents.

        During the second quarter of fiscal year 2008, we sold our operations in the United Kingdom and have classified these operations as discontinued operations in our consolidated financial statements. During the fourth quarter of fiscal year 2008, the Company signed a definitive agreement to sell the remaining international subsidiaries located in Australia and New Zealand and these operations are classified as discontinued operations in our consolidated financial statements and the assets and liabilities have been classified as held for sale. The sale of the Company's remaining international subsidiaries in Australia and New Zealand was completed subsequent to the Company's fiscal year 2008 on November 10, 2008. Our Domestic Business Services operations in the US provide a variety of staffing services, primarily in clerical and light industrial positions, through a network of Company-owned and franchise agent offices located in 42 states. The Company-owned locations are divided into four geographical regions. The franchise agent offices are managed as a single unit. The Company-owned locations and franchise agent offices are supported centrally by the corporate office located in Walnut Creek, California. We were founded in 1948 and incorporated in California in 1954. In October 1995, we reincorporated in Delaware. Our corporate name was changed from Western Staff Services to Westaff, Inc. in September 1998. Our executive offices are located at 298 North Wiget Lane, Walnut Creek, California 94598-2453, and our telephone number is (925) 930-5300. We transact business through our subsidiaries, the largest of which is Westaff (USA), Inc., a California corporation, which is our primary operating entity.

Recent Developments

        On January 28, 2009, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Koosharem Corporation, a California corporation doing business as Select Staffing ("Koosharem") and Select Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Koosharem ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation and a wholly-owned subsidiary of Koosharem (the "Merger"), in accordance with and subject to the terms and conditions set forth in the Merger Agreement.

        Concurrently with the execution of the Merger Agreement, our principal stockholder, DelStaff, LLC ("DelStaff"), entered into a Stock & Note Purchase Agreement with Koosharem (the "Purchase Agreement"), pursuant to which Koosharem will purchase, immediately prior to the effective time of the Merger: (1) all of the Company common stock that DelStaff then owns in exchange for first lien term loan debt to be issued by Koosharem under Koosharem's first lien credit facility bearing a face amount of $40,000,000 and (2) all of the then outstanding subordinated notes (the "DelStaff Subordinated Notes") issued by the Company to DelStaff under the Subordinated Loan Agreement, dated as of August 25, 2008, by and among the Company, Westaff (USA), Inc., Westaff Support, Inc., MediaWorld International (as borrowers) and DelStaff in exchange for first lien term loan debt to be issued by Koosharem under Koosharem's first lien credit facility bearing a face amount equal to the actual principal amount of the DelStaff Subordinated Notes then outstanding, but not to exceed $3,000,000.

        Pursuant to the terms and conditions of the Merger Agreement, at the effective time of the Merger: (1) each outstanding share of Company common stock (other than those owned by the Company, Koosharem, Merger Sub or any subsidiary of the Company, Koosharem or Merger Sub, and other than those shares with respect to which dissenters rights are properly exercised) will be cancelled and converted into the right to receive $1.25 per share in cash (the "Merger Consideration") and (2) each outstanding stock option to purchase shares of Company common stock, whether or not then exercisable or vested, will be cancelled and converted into the right to receive, within ten business days

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following the effective time of the Merger, an amount in cash (subject to applicable withholding taxes) equal to (a) the excess, if any, of the Merger Consideration over the per share exercise price of the stock option, multiplied by (b) the number of shares of Company common stock subject to the stock option.

        Consummation of the Merger is subject to the satisfaction of various conditions, including, among others, the receipt by Koosharem and Merger Sub of the financing pursuant to and on the terms contemplated by the applicable commitment letters, the consummation of the transactions under the Purchase Agreement, the requisite approval by the Company's stockholders, a requirement for the Company to hold a minimum of $9.5 million in cash and equivalents immediately prior to the closing date, the lack of any legal impediment to the Merger, and the lack of any Material Adverse Effect as specified in the Merger Agreement.

        Upon the recommendation of a special committee of independent members of the Company's board of directors (the "Special Committee"), all of the members of the Company's board of directors not affiliated with DelStaff approved the Merger Agreement and the Purchase Agreement. Robert W. Baird & Co. Incorporated provided a fairness opinion to the Special Committee.

        The Merger Agreement contains certain termination rights for both the Company, on the one hand, and Koosharem and Merger Sub, on the other hand. Upon any termination of the Merger Agreement, under specified circumstances, the Company may be required to pay Koosharem and Merger Sub a $2.0 million termination fee, and under other specified circumstances, Koosharem and Merger Sub may be required to pay the Company a $2.0 million termination fee. The foregoing description of the Merger Agreement and the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement and the Purchase Agreement, as applicable. For additional and more detailed information regarding the Merger Agreement, please refer to our Current Report on Form 8-K that we filed with the Securities and Exchange Commission on February 2, 2009. Please also refer to the risk factors included in Part I, Item 1A "Risk Factors" of this Annual Report on Form 10-K under the heading "The Process and Uncertainties Relating to the Proposed Merger Could Adversely Affect our Business."

        The Company has agreed to file a proxy statement with the SEC in connection with the proposed Merger. The Company's stockholders are urged to read the proxy statement and other relevant materials when they become available because they will contain important information about the proposed Merger. The Company's stockholders will be able to obtain a free copy of the proxy statement and other related documents filed with the SEC by the Company (when they become available) at the SEC's website at www.sec.gov. The proxy statement and the other documents (when they become available) will also be available for free at the Company's website at http://www.westaff.com. The Company and its directors and executive officers may be deemed to be participants in the solicitation of proxies from stockholders in respect of the Merger Agreement and the Merger. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of stockholders in connection with the Merger will be set forth in the proxy statement when it is filed with the SEC. More detailed information regarding the identity of potential participants, and their direct or indirect interests, by securities, holdings or otherwise, will be set forth in the proxy statement to be filed with the SEC in connection with the proposed Merger.

Services

        Our service offerings are focused primarily on placing clerical/administrative and light industrial personnel into both temporary and permanent positions.

        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

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office, accounting, bookkeeping and clerical staff. Clerical/administrative positions also include call center agents, such as customer service, help desk and technical support staff.

        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).

        Permanent Placement Services.    Permanent placement services are typically contingent fee-based services to recruit and fill regular staff positions for customers. These services include locating, screening and assessing candidates on behalf of customers. If the candidate is hired by the customer, we are generally paid a fee based on a percentage of the annual starting compensation for the candidate placed.

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

        We also provide other services within the clerical/administrative and light industrial staffing market such as 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.

•

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

•

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

•

On-site programs provide administrative services for our 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 typically intended for large non-seasonal accounts with more than $1.0 million in annual revenue. This type of branch office is generally 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.

        We use Talent Trak® to strengthen the quality of our selection process and to ensure high quality placements for customers and employees. This comprehensive selection process includes flexible recruiting methods, interviewing and reference checking. We conduct advanced skills and behavioral assessments using Talent Trak®, and also provide the option for both background and drug testing that can be customized to meet a customer's specific needs. We maintain contracts with national drug testing and background testing service providers to help ensure high quality and consistency in assessing our candidates.

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Markets

        We provide staffing services primarily in "secondary markets," as well as in the downtown areas of certain "primary markets" in the United States.

        We capitalize on our presence in secondary markets to build market share by targeting small to medium-sized customers, including divisions of Fortune 500 companies. We believe that in many cases, such markets are less competitive and less costly to operate in 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.

        We augment this concentration on secondary markets by also focusing on selected 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. We currently have existing national accounts across many different business sectors such as manufacturing, government, financial services, technology and communications. We maintain a professional sales team that services and leverages existing relationships to retain and grow these accounts. In addition, we continue to develop aggressive marketing programs to target and acquire additional clients that fit our branch system footprint. Management believes that our geographic alignment allows us to effectively compete for some of these national contracts.

        We market our staffing services to local and regional customers through a network of Company-owned and franchise agent offices, as well as through our on-site and on-location service locations. Domestically, our national marketing campaigns are coordinated through our corporate headquarters in cooperation with US field offices. Marketing efforts for regional markets are generally conducted at the local level. New customers are developed by the field offices primarily through direct sales efforts and referrals. We have a targeted marketing program and a consultative sales process that includes telemarketing, e-mail marketing and direct mail campaigns.

Recruiting

        We believe that a key component of our success is the ability to recruit and maintain a pool of qualified personnel and regularly place them into desirable and appropriate positions. We use comprehensive methods to identify, assess, select and, when appropriate, measure the skills of our temporary employees and permanent placement candidates to meet the needs of our customers. Domestically, we believe one of our key competitive advantages in attracting and retaining staffing personnel is our payroll system, which provides us with the ability to print payroll checks at virtually all of our branch offices within 24 hours after receipt of a timecard. Most Company-owned offices offer temporary employees a benefit package, including a service bonus and holiday pay. Franchise agent offices have the option to offer this benefit. All eligible temporary employees have the option to participate in our 401(k) savings plan.

Operations

        We operate each Company-owned office as a separate profit center and provide metric driven incentive programs. We also operate franchise agent offices in geographic locations not serviced by Company-owned offices. This structure 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, unemployment insurance, credit, collections, accounting, advice on legal and regulatory matters, quality standards and marketing.

        Currently we operate through a network of 157 offices in 42 states. In addition, from time to time we establish recruiting offices both for recruiting candidates and for testing demand for our services in

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new market areas. Our operations are decentralized with area managers, regional vice presidents and franchise agents who oversee the individual branch offices.

        The following table sets forth information as to the number of offices in operation as of the respective dates indicated below:

			Jan. 30, 2009		Nov. 1, 2008		Nov. 3, 2007		Oct. 28, 2006
Number of Offices by Ownership(1):
Company Owned				97		113		141		180
	Franchise agent			60		61		63		58
	Licensed			—		—		—		1
		Total		157		174		204		239
Number of Offices by Locations(1):
	Domestic			157		156		161		192
	International(2)			—		18		43		47
		Total		157		174		204		239

(1)

Excludes Company-owned recruiting offices.

(2)

Number of offices as of November 1, 2008 includes Australia and New Zealand due to sale of United Kingdom subsidiary in the second quarter of fiscal year 2008.

        Company-Owned Offices.    Employees of each domestic Company-owned office typically report to an area manager who is responsible for day-to-day operations of multiple branches. Area managers and senior area managers report to regional vice presidents. Regional vice presidents report to the Senior Vice President of Field Operations who, in turn reports directly to the President and Chief Operating Officer. This structure was instituted as a result of the restructuring that occurred in the third quarter of fiscal 2007. Prior to the restructuring each individual branch had a manager who in turn reported to market managers. Additionally, there were eight regional vice presidents who reported directly to the President and Chief Executive Officer.

        Franchise Agent Offices.    Our franchise agents have the exclusive right by contract to sell certain of our services and to use our service marks, business names and systems in a specified geographic territory. Our franchise agent agreements generally allow franchise agents to open multiple offices within their exclusive territories.

        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, we are the employer of the temporary employees and the owner of the customer accounts receivable and are responsible for paying the wages of the temporary employees and all related payroll taxes and insurance. As a result, we provide a substantial portion of the working capital needed for the franchise agent operations.

        Franchise agents are required to follow our operating procedures and standards in customer credit and terms, recruiting, screening, classifying and retaining temporary personnel.

        Our sale of franchises is regulated by the Federal Trade Commission and by state business opportunity and franchise laws. We have filed registrations, been exempted from registration or filed a notice in all 15 states that require pre-sale registration or a notice filing under franchise investment

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laws in order to offer the sale of franchises. We have not sought registration in one state in which no pre-sale notice is required.

        Currently, our 28 franchise agents operate 60 franchise agent offices. Sales generated by franchise agent operations and related costs are included in our consolidated revenue and costs of services, respectively, and during fiscal 2008, 2007 and 2006 franchise agent sales represented 40.1%, 35.8% and 35.1% respectively, of our total revenue.

        Our franchise 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 we vigorously seek to enforce. Efforts to enforce the non-competition covenants have resulted in litigation brought by us following termination of certain franchise agent agreements.

        Licensed Offices.    Currently we no longer have any licensed offices. Previously, licensee offices would act as the employer of the temporary employees and the owner of the customer accounts receivable. The Company financed the licensee's temporary employee payroll, payroll taxes and insurance. The licensee secured this advance by pledging their accounts receivable, tangible and intangible assets, and the license agreement. Licensees were required to operate within the framework of our policies and standards, but were responsible for their own workers' compensation, liability, fidelity bonding and state unemployment insurance coverage.

Seasonality

        We have experienced significant fluctuations in our operating results and anticipate that these fluctuations will continue. Operating results may fluctuate due to a number of factors, including seasonality, the demand for our services, the level of competition within our markets, our ability to increase the productivity of our existing offices, control costs and expand operations and the availability of qualified personnel. In addition, our results of operations could be, and have in the past been, adversely affected by severe weather conditions. Our fourth fiscal quarter consists of 16 or 17 weeks, while our first, second and third fiscal quarters consist of 12 weeks each. Moreover, our results of operations have historically been subject to seasonal fluctuations, with demand for our services typically greatest during our fourth fiscal quarter due largely to the planning cycles of many of our customers. However, demand was flat in the fourth quarter of fiscal year 2008. Furthermore, sales for the first fiscal quarter are typically lower due to national holidays as well as customer shutdowns during and after the holiday season. These shutdowns and post-holiday season declines in economic activity negatively impact job orders received by us, particularly in the light industrial sector.

Customers

        We service small and medium-sized companies as well as divisions of Fortune 500 companies and local, state and federal government agencies. As is common in the staffing industry, our engagements to provide temporary services to our customers are generally of a non-exclusive, short-term nature and subject to termination by the customer with little or no notice. During fiscal 2008, no single customer accounted for more than 3.8% of our revenue. Our ten highest volume customers in fiscal 2008 accounted for an aggregate of 17.8% of our revenue.

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Competition

        The staffing industry is highly competitive with few barriers to entry. We believe that the majority of commercial 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. We also compete for qualified candidates 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., Manpower Inc., Select Staffing, Express Personnel Services, Inc., and Randstad North America. Many of our principal competitors have greater financial, marketing and other resources than we. In addition, there are a number of medium- sized firms which compete with us in certain markets where they may have a stronger presence, such as regional or specialized markets.

        We believe that the competitive factors in obtaining and retaining customers include understanding customers' specific job requirements, providing qualified temporary personnel and permanent placement candidates in a timely manner, monitoring quality of job performance and pricing of services. We believe that the primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits, and flexibility of work schedules.

Management Information Systems

        Our domestic management information systems provide support to both branch office locations and the corporate back-office. Branch offices utilize a proprietary application designed to assist in candidate searches, recruiting, customer order management, customer service, sales management and payroll entry and submission. The application also provides for the sharing of information between branch offices and corporate headquarters. Utilizing this system, field offices capture and input customer, employee, billing and payroll information. This information is electronically captured on centralized servers where payroll, billing and financial information is processed. These systems allow us to print checks at our branch offices within 24 hours after receipt of the timecard. Invoices are also processed daily and distributed from our centralized corporate office. These systems also support branch office operations with daily, weekly, monthly and quarterly reports that provide information ranging from customer activity to office profitability.

        During fiscal 2004, we entered into a license agreement for a domestic Business Process Management or BPM system, which was implemented in three phases. The initial phase, which consisted of the human resources system for our regular employees, was successfully implemented in July 2005. The second phase, which included the core financial systems and the accounts payable module, went live in the beginning of fiscal year 2006. The final phase, which incorporated a fully integrated payroll and billing system for temporary associates with our in house developed front office application, 2^nd Wave, went live during the first quarter of fiscal 2008. In addition, we made certain technology infrastructure upgrades in our former Australian operation during fiscal 2006.

Risk Management Programs

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

        We provide workers' compensation insurance covering our domestic regular and temporary employees through a long-term relationship with Travelers Property Casualty Company of America ("Travelers"). For fiscal years 2006 and 2007 we retained a $500,000 deductible per occurrence for these policies. In fiscal 2008, the deductible was increased to $750,000 per claim. We are self-insured in the states of Ohio and Washington. The number of claims decreased for fiscal year 2008 as compared

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to fiscal year 2007, however, the average loss amount per claim increased in fiscal year 2008 as compared to the prior year.

        We are contractually required to collateralize our recorded obligations under the workers' compensation insurance contracts with Travelers through irrevocable letters of credit, surety bonds or cash. As of November 1, 2008, these aggregate collateral requirements have been satisfied through $27.3 million of letters of credit and $1 million of cash which was recorded as a short term deposit. An additional deposit of $250,000 will be paid when the policy is extended through April 1, 2009.

        Our nationwide risk management program is managed by our Risk Management Department consisting of risk management and workers' compensation professionals as well as claim 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 claim management strategies. The risk management program includes safety programs, claim strategy reviews with the carrier and third-party administrator, a return-to-work modified duty program, pre-placement customer safety evaluations and certain light industrial job approvals, the use of personal protective equipment, and the use of individual local office expense allocation formulas.

Employees

        Currently we have approximately 8,000 temporary employees on assignment and employ 345 regular staff. Our employees are not covered by any collective bargaining agreements. Management believes that its relationships with its employees are good.

Service Marks

        We have various service marks registered with the United States Patent and Trademark Office, with the State of California and in various foreign countries, including our primary Westaff® service mark.

        We also own other service marks, including the Westaff® logo, Talent Trak®, Learning Trak®, West-Tek®, Ms. Carmen Courtesy®, and Staff for Business Jobs for People®. Federal and state service mark registrations may be renewed indefinitely as long as the underlying mark remains in use.

Available Information

        We file electronically with the Securities and Exchange Commission, or the SEC, Annual Reports on From 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. We maintain a site on the worldwide web at http://www.westaff.com; however, information found on our website is not incorporated by reference into this report. We make available free of charge on or through our website our SEC filings, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Further, a copy of this Annual Report on Form 10-K is located at the SEC's Public Reference Rooms at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov. Furthermore, we will provide electronic or paper copies of filings free of charge upon written request to our Chief Financial Officer or Chief Operating Officer.

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ITEM 1A.    RISK FACTORS.

        This Annual Report on Form 10-K contains forward-looking statements concerning our future programs, products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information, except as required by applicable laws and regulations. Numerous factors could cause actual results to differ significantly from the results described in these forward-looking statements, including the following risk factors.

        Investing in our common stock involves a high degree of risk. The following risk factors, issues and uncertainties should be carefully considered before deciding to buy, hold or sell our common stock. Set forth below and elsewhere in this Annual Report on Form 10-K, and in other documents that we file with the SEC, are risks and uncertainties that could cause the Company's actual results and financial position to differ materially from those expressed or implied in forward-looking statements and to be below the expectations of public market analysts and investors. See "Cautionary Statement Regarding Forward-Looking Statements" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Any one of the following risks could harm our operating results or financial condition and could result in a significant decline in the value of an investment in Westaff Inc. Further, additional risks and uncertainties that have not yet been identified or which we currently believe are immaterial may also harm our operating results and financial condition.

The recent economic downturn and recession has materially and adversely affected our business and a continuation of current economic conditions could cause further harm to our business, financial condition, results of operations and cash flows.

        Demand for staffing services is significantly affected by the general level of economic activity. According to the National Bureau of Economic Research, the United States economy has been in a recession since December 2007. We expect that the current significant economic downturn and recession in the economy will continue to materially and adversely impact the demand for staffing services and the Company's performance. As economic activity slows, many customers reduce their utilization of temporary employees before undertaking layoffs of their regular full-time employees. Further, demand for permanent placement services also slows as the labor pool directly available to our customers' increases, making it easier for them to identify new employees directly. In addition, we have experienced and expect to continue to experience increased pricing pressures from other staffing companies adversely affecting our revenues and operating margins. These adverse impacts may persist and worsen over the next several quarters if not longer, resulting in a material adverse effect on our financial condition.

The process and uncertainties relating to the proposed Merger could adversely affect our business.

        We entered into the Merger Agreement with Koosharem Corporation, a California corporation doing business as Select Staffing and Select Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Koosharem, on January 28, 2009. The pendency of the Merger could adversely affect our ability to obtain and retain customers, to recruit temporary employees and to retain our existing employees. Further, the attention of our management will be directed at least in part toward the completion of a transaction and thus diverted in part from day-to-day operations. Our business and operating results could be adversely affected by these factors.

        Completion of the Merger is subject to a number of conditions which are largely or partially outside of our control, including the ability of Koosharem to finalize the financing required in a manner satisfactory to our workers compensation carrier, our ability to avoid declines in our revenues, and our ability to maintain a specified cash and cash equivalent balance immediately prior to closing, all as set forth in the Merger Agreement. A failure to complete the Merger would require us to address immediate issues with our existing lenders and to raise additional capital at a time when our

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business may have declined substantially and our alternatives are limited. There can be no assurance that we would be able to successfully address issues with our lenders, raise additional capital or address other problems we might face at the time if the Merger is not completed. Accordingly, if the Merger is not completed, we may be immediately unable to, among other things: (1) adequately collateralize our workers' compensation obligations and obtain sufficient workers' compensation coverage to support our operations and (2) satisfy our liquidity requirements and continue our operations as a going concern. Under these circumstances, we may be required to seek alternative transactions and/or consider filing for bankruptcy protection. There can be no assurance that any other alternative transaction similar to the merger would be available to us. Further, whether or not the proposed Merger is completed, we will have incurred substantial costs related to the Merger.

        While the Merger Agreement is in effect, we are subject to significant restrictions on our business activities and must generally operate our business in the ordinary course (subject to certain exceptions or the consent of Koosharem) as set forth in the Merger Agreement. These restrictions on our business activities could limit our ability to respond to changes in business conditions or other events, and therefore could have a material adverse effect on our future results of operations or financial condition.

We are currently in default under the primary credit facility that we use to finance our operations. If we are unable to obtain a waiver or continued forbearance with respect to this default, we may be unable to satisfy our liquidity requirements and continue our operations as a going concern.

        We are currently in default under the Financing Agreement, dated as of February 14, 2008 (the "Financing Agreement"), among Westaff (USA), Inc. (as borrower), the Company (as parent guarantor), U.S. Bank National Association (as agent for the lenders, letter of credit issuer and a lender) and Wells Fargo Bank, National Association (as a lender). We finance our operations primarily through cash generated by our operating activities and through borrowings under our revolving line of credit under the Financing Agreement. On May 23, 2008, we received a notice of default from U.S. Bank (as agent for itself and Wells Fargo Bank) stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to our failure to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for our fiscal period ended April 19, 2008; and (2) as a result of the Event of Default, effective May 21, 2008, U.S. Bank increased the rate of interest to the default rate of interest on the borrowings outstanding under our line of credit. We had no borrowings outstanding under the Financing Agreement, but do have $27.3 million of outstanding letters of credit supporting our workers' compensation obligations. While the Company previously entered into a series of forbearance agreements providing for the lenders to forbear from exercising their default rights and remedies under the Financing Agreement through December 19, 2008, the lenders' agreement to forbear have not been extended past December 19, 2008. Accordingly, the Company does not currently have any waiver or continued forbearance in respect of the Event of Default described above, and the lenders may elect at any time to pursue remedies available to them under the Financing Agreement, such as limiting or terminating Westaff (USA), Inc.'s right to borrow under the Financing Agreement or electing not to renew letters of credit issued under the Financing Agreement.

        The Company is currently in discussions with U.S. Bank and Wells Fargo to seek a waiver or continued forbearance in respect of the Event of Default. There can be no assurance that the Company will be able to obtain a waiver or continued forbearance or that such a waiver or continued forbearance would be on terms acceptable to the Company. If the Company is unable to obtain a waiver or continued forbearance and the lenders elect to pursue remedies under the Financing Agreement, such as limiting or terminating the Company's right to borrow under the Financing Agreement or electing not to renew letters of credit, it would have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and ability to continue our operations as a going concern. Under these circumstances, and unless the pending merger with Koosharem is completed, we may be required to seek alternative transactions, raise additional capital and/or consider filing for

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bankruptcy protection. There can be no assurance that any alternative transactions and/or additional capital would be available to us in the current challenging economic environment.

        On January 28, 2009, the carrier under the Company's existing workers compensation insurance program and the beneficiary of a letter of credit expiring on February 28, 2009 previously issued by U.S. Bank under the Financing Agreement, was notified by U.S. Bank that such letter of credit will not be renewed. While the Company is currently in discussions with U.S. Bank and Wells Fargo to seek and extension of such letter of credit, there can be no assurances that the Company will be able to obtain such an extension.

        In response to our short term forbearance issues, on August 25, 2008, the Company secured a $3.0 million Subordinated Loan facility with its principal stockholder, Delstaff, LLC. This facility may be used by the Company for working capital and general business purposes during the term of the facility. The unpaid principal balance under the Subordinated Loan bears interest at an annual rate of twenty percent (20%). Interest is payable-in-kind and accrues monthly in arrears on the first day of each month as an increase in the principal amount of the Subordinated Loan. A default rate applies on all obligations under the Subordinated Loan Agreement from and after the Maturity Date (August 15, 2009) and also during the existence of an Event of Default (as defined in the Subordinated Loan Agreement) at an annual rate of ten percent (10%) also payable-in-kind over the then-existing applicable interest rate and if principal is not repaid on the Maturity Date, an additional 5% of outstanding principal must be paid along with the default rate interest. The obligations under the Subordinated Loan Agreement are secured by a security interest in substantially all of the existing and future assets (the "Subordinated Collateral") of the Company. The lien granted to the Subordinated Lender in the Subordinated Collateral is subordinated to the lien in that same collateral granted to U.S. Bank. Borrowings in excess of $1.0 million require the Subordinated Lender approval. The Subordinated Loan may be prepaid without penalty, subject to approval by U.S. Bank and the terms of an Intercreditor Agreement. Under certain circumstances, the Company must prepay all or a portion of any amounts outstanding under the Subordinated Loan Agreement, subject to the terms of the Intercreditor Agreement. The outstanding loan balance at November 1, 2008 was $2.2 million, which includes a $0.2 million facility fee that was added to the loan balance upon receipt of the initial advance. Accrued and unpaid interest on this note at November 1, 2008 was $40,000. The Company borrowed an additional $500,000 on the subordinated loan on January 7, 2009 and an additional $500,000 on January 29, 2009.

We have significant working capital requirements and are heavily dependent upon our ability to borrow money to meet these working capital requirements.

        We require significant amounts of working capital to operate our business and to pay expenses relating to employment of temporary employees. 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, we must maintain sufficient cash availability to pay temporary personnel prior to receiving payment from customers. Any lack of access to liquid working capital would have an immediate, material, and adverse impact on our business. There can be no assurance that we will be able to access the funds necessary for our liquidity requirements, especially in light of the recent downturn in the economy and dislocations in the credit and capital markets.

        We finance our operations primarily through cash generated by our operating activities and through borrowings under our revolving credit facilities. Our primary credit facility is the Financing Agreement with U.S. Bank and Wells Fargo, which provides for a five-year revolving credit facility with an aggregate commitment of up to $33.0 million. In addition, our former Australian subsidiary maintained a $12.0 million Australian dollar facility agreement with GE Capital that was due to expire in May 2009. As of November 1, 2008, our total borrowing capacity was $3.3 million, consisting of $1.5 million for our domestic operations and $1.8 million for our former Australian operations. On

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September 27, 2008, the Company entered into a definitive agreement to sell its Australia and New Zealand subsidiaries and the sale was completed on November 10, 2008. In connection with the agreement, the Australian GE Capital debt was paid in full.

        The amounts we are entitled to borrow under our revolving credit facilities are calculated daily and are dependent on available cash and eligible trade accounts receivable generated from operations, which are affected by financial, business, economic and other factors, as well as by the daily timing of cash collections and cash outflows. If we experience a significant and sustained drop in operating profits, or if there are unanticipated reductions in cash inflows or increases in cash outlays, we may be subject to cash or availability shortfalls. If such a shortfall were to occur for even a brief period of time, it may have a significant adverse effect on our business, financial condition or results of operations. Furthermore, our receivables may not be adequate to allow for borrowings for other corporate purposes, such as capital expenditures or growth opportunities, and we would be less able to respond to changes in market or industry conditions.

        We typically experience significant seasonal and other fluctuations in our borrowings and borrowing availability, particularly in the United States, and aggressively manage our cash to ensure adequate funds to meet working capital requirements. Such steps include working to improve collections and adjusting the timing of cash expenditures and reducing operating expenses where feasible.

        We have historically experienced periods of negative cash flow from operations and investment activities, especially during seasonal peaks in revenue experienced in the third and fourth fiscal quarters of the year and in economic downturns. In addition, we are required to pledge amounts to secure letters of credit that collateralize certain workers' compensation obligations, and these amounts may increase in future periods. Any such increase in pledged amounts or sustained negative cash flows or reductions in accounts receivable would decrease amounts available for working capital purposes and could have an adverse effect on our liquidity and financial condition.

We may be unable to adequately collateralize our workers' compensation obligations at their current levels or at all.

        We are contractually obligated to collateralize our workers' compensation obligations under our workers' compensation program through irrevocable letters of credit, surety bonds or cash. As of November 1, 2008, our aggregate collateral requirements under these contracts have been secured through $27.3 million of letters of credit obtained through our U.S. Bank facility. Our workers' compensation policy expired November 1, 2008 and it has been extended through April 1, 2009. As part of the extension the Company paid $1.0 million in cash collateral on October 31, 2008 and will pay an additional $250,000 by February 28, 2009. These collateral requirements are significant, place pressure on our liquidity and working capital capacity and are dependent on the Company having sufficient accounts receivable and cash balances. If we are not able to obtain a renewal of our letters of credit at a level sufficient to meet our collateral requirements, we could be unable to obtain sufficient workers' compensation coverage to support our operations.

        On January 28, 2009, the Company's workers' compensation carrier was notified by the issuing Bank that the letter of credit issued in favor of the carrier and expiring on February 28, 2009 will not be renewed. The Company is currently in discussions with U.S. Bank and Wells Fargo to seek an extension of the letter of credit however there can be no assurances that the Company will receive an extension. The carrier has the right to draw on the letter of credit prior to the expiration. If the carrier draws on the Letter of Credit, the issuing Bank may require the Company to fund the draw in cash which would require the Company to borrow under its credit facility. The Company is currently in default under the terms of its credit facility and in discussions with U.S. Bank and Wells Fargo to seek a waiver or continued forbearance in respect of the event of default. There can be no assurance that the Company will be able to obtain a waiver or continued forbearance or that such a waiver or

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continued forbearance would be on terms acceptable to the Company. If the Company is unable to obtain a waiver or continued forbearance and the lenders elect to pursue remedies under the Financing Agreement, such as limiting or terminating the Company's right to borrow under the Financing Agreement or calling the loan, there can be no assurance that the Company could find alternative sources of capital to repay the loan.

We are exposed to credit risks on collections from our customers due to, among other things, our assumption of the obligation to make wage, tax, and regulatory payments to our temporary employees.

        We are exposed to the credit risk of some of our customers. Temporary personnel are typically paid on a weekly basis while payments from customers are generally received 30 to 60 days after billing. We generally assume responsibility for and manage the risks associated with our payroll obligations, including liability for payment of salaries and wages, payroll taxes as well as group health insurance. These obligations are fixed and become a liability of ours, whether or not the associated client to whom these employees have been assigned makes payments required by our service agreement, which exposes us to credit risks. We attempt to mitigate these risks by billing on a frequent basis, which typically occurs daily or weekly. In addition, we establish an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required and timely payments. Further, we carefully monitor the timeliness of our customers' payments and impose strict credit standards. However, there can be no assurance that such steps will be effective in reducing these risks. Finally, the majority of our accounts receivable is used to secure our revolving credit facilities, which we rely on for liquidity. If we fail to adequately manage our credit risks associated with accounts receivable, our financial position could be adversely impacted. Additionally, to the extent that recent turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers' ability to pay could be adversely impacted, which in turn could have a material adverse effect on our business, financial condition or results of operations.

Price competition in the staffing industry continues to be intense, and pricing pressures from both competitors and customers could adversely impact our financial decisions.

        We expect the level of competition to remain high in the future, and competitive pricing pressures will continue to make it difficult for us to raise our prices to immediately and fully offset increased costs of doing business, including increased labor costs, costs for workers' compensation and, domestically, state unemployment insurance. If we are not able to effectively compete in our targeted markets, our operating margins and other financial results will be harmed and the price of our securities could decline. We also face the risk that our current or prospective customers may decide to provide services internally.

The market for our stock may be limited, and the stock price may continue to be extremely volatile.

        The average daily trading volume for our common stock on the NASDAQ Global Market was approximately 21,044 shares during the fiscal year ended November 1, 2008. Accordingly, the market price of our common stock is subject to significant fluctuations that have been, and may continue to be, exaggerated because an active trading market has not developed for our common stock. We believe that the price of our common stock has also been negatively affected by the fact that our common stock is thinly traded and also due to the absence of analyst coverage. The lack of analyst reports about our stock may make it difficult for potential investors to make decisions about whether to purchase our stock and may make it less likely that investors will purchase the stock, thus further depressing the stock price. These negative factors may make it difficult for stockholders to sell our common stock, which may result in losses for investors.

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Recently our common shares traded at prices below $1.00. If this continues in the future, our common shares could be subject to delisting by NASDAQ Stock Market.

        Our common stock currently trades on the NASDAQ Global Market. On September 10, 2008 we received a letter from the NASDAQ Stock Market ("NASDAQ") indicating that for the last 30 consecutive business days prior to the date of the letter, the bid price of Westaff's common stock had closed below the minimum $1.00 per share requirement for continued inclusion under NASDAQ Marketplace Rule 4450 (a)(5) and that we had until March 9, 2009 for the bid price of our common stock to close at $1.00 per share or more for a minimum of 10 consecutive business days to regain compliance. As of the date of this Annual Report on Form 10-K our common stock has not been delisted and continues to be listed on the NASDAQ Global Market. On October 16, 2008, NASDAQ implemented a temporary suspension of the rules requiring a minimum $1.00 closing bid price and a minimum market value of publicly held shares. On December 23, 2008, NASDAQ extended this suspension until April 20, 2009. As a result of the suspension we now remain at the same stage of the compliance process at the time of the suspension. In the event Westaff does not regain compliance, or NASDAQ does not further extend this suspension, NASDAQ will reinstate the compliance process for Westaff's common stock. If our common shares are delisted from the NASDAQ, there may be a limited market for our shares, trading our stock may become more difficult and our share price could decrease even further. If our common shares are not listed on a national securities exchange or the NASDAQ, potential investors may be prohibited from or be less likely to purchase our common shares, limiting the trading market for our stock even further.

        In February 2009, the Company was notified by NASDAQ that the closing bid price of Westaff's common stock has been at $1.00 per share or greater for at least 10 consecutive business days. Accordingly, the Company has regained compliance with Marketplace Rule 4450(a)(5) and this matter is now closed.

If we fail to maintain effective internal control over our financial reporting, we may cause investors to lose confidence in our reported financial information, which could have an adverse effect on our stock price.

        Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC regulations and proposed rules, we are required to include in our annual report on Form 10-K a report that assesses the effectiveness of our internal control over financial reporting. In addition, the SEC approved a one-year extension of the compliance date for smaller public companies, therefore, beginning with our Form 10-K for the 2010 fiscal year our external auditors will be required to audit our internal control over financial reporting report and include their attestation on that report. The process of fully documenting and testing our internal control procedures in order to satisfy these requirements have resulted and are likely to continue to result in increased general and administrative expenses and the diversion of management time and attention from profit-generating activities to compliance activities. Furthermore, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective and our business may be harmed. Market perception of our financial condition and the trading price of our stock may also be adversely affected and customer perception of our business may suffer.

Our principal stockholder, together with its affiliates, controls a significant amount of our outstanding common stock thus allowing them to exert significant influence on our management and affairs.

        As of November 1, 2008, our principal stockholder, DelStaff LLC ("DelStaff"), together with its affiliates, controls approximately 49.5% of the total outstanding shares of our common stock. The members of DelStaff are H.I.G. Staffing, 2007, Ltd., Alarian Associates, Inc. and Michael T. Willis. As our principal stockholder, DelStaff and its affiliates have the ability to significantly influence all matters submitted to our stockholders for approval, including the election of directors, and to exert significant influence over our management and affairs. On April 30, 2007, we entered into a Governance

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Agreement with DelStaff, Mr. Willis and Mr. Stover. On May 9, 2007, pursuant to the terms of the Governance Agreement, we expanded the size of our Board of Directors from five to nine directors and appointed the following DelStaff nominees to the Board: Michael T. Willis, John R. Black, Michael R. Phillips, Gerald E. Wedren and John G. Ball. DelStaff also has the ability to strongly influence any merger, consolidation, sale of substantially all of our assets or other strategic decisions affecting us or the market value of the stock. This concentration of stock and voting power could be used by DelStaff to delay or prevent an acquisition of Westaff or other strategic action or result in strategic decisions that could negatively impact the value and liquidity of our outstanding stock.

We derive a significant portion of our revenue from franchise agent operations.

        Franchise agent operations comprise a significant portion of our revenue. As of November 1, 2008, franchisees represented 40.1% of gross receipts. In addition, our ten largest franchise agents (based on sales volume) accounted for 27.5% of our revenue. There can be no assurances that we will be able to attract new franchisees or that we will be able to retain our existing franchisees. The loss of one or more of our franchise agents and any associated loss of customers and sales could have a material adverse effect on our results of operations.

Our service agreements may be terminated on short notice, leaving us vulnerable to loss of a significant amount of customers in a short period of time.

        Our service agreements are generally cancellable with little or no notice by the customer to us. As a result, our customers can terminate their agreement with us at any time, making us particularly vulnerable to a significant decrease in revenue within a short period of time that could be difficult to quickly replace.

Our reserves for workers' compensation claims may be inadequate to cover our ultimate liability, and we may incur additional charges if the actual amounts exceed the reserved amounts.

        We maintain reserves to cover our estimated liabilities for workers' compensation claims based upon actuarial estimates of the future cost of claims and related expenses which have been reported but not settled, and that have been incurred but not yet reported. The determination of these reserves is based on a number of factors, including current and historical claims activity, medical cost trends and developments in existing claims. Reserves do not represent an exact calculation of liability and are affected by both internal and external events, such as adverse development on existing claims, changes in medical costs, claims handling procedures, administrative costs, inflation, legal trends and legislative changes. Reserves are adjusted as necessary to reflect new claims and existing claims development, and such adjustments are reflected in the results of the periods in which the reserves are adjusted. While we believe our judgments and estimates are adequate, if our reserves are insufficient to cover our actual losses, an adjustment could be charged to expense that may be material to our earnings.

Workers' compensation costs for temporary employees may continue to rise and reduce margins and require more liquidity.

        In the United States, we are responsible for and pay workers' compensation costs for our regular and temporary employees. In recent years, these costs have risen substantially as a result of increased claims, general economic conditions, increases in healthcare costs and governmental regulations. The frequency of new claims has fallen in fiscal 2008 as compared to prior years, yet the cost per claim continues to increase. Under our workers' compensation insurance program, we maintain "per occurrence" insurance, which only covers claims for a particular event above a deductible. This deductible has been increased for our policy year ending November 1, 2008 from $500,000 to $750,000 per claim for fiscal 2008 claims. Our workers' compensation insurance policy expired November 1, 2008 and we have extended the policy through April 1, 2009. We have provided a cash payment of $1 million which was recorded as a short term deposit at November 1, 2008 and we will pay an additional $0.3 million in collateral by February 28, 2009. Should our workers' compensation premium costs

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continue to increase in the future, there can be no assurance that we will be able to increase the fees charged to our customers to keep pace with increased costs or if we were unable to obtain insurance on reasonable terms or forced to significantly increase our deductible per claim, our results of operations, financial condition and liquidity could be adversely affected.

Our success is impacted by our ability to attract and retain qualified temporary and permanent candidates.

        We compete with other staffing services to meet our customers' needs, and we must continuously attract reliable candidates to meet the staffing requirements of our customers. Consequently, we must continuously evaluate and upgrade our base of available qualified personnel to keep pace with changing customer needs and emerging technologies. Furthermore, a substantial number of our temporary employees during any given year will terminate their employment with us and accept regular staff employment with our customers. 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 candidates will continue to be available to us in sufficient numbers and on acceptable terms to us. The failure to identify, recruit, train and place candidates as well as retain qualified temporary employees over a long period of time could materially adversely affect our business.

The staffing industry is highly competitive with limited barriers to entry which could limit our ability to maintain or increase market share.

        The staffing industry is highly competitive with limited barriers to entry and continues to undergo consolidation. We compete in regional and local markets with large full service agencies, specialized temporary and permanent placement services agencies and small local companies. While some competitors are smaller than us, they may enjoy an advantage in discrete geographic markets because of a stronger local presence. Other competitors have greater marketing, financial and other resources than us that, among other things, could enable them to attempt to maintain or increase their market share by reducing prices. Furthermore, in past years 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 us to obtain or retain business.

The cost of unemployment insurance for temporary employees may rise and reduce our margins.

        In the United States, we are responsible for and pay unemployment insurance premiums for our temporary and regular employees. At times, these costs have risen as a result of increased claims, general economic conditions and government regulations. Should these costs continue to increase, there can be no assurance that we will be able to increase the fees charged to our customers in the future to keep pace with the increased costs, and if we do not, our results of operations and liquidity could be adversely affected.

Our information technology systems are critical to the operations of our business.

        Our information management systems are essential for data exchange and operational communications with branches spread across large geographical distances. We have replaced key component hardware and software including backup systems within the past 12 months. On November 12, 2007, we implemented a new accounts receivable billing and temporary payroll system. The new system receives information from our custom built front office system. We experienced technical issues after conversion that were not detected during the testing phases. These issues affected both the payroll and billing systems. We believe that we have identified and resolved the significant issues. These issues were disruptive to our business and could have affected customer and employee relations. Additionally, these issues required significant amount of management time that impacted our ability to sell new services during the first half of fiscal 2008. We have made progress in resolving these

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specific payroll and billing systems issues. However, any future interruption, impairment or loss of data integrity or malfunction of these systems could severely impact our business, especially our ability to timely and accurately pay employees and bill customers.

Our business is subject to extensive government regulation, which may restrict the types of employment services that we are permitted to offer or result in additional tax or other costs that adversely affect our revenues and earnings.

        We are in the business of employing people and placing them in the workplace of other businesses on either a temporary or permanent basis. As a result, we are subject to extensive laws and regulations relating to employment. Changes in laws or government regulations may result in prohibition or restriction of certain types of employment services we are permitted to offer or the imposition of new or additional benefit, licensing or tax requirements that could reduce our revenues and earnings. There can be no assurance that we will be able to increase the fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes in laws or government regulations. Any future changes in laws or government regulations may make it more difficult or expensive for us to provide staffing services and could have a material adverse effect on our business, financial condition or results of operations.

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

        The risks related to engaging in our business include but are not limited to:

•

claims by our placed personnel of discrimination and harassment directed at them, including claims arising from the actions of our customers;

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workers' compensation claims and other similar claims;

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violations of wage and hour laws and requirements;

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claims of misconduct, including criminal activity or negligence on the part of our placed personnel;

•

claims by our customers relating to actions by our placed personnel, including property damage and personal injury, misuse of proprietary information and misappropriation of assets or other similar claims; and

•

immigration related claims.

        In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management team, and therefore, could have a negative effect on our business, financial conditions and results of operations. In some instances, we have agreed to indemnify our customers against some or all of these types of liabilities. We have policies and guidelines in place to help reduce our exposure to these risks and have purchased insurance policies against certain risks in amounts that we currently believe to be adequate. However, there can be no assurance that our insurance will be sufficient in amount or scope to cover these types of liabilities or that we will be able to secure insurance coverage for such risks on affordable terms. Furthermore, there can be no assurance that we will not experience these issues in the future or that they could have a material adverse effect on our business.

We are involved in an action taken by the California Employment Development Department.

        During the fourth quarter of fiscal 2005, we were notified by the California Employment Development Department ("EDD") that our domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004. The total assessment by the EDD of additional unemployment taxes for both years, net of applied overpayments is approximately

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$1.5 million including interest at applicable statutory rates. Management believes that it has properly calculated its unemployment insurance tax and is in compliance with all applicable laws and regulations. The Company has timely appealed the ruling by the EDD and is working with the outside counsel to resolve this matter. Additionally, management contends that the notification by the EDD of the 2004 assessment was not timely and holds the position that the assessment is procedurally invalid. Consequently, at November 1, 2008, the Company has no reserve for the 2004 assessment and has accrued the assessment for 2005 of $0.3 million, including interest and net of an applied overpayment. Although we believe that we have properly calculated our unemployment insurance tax and are in compliance with all applicable laws and regulations, there can be no assurances this will be settled in our favor. Management believes the Company is well positioned to defend against the un-accrued portion and the ultimate resolution of this matter will not have a material adverse effect on the Company's consolidated financial statements.

We are 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.

        We are regularly involved in a variety of litigation arising out of our business and, in recent years, have paid significant amounts as a result of adverse arbitration awards. 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.

We have assets on our balance sheet for which their realization is dependent on our future cash flows.

        As of November 1, 2008, we have intangibles of $3.5 million. During the Company's third quarter of fiscal year 2008 in light of the continued decline in revenue and the continued decline in the market capitalization of the Company, management determined that an interim impairment test was necessary during the third quarter of 2008. Based on the impairment evaluation as of July 12, 2008, it was determined that the indefinite life franchise right intangible was impaired by $0.2 million. Such an impairment charge was measured in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" as the excess of the carrying value over the fair value of the asset. After completing the intangible asset impairments, the Company compared the fair value of the US Domestic Business Services reporting unit to its carrying value and determined that the reporting unit was impaired. Upon completion of Step 2 of the impairment test, the Company recorded a goodwill impairment of $11.4 million in relation to its US Domestic Business Services reporting unit. Given the continued decline in revenues in the fourth quarter of fiscal 2008, the Company again performed an impairment test for its indefinite life franchise right intangibles but determined there was no material impairment as of November 1, 2008.

        A majority of the remaining intangible asset balance of $3.5 million as of November 1, 2008 relates to an indefinite life franchise right relating to the Houston market. If we are unable to maintain our projected levels of cash flows for this market, we may need to write off a portion or all of these assets which would result in a reduction of our assets and stockholders equity. Furthermore, under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company is required to assess the recoverability of its long-lived assets (such as its property and equipment) whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated cash flows expected to result from its use and eventual disposition. If we are unable to generate adequate cash flows we may need to write off a portion of our long-lived assets.

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Improper disclosure of employee and customer data could result in liability and harm to our reputation.

        Our business involves the use, storage and transmission of information about our employees and their customers. It is possible that our security controls over personal data and other practices we and our third party service providers follow may not prevent the improper access to or disclosure of personally identifiable information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue. Further, data privacy is subject to frequently changing rules and regulations. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

        None.

ITEM 2.    PROPERTIES.

        We lease three adjacent buildings in Walnut Creek, California, consisting of approximately 50,000 square feet, which house our executive and administrative offices. The lease is for a term of seven years which commenced on December 12, 2002.

        In addition, we lease space for our Company-owned 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. Management 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 our business, we are periodically threatened with or named as a defendant in various lawsuits. The principal risks that we insure against, subject to and upon the terms and conditions of our various insurance policies, are workers' compensation, general liability, automobile liability, property damage, alternative staffing errors and omissions, fiduciary liability and fidelity losses.

        During the fourth quarter of fiscal 2005, we were notified by the California Employment Development Department ("EDD") that our domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004. The total assessment by the EDD of additional unemployment taxes for both years, net of applied overpayments, is approximately $1.5 million including interest at applicable statutory rates. Management believes that it has properly calculated its unemployment insurance tax and is in compliance with all applicable laws and regulations. The Company has timely appealed the ruling by the EDD and is working with the outside counsel to resolve this matter. Additionally, management contends that the notification by the EDD of the 2004 assessment was not timely and holds the position that the assessment is procedurally invalid. Consequently, at November 1, 2008, the Company has no reserve for the 2004 assessment and has accrued the assessment for 2005 of $0.3 million, including interest and net of an applied overpayment. Although we believe that we have properly calculated our unemployment insurance tax and are in compliance with all applicable laws and regulations, there can be no assurances this will be settled in our favor. Management believes the Company is well positioned to defend against the un-accrued portion and the ultimate resolution of this matter will not have a material adverse effect on the Company's consolidated financial statements.

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

        None.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

        Market Information.    Our Common Stock has been included for quotation in the NASDAQ Global Market, formerly 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.

		High		Low
Fiscal 2007:
	First Quarter ended January 20, 2007		5.73		4.15
	Second Quarter ended April 14, 2007		5.91		4.74
	Third Quarter ended July 7, 2007		5.71		4.24
	Fourth Quarter ended November 3, 2007		5.18		3.47
Fiscal 2008:
	First Quarter ended January 26, 2008		4.23		3.52
	Second Quarter ended April 19, 2008		4.11		2.00
	Third Quarter ended July 12, 2008		2.15		1.02
	Fourth Quarter ended November 1, 2008		1.16		0.23
Fiscal 2009:
	First Quarter ended January 24, 2009		0.92		0.36

        On February 11, 2009, the closing reported sales price on NASDAQ for our Common Stock was $1.12 per share. As of February 11, 2009, there were approximately 61 stockholders of record.

        Sales of Unregistered Securities.    During fiscal 2008, we did not sell any unregistered securities.

        Issuer Purchases of Equity Securities.    None during the fourth quarter of fiscal 2008.

        Dividends.    We did not declare or pay dividends during fiscal 2006, 2007 or fiscal 2008. Further, our current credit facilities prohibit payment of dividends, so we are not currently contemplating a dividend declaration.

        Securities Authorized Under Equity Plans.    The following table sets forth securities authorized for issuance under equity compensation plans as of November 1, 2008. All applicable equity compensation plans were previously approved by security holders.

EQUITY COMPENSATION PLAN INFORMATION

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		584,000	$	2.47		973,000

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ITEM 6.    SELECTED FINANCIAL DATA.

		Fiscal Year
		2008(1)/(2)/(5)			2007(3)/(5)			2006(5)		2005(4)/(5)		2004(5)
		(Amounts in Thousands, Except Per Share Amounts and Number of Offices)
Revenue		$	324,495		$	439,822		$	482,153	$	470,971	$	470,414
Operating income (loss) from continuing operations(a)			(24,901	)		(5,500	)		3,377		3,174		1,273
Income (loss) from continuing operations(b)			(47,050	)		(4,307	)		1,421		17,727		(468	)
Earnings (loss) per share—continuing operations
	Basic	$	(2.82	)	$	(0.26	)	$	0.09	$	1.09	$	(0.03	)
	Diluted	$	(2.82	)	$	(0.26	)	$	0.09	$	1.08	$	(0.03	)
Balance Sheet data (at end of period):
Working capital		$	18,477		$	39,191		$	41,892	$	40,626	$	33,604
Total assets			74,991			141,292			139,265		138,782		122,408
Short-term debt and capital lease obligations			4,737			9,381			7,135		8,911		16,199
Long-term debt and capital lease obligations (excluding current portion)			165			752			833		3,174		2,125
Stockholders' equity		$	18,619		$	65,895		$	66,009	$	61,621	$	39,847
Other operating data:
Number of offices (at end of period)
Company-owned			113			141			180		175		187
Franchise agent			61			63			58		63		68
Licensed			0			0			1		1		1
	Total		174			204			239		239		256

(a)

Amounts exclude intercompany royalty income.

(b)

Amounts exclude intercompany royalty income and interest income.

(1)

Fiscal 2008 includes $11,540 of impairment of goodwill and intangibles ($0.69 per diluted share).

(2)

Fiscal 2008 includes $29,852 due to the establishment of valuation allowance for deferred tax assets ($1.79 per diluted share).

(3)

Fiscal 2007 includes $3,111 of restructuring expense ($0.19 per diluted share).

(4)

Fiscal 2005 includes the reversal of $16,681 of domestic deferred tax valuation allowance ($1.02 per diluted share).

(5)

Results of operations for United Kingdom, Australia, and New Zealand subsidiaires have been reclassified as discontinued operations for all years presented. (See Note 5 under Item. 15—Notes to the Consolidated Financial Statements).

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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 our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K for the fiscal year ended November 1, 2008. Our fiscal year ends on the Saturday nearest the end of October and consists of either 52 or 53 weeks. The fiscal year ended November 1, 2008 consisted of 52 weeks while the fiscal year ended November 3, 2007 consisted of 53 weeks.

        References in this Annual Report on Form 10-K to the "Company," "Westaff," "we," "our," and "us" refer to Westaff, Inc., its predecessor and their respective subsidiaries, unless the context otherwise requires.

Cautionary Statement Regarding Forward-Looking Statements

        This Annual Report on Form 10-K contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Except for statements that are purely historical, all statements included in this Annual Report on Form 10-K are forward-looking statements, and readers are cautioned not to place undue reliance on those statements. You can also identify these statements by the fact that they do not relate strictly to current facts and use words such as "will," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "target," "forecast," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. The forward-looking statements include, without limitation our ability to achieve better people and process efficiencies as a result of changes to our operational structure, our ability to enhance the profitability of our accounts through hiring industry-proven placement consultants, and our ability to reduce selling and administrative costs. These statements are only predictions, and actual events or results may differ materially. The forward-looking statements provide our current expectations or forecasts of future events. These forward-looking statements are made based on information available as of the date of this report and are subject to a number of risks and uncertainties that could cause the Company's actual results and financial position to differ materially from those expressed or implied in forward-looking statements and to be below the expectations of public market analysts and investors. Investors should bear this in mind as they consider forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in Part I, Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties faced by us.

        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.

Company Overview

        We provide 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 ("US") through our network of Company-owned and franchise agent offices. On March 31, 2008, the Company sold its former United Kingdom operations and related subsidiary. On November 10, 2008, the Company sold its Australia and New Zealand subsidiaries pursuant to a definitive agreement that was previously entered into on September 27, 2008. The sale was completed in the first quarter of fiscal year 2009 and is described in Note 5 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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        We offer a wide range of staffing solutions, including permanent placement, replacement, supplemental and on-site temporary programs to businesses and government agencies. Our primary focus is on recruiting and placing clerical/administrative and light industrial personnel. We have 60 years of experience in the staffing industry and currently we operate through a network of 157 offices operated domestically in 42 states. 62% of these offices were Company-owned and operated and 38% were operated by franchise agents. Our corporate headquarters provides support services to the field offices, in areas such as marketing, human resources, risk management, legal, strategic sales, accounting, and information technology.

        To complement our service offerings, which include temporary staffing, permanent placement, temp-to-hire services, payroll services and on-location programs, we utilize a number of tools focused on increasing our pool of qualified candidates. Additionally, we employ a robust, targeted marketing program as well as a consultative sales process, and both of these tools assist in our sales efforts to new and existing customers. Management believes all of these tools enhance our competitive edge and position us to effectively pursue high growth market niches.

        The staffing industry is highly competitive with generally few barriers to entry, which contributes to significant price competition as competitors attempt to maintain or gain market share. On a prospective basis, we believe our focus on increasing clerical and administrative sales, improving results from underperforming field offices and prudently managing costs will permit us to improve our operating margins.

        Our business tends to be seasonal, with sales for the first fiscal quarter typically lower than other fiscal quarters. This decrease results from the traditional holidays that are included within the first fiscal quarter, as well as other customer closures for the holiday season. These closures and post-holiday season declines in business activity negatively impact orders received from customers, particularly in the light industrial sector. Demand for staffing services historically tends to grow during the second and third fiscal quarters and has historically been greatest during the fourth fiscal quarter due largely to customers' planning and business cycles. The recent economic downturn in fiscal 2008 has negatively impacted this expected historical growth, reducing demand for temporary employees and adversely affecting our sales. We anticipate that we may continue to experience weaker demand for temporary employees throughout fiscal 2009.

        Domestically, payroll taxes and related benefits fluctuate with the level of payroll costs, but tend to represent a smaller percentage of revenue and payroll costs later in our fiscal year as federal and state statutory wage limits for unemployment are exceeded on a per employee basis. Workers' compensation expense, which is incurred domestically, generally varies with both the frequency and severity of workplace injury claims reported during a quarter. Adverse and positive loss development of prior period claims during subsequent quarters may also contribute to the volatility in our estimated workers' compensation expense.

Critical Accounting Policies

        The preparation of our consolidated financial statements and notes thereto in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions affecting the amounts and disclosures reported within those financial statements. These estimates are evaluated on an ongoing basis by management and generally affect revenue recognition, workers' compensation costs, collectibility of accounts receivable, impairment of goodwill and intangible assets, contingencies, litigation and income taxes. Management's estimates and assumptions are based on historical experiences and other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the financial statements.

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        Management believes the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements. There have been no material changes to these policies during fiscal 2008.

        Revenue Recognition.    We record revenue from the sale of temporary staffing, permanent placement fees, and temp-to-hire fees by our Company-owned and franchised operations. Temporary staffing revenue and the related labor costs and payroll taxes are recorded in the period in which the services are performed. Temp-to-hire fees are generally recorded when the temporary employee is hired directly by the customer. We reserve for billing adjustments, principally related to overbillings and client disputes, made after year end that relate to services performed during the fiscal year. The reserve is estimated based on historical adjustment data as a percent of sales. Permanent placement fees are recorded when the candidate commences full-time employment and, if necessary, sales allowances are established to estimate losses due to placed candidates not remaining employed for the permanent placement guarantee period, which is typically 30 - 60 days.

        We account for our revenue and the related direct costs of our franchise arrangements in accordance with Emerging Issues Task Force ("EITF") 99-19, "Recording Revenue Gross as a Principal versus Net as an Agent." We first assess whether we act as a principal in our transactions or as an agent acting on the behalf of others. When we are the principal in a transaction and have the risks and rewards of ownership, we record the transaction gross in our statements of operations. Where we act merely as an agent, only the net fees earned are recorded in our statements of operations. Under our traditional franchise agreement, we have the direct contractual arrangements with our customers and the contracts are binding on us. We are also the employer of all temporary employees in the franchise agents' operations and, as such, are obligated for the temporary employee payroll, related payroll taxes and the risk of loss for accounts receivable collection. As we retain the risks and rewards of ownership, the revenue and costs of services of our franchise agents are included in our results of operations. Each accounting period, we remit to each franchisee either a portion of the gross profit or a portion of the sales generated by its office(s), based on what the relevant franchise agreement dictates. Franchise agents' sales represented 40.1%, 35.8% and 35.1% of the Company's total revenue for the fiscal years 2008, 2007 and 2006, respectively. Franchise agents' share of gross profit represents the net distribution paid to the franchise agents for their services in marketing to customers, recruiting temporary employees and servicing customer accounts.

        We also had a licensing program with a single licensee who converted their business to a franchise operation in fiscal 2007. Under the licensing program, the licensee had the direct contractual relationships with the customers, held title to the related customer receivables and was the legal employer of the temporary employees. Accordingly, revenue and costs of services generated by licensee operations are not included in our consolidated financial statements. We advanced funds for payroll, payroll taxes, insurance and other related items. Fees are paid to us based either on a percentage of revenue or of gross profit generated by the licensee and such license fees are recorded by us as license fees and included in revenue. We have not entered into any new licensee arrangements for the periods reported and have no current plans to enter into such arrangements in the future.

        Workers' Compensation Reserves.    We self-insure the deductible amount related to domestic workers' compensation claims, which was $750,000 per claim for policy year 2008 and $500,000 per claim for policy years 2007 and 2006. We maintain reserves for workers' compensation costs based upon actuarial methods utilized to estimate the remaining undiscounted liability for the deductible portion of all claims, including those incurred but not reported. This process includes establishing loss development factors based on our historical claims experience and that of the staffing industry and applying those factors to current claims information to derive an estimate of our ultimate claims liability. The calculated ultimate liability is computed for each policy year and is then reduced by the cumulative claims payments to determine the required reserves. We evaluate the reserve and the underlying assumptions regularly throughout the year and make adjustments accordingly. The key

27

assumptions include but are not limited to classification of the work performed and estimates of total loss based on the severity of the injury. This data is based on past history and includes an estimate of future claims. At least annually, we obtain an independent actuarially determined calculation of the estimated costs of claims actually made to date, as well as claims incurred but not yet reported. If the actual costs of such claims and related expenses exceed the amounts estimated, additional reserves may be required. These reserves amounted to $23.3 million and $25.9 million at November 1, 2008 and November 3, 2007, respectively. While we believe that the recorded reserves are adequate, there can be no assurances that future, unfavorable changes to estimates relied upon in the determination of these reserves will not occur.

        Collectibility of Accounts Receivable.    We provide an allowance for uncollectible accounts receivable based on an estimation of credit losses and billing adjustments at a level deemed appropriate to adequately provide for known and inherent risks related to such amounts. The allowances are based on reviews of its history of losses, adjustments, current economic conditions and other factors that warrant consideration in estimating potential losses including known information specific to each customer. We evaluate this allowance on a regular basis throughout the year and make adjustments as the evaluation warrants. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. These allowances were $1.0 million at November 1, 2008, and $1.3 million at November 3, 2007. Our estimates are influenced by numerous factors including our large, diverse customer base, which is disbursed across a wide geographical area. No single customer accounted for more than 10% of accounts receivable for fiscal year 2008.

        Goodwill and Other Intangible Assets.    Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires that goodwill and certain intangible assets with indefinite useful lives no longer be amortized but instead be subject to an impairment test performed on an annual basis or whenever events or circumstances indicate that impairment may have occurred. Intangible assets with finite useful lives continue to be amortized over their useful lives. The valuation methodologies considered include analyses of estimated future discounted cash flows at the reporting unit level, publicly traded companies multiples within the temporary staffing industry and historical control premiums paid by acquirers purchasing companies similar to ours. As part of the assessment, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon market interest rates and the cost of capital at the valuation date. There are inherent uncertainties related to these factors and management's judgment in applying them to the analysis of goodwill impairment.

        Due to the presence of impairment indicators, such as a decrease in revenue, market capitalization and operating income in the third quarter of fiscal year 2008, management performed an impairment evaluation and determined that the indefinite life franchise right intangible was impaired by $0.2 million. Such an impairment charge was measured in accordance with SFAS 142 as the excess of the carrying value over the value of the asset.

        After completing the intangible asset impairments in the third quarter of fiscal year 2008, the Company compared the fair value of the Domestic Business Services reporting unit to its carrying value and determined that the reporting unit was impaired. Upon completion of the impairment test, the Company recorded a goodwill impairment of $11.4 million in relation to its Domestic Business Services reporting unit. The fair value of the Australia and New Zealand reporting units were greater than the net book value and accordingly, no further impairment testing was performed.

        Given the continued decline in revenues, the Company in the fourth quarter of fiscal 2008 again performed an impairment test under SFAS 142 for its indefinite life franchise right intangibles and Australia goodwill. As a result, goodwill of the Australia subsidiary was written down by $186,000.

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There was no material impairment on the indefinite life franchise right intangibles as of November 1, 2008.

        Income Taxes.    We account for income taxes by utilizing an asset and liability approach that requires recording deferred tax assets and liabilities for the future year consequences of events that have been recognized in our financial statements or tax returns. As required under SFAS No. 109, "Accounting for Income Taxes", we measure these expected future tax consequences based upon provisions of tax law as currently enacted. The effects of future changes in tax laws are not anticipated. Variations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations. We also provide a reserve for tax contingencies when we believe a probable and estimable exposure exists. The Company has deferred tax assets on its books from tax benefits from future deductions of workers compensation claims, tax credit carry forwards and net operating losses ("NOL"). The income tax provision from continuing operations at fiscal year ended November 1, 2008 was $19.8 million.

        At November 1, 2008 all of the Company's net deferred tax assets were offset with a valuation allowance as the Company believes it is more likely than not that all of the net deferred tax assets will not be realizable in the foreseeable future.

        Reserves for Legal and Regulatory Liabilities.    There are various claims, lawsuits and pending actions against us incident to our operations for which we have recorded liabilities that we believe are appropriate. We evaluate this reserve regularly throughout the year and make adjustments as needed. If the actual outcome of these matters is different than expected, an adjustment is charged or credited to expense in the period the outcome occurs or the period in which the estimate changes. 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 our financial condition.

Recent Accounting Pronouncements

        In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation Number (FIN) 48, "Accounting for Income Tax Uncertainties." FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. FIN 48 provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. Any differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We adopted FIN 48 during the first quarter of fiscal 2008. See Note 2.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB agreed to a one-year deferral for the implementation of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. We are currently evaluating the impact, if any that the adoption of SFAS No. 157 will have on the Company's operating results and financial condition.

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        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. We are evaluating the impact, if any that the adoption of SFAS No. 159 will have on the Company's operating results and financial condition.

        In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements" (an Amendment of ARB 51). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. In addition this statement establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 becomes effective for fiscal periods beginning after December 15, 2008. We are currently evaluating the impact of SFAS 160.

Executive Overview

        Our gross revenues from continuing operations for the fiscal year 2008 were $324.5 million, which represents a decline of $115.3 million, or 26.2% from fiscal year 2007. The decline in revenues was primarily due to the economic downturn that began in early fiscal 2008, the loss of two customers which together made up 6.9% of revenues for the fiscal year ended November 1, 2008, and the closing of a number of branch offices in fiscal year 2007. In addition, the decrease in revenue was a result of the termination of a number of unprofitable customer accounts in 2007 and the disruption in billing caused by our implementation of a new Pay/Bill system during the first quarter of fiscal year 2008.

        Our loss from continuing operations for the fiscal year 2008 was $47.0 million which was an increase of $42.7 million compared to the fiscal year 2007. The loss from continuing operations for the fiscal year 2008 includes non-cash, one time charges of $29.9 million of income tax expense resulting from the set up of a valuation allowance against 100% of our deferred tax assets, a goodwill and intangible asset impairment charge of $11.5 million, and an out of period adjustment for depreciation expense of $0.9 million. See Note 3.

        We have made changes in our domestic operational structure in an effort to achieve better people and process efficiencies. We are committed to improving the profitability of our organization and increasing our market share. We have had success in reducing our domestic selling and administrative costs in total and we are evaluating and implementing additional opportunities for savings. Further, we are divesting our international subsidiaries in order to concentrate on our core domestic business.

Recent Developments

        On November 10, 2008, the Company sold its former Australia and New Zealand subsidiaries for A$19 million (Australian dollars). A$13 million of the purchase price was paid at closing, A$3 million of the purchase price was funded by the seller and the remaining A$3 million of the purchase price will be payable in the form of a deferred payment due one year after closing. See Note 19.

        On January 28, 2009, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Koosharem Corporation, a California corporation doing business as Select Staffing

30

("Koosharem") and Select Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Koosharem ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation and a wholly-owned subsidiary of Koosharem (the "Merger"), in accordance with and subject to the terms and conditions set forth in the Merger Agreement.

        Concurrently with the execution of the Merger Agreement, our principal stockholder, DelStaff, LLC ("DelStaff"), entered into a Stock & Note Purchase Agreement with Koosharem (the "Purchase Agreement"), pursuant to which Koosharem will purchase, immediately prior to the effective time of the Merger: (1) all of the Company common stock that DelStaff then owns in exchange for first lien term loan debt to be issued by Koosharem under Koosharem's first lien credit facility bearing a face amount of $40,000,000 and (2) all of the then outstanding subordinated notes (the "DelStaff Subordinated Notes") issued by the Company to DelStaff under the Subordinated Loan Agreement, dated as of August 25, 2008, by and among the Company, Westaff (USA), Inc., Westaff Support, Inc., MediaWorld International (as borrowers) and DelStaff in exchange for first lien term loan debt to be issued by Koosharem under Koosharem's first lien credit facility bearing a face amount equal to the actual principal amount of the DelStaff Subordinated Notes then outstanding, but not to exceed $3,000,000.

        Pursuant to the terms and conditions of the Merger Agreement, at the effective time of the Merger: (1) each outstanding share of Company common stock (other than those owned by the Company, Koosharem, Merger Sub or any subsidiary of the Company, Koosharem or Merger Sub, and other than those shares with respect to which dissenters rights are properly exercised) will be cancelled and converted into the right to receive $1.25 per share in cash (the "Merger Consideration") and (2) each outstanding stock option to purchase shares of Company common stock, whether or not then exercisable or vested, will be cancelled and converted into the right to receive, within ten business days following the effective time of the Merger, an amount in cash (subject to applicable withholding taxes) equal to (a) the excess, if any, of the Merger Consideration over the per share exercise price of the stock option, multiplied by (b) the number of shares of Company common stock subject to the stock option.

        Consummation of the Merger is subject to the satisfaction of various conditions, including, among others, the receipt by Koosharem and Merger Sub of the financing pursuant to and on the terms contemplated by the applicable commitment letters, the consummation of the transactions under the Purchase Agreement, the requisite approval by the Company's stockholders, a requirement for the Company to hold a minimum of $9.5 million in cash and equivalents immediately prior to the closing date, the lack of any legal impediment to the Merger, and the lack of any Material Adverse Effect as specified in the Merger Agreement.

        Upon the recommendation of a special committee of independent members of the Company's board of directors (the "Special Committee"), all of the members of the Company's board of directors not affiliated with DelStaff approved the Merger Agreement and the Purchase Agreement. Robert W. Baird & Co. Incorporated provided a fairness opinion to the Special Committee.

        The Merger Agreement contains certain termination rights for both the Company, on the one hand, and Koosharem and Merger Sub, on the other hand. Upon any termination of the Merger Agreement, under specified circumstances, the Company may be required to pay Koosharem and Merger Sub a $2.0 million termination fee, and under other specified circumstances, Koosharem and Merger Sub may be required to pay the Company a $2.0 million termination fee.

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        The foregoing description of the Merger Agreement and the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement and the Purchase Agreement, as applicable. For additional and more detailed information regarding the Merger Agreement, please refer to our Current Report on Form 8-K that we filed with the Securities and Exchange Commission on February 2, 2009. Please also refer to the risk factors included in Part I, Item 1A "Risk Factors" of this Annual Report on Form 10-K under the heading "Risks Relating to the Pending Merger." The Company has agreed to file a proxy statement with the SEC in connection with the proposed Merger. The Company's stockholders are urged to read the proxy statement and other relevant materials when they become available because they will contain important information about the proposed Merger. The Company's stockholders will be able to obtain a free copy of the proxy statement and other related documents filed with the SEC by the Company (when they become available) at the SEC's website at www.sec.gov. The proxy statement and the other documents (when they become available) will also be available for free at the Company's website at http://www.westaff.com. The Company and its directors and executive officers may be deemed to be participants in the solicitation of proxies from stockholders in respect of the Merger Agreement and the Merger. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of stockholders in connection with the Merger will be set forth in the proxy statement when it is filed with the SEC. More detailed information regarding the identity of potential participants, and their direct or indirect interests, by securities, holdings or otherwise, will be set forth in the proxy statement to be filed with the SEC in connection with the proposed Merger.

Discontinued Operations

        On March 31, 2008, the Company sold its former United Kingdom operations and related subsidiary for cash payments of $6.3 million net of transaction costs of $0.2 million. In the second quarter of fiscal 2008 the Company recorded a pre-tax gain of $2.0 million ($1.2 million net of tax). During the third quarter of fiscal year 2008, the Company reduced the gain on the sale by about $0.3 million ($0.2 million net of tax) as a result of an amendment to the original sales agreement to forgive the buyer of various payables and royalties due to the Company in lieu of agreeing to any working capital adjustments. During the fourth quarter of fiscal year 2008, the Company further updated its gain calculation which still resulted in a pre-tax gain of $1.7 million but was $0.4 million net of tax. The reason for the change is that during the fourth quarter of fiscal 2008 the Company entered into an agreement to dispose of its two remaining foreign subsidiaries and it does not have any immediate plans to generate foreign source income in the foreseeable future. As a result, the Company determined it will likely not take the foreign tax credit in its income tax return for fiscal 2008 but rather will deduct the related foreign tax expenses in computing taxable income. The Company has reflected the results of the United Kingdom operations as discontinued operations for all years presented on the consolidated statement of operations.

        On November 10, 2008, the Company sold its former Australia and New Zealand subsidiaries as described in Note 5 and Note 19. In accordance with FASB Statement No. 144 the Company reclassified the consolidated balance sheets as of November 1, 2008 to show the assets and liabilities of these subsidiaries as held for sale. The Company also reclassified the operating results for these segments for all years presented as discontinued operations.

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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 revenue.

	Fiscal Year
	2008			2007			2006
Revenue		100.0	%		100.0	%		100.0	%
Cost of services		81.9	%		81.9	%		82.4	%
Gross Profit		18.1	%		18.1	%		17.6	%
Franchise agents' share of gross profit		4.4	%		3.9	%		3.8	%
Selling and administrative expenses		16.2	%		13.9	%		12.3	%
Impairment of goodwill and intangibles		3.6	%		0.0	%		0.0	%
Restructuring expenses		*			0.7	%		0.0	%
Depreciation and amortization		1.6	%		0.7	%		0.9	%
Operating (loss) income from continuing operations		(7.7	)%		(1.3	)%		0.7	%
Interest expense		0.8	%		0.5	%		0.4	%
Interest income		*			*			*
(Loss) income from continuing operations before income taxes		(8.4	)%		(1.8	)%		0.3	%
Income tax provision (benefit)		6.1	%		(0.8	)%		*
(Loss) income from continuing operations		(14.5	)%		(1.0	)%		0.3	%

*

less than 0.1%

Going Concern Considerations

        The Company has incurred operating losses since the second quarter of fiscal 2007, offset by slight operating income in the fourth quarter of fiscal 2007. The Company may incur additional losses in the future, particularly because of the current significant economic downturn and recession.

        The Company's operations, even if they perform in accordance with management's expectations, may not generate sufficient cash flow or accounts receivables to finance the Company's operations at current levels, collateralize workers' compensation liabilities, or permit the Company to expand its business. As a result, the Company expects to continue to rely on operational cash flow and debt financing to fund operations because equity financing is not likely to be available.

        As discussed in Note 7 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the Company has (through its wholly-owned subsidiary, Westaff (USA), Inc.) entered into a financing agreement with U.S. Bank National Association ("U.S. Bank") as agent, and the lenders thereto, which provides for a five-year revolving credit facility with an aggregate commitment of up to $33.0 million (the "Financing Agreement"). The Company is currently in default under certain covenants of the Financing Agreement and has entered into a Forbearance Agreement that provides for a forbearance period ending on December 19, 2008. While the Company is negotiating with its lenders for a waiver or continued forbearance in respect to this default, there can be no assurances that a waiver or continued forbearance can be obtained. If the Company is unable to obtain a waiver or continued forbearance on acceptable terms, the Company may be unable to access the funds necessary to satisfy its liquidity requirements, or may be unable to obtain letters of credit under the facility needed for the Company to obtain workers' compensation insurance. In that case, its business and operating results would be adversely affected and the Company may be unable to continue its operations as a going concern.

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        In response to the continued default, the Company secured a $3.0 million subordinated loan facility during the fourth quarter of fiscal 2008, of which the Company has used $2.2 million as of November 1, 2008 and has drawn an additional $1.0 million in the first and second quarter of fiscal year 2009. This facility may be used by the Company for their working capital and general business purposes during the term of the facility.

        The Company has extended its workers' compensation insurance through April 1, 2009 which required $1.0 million in cash collateral as of November 1, 2008 and $0.3 million to be paid by February 28, 2009. In addition, the letter of credit for the workers' compensation insurance expires on February 28, 2009 and the insurance carrier has received notification of non-renewal of the letter of credit from the issuing Bank. The forbearance agreement expired on December 19, 2008 and has not been extended. Among other things, the Company has responded to these issues by reducing its headcount by approximately 60 positions in the corporate and field offices during fiscal year 2008 and 65 positions in the first quarter of fiscal year 2009. This was accomplished by a combination of attrition and a planned reduction in force. Total severance amounts paid in fiscal year 2008 were immaterial and are included as part of selling and administrative expenses. The Company continues to look for and act on additional cost savings measures within the organization while it is exploring alternative financing arrangements and strategic partnering alternatives. See Note 19.

Fiscal 2008 compared to Fiscal 2007

Revenue

        Gross revenue from continuing operations totaled $324.5 million which represented a decrease of $115.3 million, or 26.2% from fiscal 2007.

        Fiscal 2008 contained fifty-two weeks while fiscal 2007 contained fifty-three weeks. After eliminating the effect of this extra week, sales of service declined $107.0 million or 24.8%. This was a result of a decrease in revenue from franchise operations as well as company-owned operations. Revenue from franchise operations declined 17.2% to $130.2 million due largely to a 21.5% decrease in billed hours as a result of economic downturn. Revenue from company-owned operations declined 30.6% to $195.3 million also due to a decrease of 32.8% in billed hours as a result of the economic downturn and customer losses related to the restructuring plan implemented in the third quarter of fiscal 2007.

        On a comparable 52 week basis the decline in total billable hours would have been 27.2% with the significant decline being driven in the domestic market primarily as a result of the economy. The decrease in gross revenue was also due to lower billings for several of our large customers. Total billings for the top 20 customers in fiscal year ended 2008 declined 12.2%, or $11.5 million to $82.4 million compared to the prior fiscal year, which was partially offset by an increase in average bill rate and increase in average bill pay spread. The average bill rate on a per hour basis for temporary services increased 3.4% compared to fiscal 2007. Additionally, revenue from domestic permanent placement and transition fees declined by 52.1% to $2.8 million compared to fiscal 2007.

Costs of services and gross profit

        Costs of services from continuing operations include hourly wages of temporary employees, employer payroll taxes, state unemployment and workers' compensation costs and other temporary employee-related costs. Costs of services from continuing operations decreased $94.6 million or 26.2% to $265.8 million for fiscal 2008 as compared to fiscal 2007.

        Gross margin from continuing operations decreased $20.8 million or 26.1% to $58.7 million during fiscal 2008 as compared to fiscal 2007. This decrease was primarily as a result of a decrease in permanent placement revenue in the fiscal year 2008 compared to the fiscal year 2007. However, our

34

gross profit as a percent of sales remained at approximately 18.1% in fiscal 2008. Our average pay rate on a per hour basis for domestic temporary services increased 3.2% in fiscal year 2008 compared with the fiscal year 2007. The resulting pay-bill spread on domestic temporary services has increased 3.9% in the fiscal year 2008 as compared to 2007. The change in the pay-bill spread is a result of the continued focus of our sales efforts on opportunities yielding a higher gross margin, which has resulted in decreased sales revenue from lower margin business.

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 the sales or gross profit generated by the franchise agents' operations. Franchise agents' share of gross profit decreased $3.0 million or 17.5% to $14.3 million which was slightly more than the decline in overall franchise owned gross revenue. Franchisees generally receive a greater share of permanent placement revenue which declined at a lesser rate than the overall decline in permanent placement revenue during fiscal 2008.

Selling and administrative expenses

        Selling and administrative expenses decreased $8.7 million or 14.2% to $52.6 million during the fiscal year 2008 as compared to the fiscal year 2007. This decrease is primarily attributable to decreased salary and related costs of $7.6 million as a result of decreased headcount in the domestic operations following the restructuring in the third quarter of fiscal 2007. We achieved cost savings in the areas of facilities, advertising and promotion and supplies totaling $3.1 million as we consciously looked at opportunities to reduce spending in light of the decline in gross revenue. In addition, we incurred lower communications and services costs due to improvements made in our information systems infrastructure. We achieved a reduction in bad debt expense of $0.5 million in fiscal 2008 as compared to fiscal year 2007. Management is also closely monitoring slow paying customers in light of the slowdown in the domestic U.S. economy and is more proactive in reserving for those amounts in the early stages of identifying concerns. These reductions were offset by the recording of currency translation losses totaling $1.5 million on the Australia note receivable. The losses were recognized in our statement of operations commencing in the fourth quarter of fiscal year 2008 because we believe the note will be settled in the foreseeable future due to the upcoming sale of the Australia and New Zealand subsidiaries which was completed on November 10, 2008.

Impairment of goodwill and intangible assets

        As a result of the continued decline in revenue due to the economic downturn, the continued decline in market capitalization for Westaff, and the magnitude of our recent operating losses the Company determined that an interim impairment test was necessary during the third quarter of 2008. Accordingly, in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets," the Company applied impairment tests to its intangible assets, including goodwill during the third quarter of 2008. As a result of this testing and in accordance with SFAS No. 142, the Company recorded a pre-tax, non-cash charge of approximately $11.5 million in the third quarter of fiscal 2008 related to the impairment of intangible assets and goodwill associated with the US reporting unit and as described in Note 6.

Restructuring expense

        We recorded charges in the third and fourth quarter of fiscal 2007 related to reduction in force and closure of several branch offices. In connection with the closures we recorded an expense in the third and fourth quarter of fiscal 2007 for severance payments and an estimate for lease termination costs calculated for the remainder of the lease term reduced by an estimate for sublease income. During the fiscal year 2008, the Company successfully negotiated early termination agreements for nine

35

locations and entered into a sublease for four locations, the effects of which resulted in an $84,000 reduction in our estimated accrual. The Company is still responsible for lease payments on seven locations and is actively negotiating early terminations, where possible, and sublease opportunities to mitigate its obligation. The restructuring accrual, representing rent expense under non-cancellable leases with lease terms that extend through fiscal year 2012 has been reduced by the current estimated future sublease income.

Depreciation and amortization

        Depreciation and amortization increased $2.1 million or 65.5% to $5.2 million, excluding the write-down of intangibles of $11.5 million as described in Note 6, during fiscal 2008 as compared to fiscal 2007. This increase is primarily attributable to an out of period adjustment of $0.9 million in the second quarter of fiscal 2008, resulting in additional depreciation that should have been expensed in prior periods. In addition, the increase was caused by the new Pay-Bill system implementation costs, which were previously capitalized during pre-launch stages and now are amortized to income concurrent with the launch of the system in the first quarter of fiscal 2008.

Net interest expense

        Net interest expense for the fiscal year 2008 and fiscal year 2007 remained consistent at $2.3 million. Lower interest rates during the year were offset by an increase in average borrowings.

Income tax provision

        We recorded an income tax provision on continuing operations of $19.8 million on a pre-tax loss of $27.2 million in fiscal year 2008. The difference between the fiscal year 2008 tax expense of $19.8 million and the fiscal year 2007 benefit of $3.5 million relates primarily to the establishment of a valuation allowance against all of the Company's deferred tax assets of $29.9 million. The Company recorded a valuation allowance in fiscal 2008 due to cumulative losses in recent periods and revised projections indicating continued losses in the foreseeable future. Although it is possible these deferred tax assets could still be realized in the future, the Company believes that is it more likely than not that these deferred tax assets will not be realized in the foreseeable future. The 2007 provision differs from statutory rates primarily due to federal tax credits we took advantage of, primarily as a result of the work opportunity tax credit program. In addition, the fiscal 2007 tax provision also derived a substantial tax benefit from net operating losses.

Net loss

        The result of the aforementioned items plus the gain net of tax on the sale of the U.K. subsidiary of $0.4 million and the net income from discontinued operations of $0.4 million, was a total net loss for the fiscal year 2008 of $46.3 million, or $2.77 per share, as compared with net loss of $1.9 million, or $0.12 per share for the fiscal year 2007.

Fiscal 2007 compared to Fiscal 2006

Revenue

        Gross revenue declined by $42.3 million or 8.8% to $439.8 million for fiscal 2007 as compared to fiscal 2006. Fiscal 2007 contained 53 weeks. The estimated sales for the extra week in fiscal 2007 were $8.3 million. The decrease for a comparable 52 week year would have been $50.6 million or 10.5%.

        The decline was attributable to a number of factors: the closure of 26 unprofitable offices in fiscal 2007, changes in management and field structure, the termination of unprofitable customer relationships and a softening economy. Within our remaining branches, we have continued to focus our

36

sales efforts on opportunities yielding a higher gross margin. Total billable hours declined 11.2% in fiscal 2007 compared to fiscal 2006. On a comparable 52 week basis the decline in total billable hours would have been 12.9% with the significant decline being driven in the domestic market primarily as a result of the closed offices. The average bill rate for fiscal 2007 increased 3.0% from fiscal 2007 over fiscal 2006 for continuing operations.

Costs of services and gross profit

        Costs of services include hourly wages of temporary employees, employer payroll taxes, state unemployment and workers' compensation insurance and other employee-related costs. On a continuing operations basis, costs of services decreased $36.9 million or 9.3% to $360.4 million in fiscal 2007 as compared to fiscal 2006.

        Gross margin decreased $5.4 million or 6.4% to $79.4 million as compared to fiscal 2006. However, our gross profit as a percent of sales increased from 17.6% in fiscal 2006 to 18.1% in fiscal 2007. Our average pay rate on a per hour basis for domestic temporary services increased 2.4% in fiscal year 2007 compared with the fiscal year 2006. The resulting pay-bill spread on domestic temporary services has increased 4.5% in the fiscal year 2007 as compared to 2006. The change in the pay-bill spread is a result of the continued focus of our sales efforts on opportunities yielding a higher gross margin, which has resulted in decreased sales revenue from lower margin business.

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 the sales or gross profit generated by the franchise agents' operations. Franchise agents' share of gross profit decreased $0.8 million or 4.4% to $17.4 million for fiscal 2007 but remained flat as a percent of total sales at 4%. The decrease was primarily the result of a decrease in gross receipts from our franchise offices of 6.9% in fiscal 2007 as compared to fiscal 2006.

Selling and administrative expenses

        Selling and administrative expenses increased $2.2 million or 3.7% to $61.3 million for the 2007 fiscal year as compared to fiscal 2006. There were numerous factors which drove the increase, the largest of which was an increase in incentive compensation of $1.0 million. The other significant increases, totaling $0.4 million, reflected guaranteed amounts paid under a new corporate program designed to retain staff following the restructuring and bonus program for technical implementation of the third phase of the BPM project. The Company also experienced an increase of $1.0 million in recruiting costs associated with a domestic national contract for internet job boards utilized by field offices to attract and identify associates, the recruitment of several new senior executives as well as field sales personnel hired to increase domestic sales.

        Bad debt expense (net of recoveries) increased 515.4% or $0.9 million to $1.1 million in fiscal 2007. $1.0 million of the increase resulted from charge offs of trade accounts receivables from continuing operations as the collectibility of a number of accounts were challenged by new senior management. The primary component of the increase related to $0.7 million of receivables that related to billings generated in 2006 and prior that were deemed uncollectible in fiscal 2007. The remaining increase in bad debt expense resulted primarily from reserves on notes receivables from franchise holders.

Restructuring expense

        In the third quarter of fiscal 2007, the Company approved certain restructuring plans to, among other things, reduce its workforce and consolidate facilities. Restructuring charges have been recorded to align the Company's cost structure with changing market conditions and to create a more efficient

37

organization. The Company's restructuring charges are comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce and (ii) lease termination costs. The Company accounted for each of these costs in accordance with FASB No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

        The restructuring resulted in the elimination of 86 field positions, the closure of 26 branches prior to their lease termination and a reduction in the number of our geographic regions from eight to four.

        The Company recorded an expense in fiscal 2007 of $3.1 million associated with the restructuring plan which includes an estimated liability for leased locations based on the future minimum lease payments reduced by estimated sublease income.

Depreciation and amortization

        Depreciation and amortization decreased by $1.0 million or 24.6% to $3.1 million, primarily due to certain technology related assets becoming fully depreciated early in the year. The Company spent significant resources on the third phase of its BPM system which was originally anticipated to be implemented during fiscal 2007. The BPM system was placed in service in (and did not start depreciating until) the first quarter of fiscal 2008.

Net interest expense

        Net interest expense increased 21.6% or $0.4 million to $2.3 million for fiscal 2007 as compared to fiscal 2006 primarily as a result of higher average interest rates which included an increase in our borrowing rate. The rate increase was imposed on actual borrowings and letters of credits issued to our insurance administrator to secure outstanding worker compensation liabilities. The increased rates were offset by lower borrowing amounts during the fiscal year.

Income tax provision

        The income tax provision recorded during fiscal 2006 and 2007 differs from statutory rates primarily due to federal tax credits we take advantage of, primarily as a result of the work opportunity tax credit program. In addition, the fiscal 2007 tax provision also derives a substantial tax benefit from net operating losses generated in the current fiscal year.

Net loss

        The net loss for the fiscal year 2007 of $1.9 million, or $0.12 per share, as compared with net income of $3.1 million, or $0.19 per share for the fiscal year 2006 is a result of the above mentioned items and an increase of $0.7 million in net income for discontinued operations.

Liquidity and Capital Resources

        We require significant amounts of working capital to operate our business and to pay expenses relating to employment of temporary employees. Our traditional use of cash is for financing of accounts receivable, particularly during periods of economic upswings and growth when sales are seasonally high. Temporary personnel are typically paid on a weekly basis while payments from customers are generally received 30 to 60 days after billing.

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        We finance our operations primarily through cash generated by our operating activities and borrowings under our revolving credit facilities. Net cash provided by operations was $1.4 million for fiscal year ended November 1, 2008, compared to cash provided of $2.9 million for the fiscal year ended November 3, 2007, a decrease of $1.5 million. Changes in accounts receivable due to decreased sales and increased cash collections was the largest significant source of cash providing $21.2 million during the fiscal year ended November 1, 2008 as compared to $3.0 million for the fiscal year ended November 3, 2007. This source of cash provided by accounts receivable was offset by an increase in changes in accounts payable and accrued expenses of $11.2 million during fiscal year ended November 1, 2008 as compared to $0.6 million for the fiscal year ended November 3, 2007. For the fiscal year ended November 1, 2008, the net loss of $46.3 million includes $21.4 million of non-cash income tax expense, as described in Note 9, $5.8 million in non-cash depreciation and amortization, and $11.7 million of non-cash impairment to goodwill and intangibles, as described in Note 6, compared with a net loss of $1.9 million and $4.0 million in non-cash depreciation and amortization for the fiscal year ended November 3, 2007. Additionally, included in the Company's net loss for the fiscal year ended November 1, 2008, is a recorded gain, net of tax, of $0.4 million resulting from the sale of our former United Kingdom operations and related subsidiary on March 31, 2008, as described in Note 5.

        Our domestic days sales outstanding (DSO) is measured by dividing our ending net accounts receivable balance by total sales multiplied by the number of days in the fiscal year. DSO at November 1, 2008 decreased to 40.3 days from 45.0 at November 3, 2007. This decrease in DSO was a result of increased collection efforts in fiscal year 2008. We continue our efforts to focus on reducing our DSO and believe that we will be successful in further reducing DSO in fiscal year 2009.

        Cash provided by investing activities was $4.6 million for the fiscal year ended November 1, 2008, as compared to cash used for investing activities of $4.3 million for the fiscal year ended November 3, 2007. Capital expenditures, which are primarily for information system initiatives both domestically and internationally, were $0.6 million for the fiscal year ended November 1, 2008 compared to $4.1 million for the fiscal year ended November 3, 2007. The decrease in capital expenditures for the fiscal year ended November 1, 2008 was primarily a result of significantly less purchases of furniture and equipment both domestically and internationally, and the reduction of expenditures related to the domestic company's Peoplesoft system implementation which substantially occurred in the fiscal year ended November 3, 2007. As noted above in Discontinued Operations, effective March 31, 2008 the Company sold its UK subsidiary operations for proceeds of approximately $5.4 million net of cash acquired by the purchaser of $1.1 million. Expenses relating to the sale totaled $0.2 million.

        Cash used in financing activities was $5.3 million in the fiscal year ended November 1, 2008 compared with cash provided by financing activities of $0.9 million for the fiscal year ended November 3, 2007. This increase in cash used for financing activities is primarily attributable to an increase in restricted cash of $5.0 million during the fiscal year ended November 1, 2008, as described in Note 4. In the fiscal year ended November 1, 2008 the company paid debt issuance costs of $1.4 million, made principal payments on capital lease obligations of $0.5 million and paid down our line of credit by $0.5 million. The Company also increased borrowings on notes by drawing $2.2 million on its subordinated loan facility.

        On February 14, 2008, the Company (through its wholly-owned subsidiary Westaff (USA), Inc.) entered into a financing agreement with U.S. Bank National Association ("U.S. Bank"), as agent, and the lenders thereto, which provides for a five-year revolving credit facility that previously provided for an aggregate commitment of up to $50.0 million, including a letter of credit sub-limit of $35.0 million (the "Financing Agreement"). Borrowings under the Financing Agreement bear interest, at the Company's election, at either U.S. Bank's prime rate or at LIBOR plus an applicable LIBOR rate margin ranging from 1.25% to 2.00%. The Financing Agreement provides that a default rate would apply on all loan obligations in the event of default under the Financing Agreement and related

39

documents, at a rate per annum of 2.0% above the applicable interest rate. Interest is payable on a monthly basis. The Company has $27.3 million of letters of credit supporting workers' compensation obligations outstanding under the U.S. Bank Credit facility at November 1, 2008, but no cash borrowings.

        On May 23, 2008, the Company received a notice of default from U.S. Bank National Association ("U.S. Bank") (as agent for itself and Wells Fargo Bank, National Association ("Wells Fargo"), as lenders, stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to the Company's failure to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for the fiscal period ended April 19, 2008; and (2) as a result of the Event of Default, effective May 21, 2008, U.S. Bank increased the rate of interest to the default rate of interest on the borrowings outstanding under the Financing Agreement.

        On July 31, 2008, the Company entered into a Forbearance Agreement with U.S. Bank and the lenders. Pursuant to the terms of the Forbearance Agreement, (i) the lenders agreed to forbear from exercising any of their default rights and remedies in response to the occurrence and continuance of the Event of Default commencing on the date of the Forbearance Agreement and ending on August 26, 2008, (ii) the Company agreed to a reduction in the aggregate amount of the commitments under the Financing Agreement from $50.0 million to $33.0 million effective as of June 23, 2008, and (iii) U.S. Bank agreed to maintain a reserve against the revolving credit availability to cover the Company's payroll and payroll tax obligations.

        On August 27, 2008, the Company entered into an Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to forbear from exercising any of their default rights and remedies through September 30, 2008 so long as no additional Events of Default occur. In addition, pursuant to the terms of the Amended and Restated Forbearance Agreement, (i) the parties agreed that U.S. Bank and the lenders shall continue to maintain a reserve against the revolving credit availability to cover the Company's payroll and payroll tax obligations, (ii) the Company agreed to continue to use its best efforts to have one of its undrawn letters of credit in the face amount of $27.0 million returned in exchange for cash collateral security, (iii) the Company agreed to pay to U.S. Bank and the lenders a one-time forbearance fee in the aggregate amount of $25,000. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through September 30, 2008.

        On September 30, 2008, the Company entered into a Second Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to forbear from exercising any of their default rights and remedies through November 21, 2008, so long as no additional Events of Default occur. In addition, pursuant to the terms of the Second Amended and Restated Forbearance Agreement, (i) the parties agreed to amend the Financing Agreement to add a minimum EBITDA financial covenant in respect of the next five 4-week fiscal periods, (ii) the parties agreed that U.S. Bank and the lenders shall continue to maintain a reserve against the revolving credit availability to cover the Company's payroll and payroll tax obligations, (iii) the Company agreed to continue to use its best efforts to have one of its undrawn letters of credit in the face amount of $27.0 million returned in exchange for cash collateral security, (iv) the Company agreed to comply with certain additional covenants relating to the pending sale of its shares in Westaff (Australia) Pty Limited and Westaff NZ Limited, dated as of September 27, 2008; (v) the Company agreed to provide U.S. Bank and the lenders with evidence that it has renewed its existing workers' compensation insurance policy or obtained a replacement, and (vi) the Company agreed to pay to U.S. Bank and the lenders a one-time forbearance fee in the aggregate amount of $25,000. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through November 21, 2008.

        On November 20, 2008, the Company entered into a First Amendment to the Second Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to

40

forbear from exercising any of their default rights and remedies through December 5, 2008, so long as no additional Events of Default occur. The Company consented to the revision of certain additional covenants relating to the sale of its shares in Westaff (Australia) Pty Limited and Westaff NZ Limited, completed as of November 10, 2008. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through December 5, 2008.

        On December 3, 2008, the Company entered into a Second Amendment to the Second Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to forbear from exercising any of their default rights and remedies through December 19, 2008, so long as no additional Events of Default occur. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through December 19, 2008.

        The Company is currently outside its forbearance period and is in discussions with its banks in order to seek a waiver or continued forbearance in respect of the Event of Default. There can be no assurance that the Company will be able to obtain a waiver or continued forbearance or that such a waiver or continued forbearance would be on terms acceptable to the Company. If the Company is unable to obtain a waiver or continued forbearance and the lenders elect to pursue remedies under the Financing Agreement, such as limiting or terminating the Company's right to borrow under the Financing Agreement or electing not to renew letters of credit, it would have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and ability to continue our operations as a going concern. Under these circumstances, and unless the pending merger with Koosharem is completed, we may be required to seek alternative transactions, raise additional capital and/or consider filing for bankruptcy protection. There can be no assurance that any alternative transactions and/or additional capital would be available to us in the current challenging economic environment.

        On August 25, 2008, the Company secured a $3.0 million subordinated loan facility with its principal stockholder, Delstaff, LLC. This facility may be used by the Company for working capital and general business purposes during the term of the facility. The unpaid principal balance under the Subordinated Loan bears interest at an annual rate of twenty percent (20%). Interest is payable-in-kind and accrues monthly in arrears on the first day of each month as an increase in the principal amount of the Subordinated Loan. A default rate applies on all obligations under the Subordinated Loan Agreement from and after the Maturity Date (August 15, 2009) and also during the existence of an Event of Default (as defined in the Subordinated Loan Agreement) at an annual rate of ten percent (10%) also payable-in-kind over the then-existing applicable interest rate and if principal is not repaid on the Maturity Date, an additional 5% of outstanding principal must be paid along with the default rate interest. The obligations under the Subordinated Loan Agreement are secured by a security interest in substantially all of the existing and future assets (the "Subordinated Collateral") of the Company. The lien granted to the Subordinated Lender in the Subordinated Collateral is subordinated to the lien in that same collateral granted to U.S. Bank. Borrowings in excess of $1.0 million require the Subordinated Lender approval. The Subordinated Loan may be prepaid without penalty, subject to approval by U.S. Bank and the terms of an Intercreditor Agreement. Under certain circumstances, the Company must prepay all or a portion of any amounts outstanding under the Subordinated Loan Agreement, subject to the terms of the Intercreditor Agreement. The outstanding loan balance at November 1, 2008 was $2.2 million, which includes a $0.2 million facility fee that was added to the loan balance upon receipt of the initial advance. Accrued and unpaid interest on this note at November 1, 2008 was $40,000. On January 7, 2009 and January 29, 2009, the Company was advanced a loan in an aggregate principal amount of $500,000 each for a total of an additional $1.0 million from DelStaff, LLC under the previously-announced loan agreement, dated as of August 25, 2008 (the "Subordinated Loan Agreement"), among DelStaff, LLC and the Borrowers.

        The Company has an unsecured subordinated promissory note in an amount of $2.0 million, dated May 17, 2002 and payable to the former Chairman of the Board of Directors. The note, matured on

41

August 18, 2007, is now past due and has an interest rate equal to an indexed rate as calculated under the Company's credit facilities plus seven percent, compounded monthly and payable 60 calendar days after the end of each of the Company's fiscal quarters. The effective interest rate on November 1, 2008 was 11.0%. Payment of interest is contingent on the Company meeting minimum availability requirements under its credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the credit facilities. U.S. Bank, which is the agent and a lender under our primary credit facility, has exercised its right to prohibit repayment of the note. Accrued and unpaid interest on this note at November 1, 2008 was $0.4 million and is included in accrued expenses in the Company's consolidated balance sheets.

        In addition, our former Australian subsidiary maintained a $12.0 million Australian dollar facility agreement with GE Capital that was due to expire in May 2009. As of November 1, 2008, our total borrowing capacity was $3.3 million, consisting of $1.5 million with U.S. Bank for our domestic operations and $1.8 million with GE Capital for our former Australian operations. On September 27, 2008, the Company entered into a definitive agreement to sell its Australia and New Zealand subsidiaries and the sale was completed on November 10, 2008. In connection with the agreement, the Australian GE Capital debt was paid in full.

        We work to balance our worldwide cash needs through dividends from and loans to our international subsidiaries. These loans and dividends are limited by the cash availability and needs of each respective subsidiary, restrictions imposed by our senior secured debt facilities and, in some cases, statutory regulations of the subsidiary. The U.S. operations cannot directly draw on the excess borrowing availability of the Australian operations; however, we may request repayments on its intercompany loan to Australia, along with intercompany interest and royalties, although remittances from Australia may be limited by certain covenants under the terms of the Australia credit facility. The outstanding principal on the intercompany loan to Australia was approximately $3.6 million at November 1, 2008. An additional $1.1 million was outstanding from New Zealand to the U.S at November 1, 2008. On September 27, 2008, the Company entered into a definitive agreement to sell its Australia and New Zealand subsidiaries at which time the debt was contributed to capital as an increase to the basis of the sale.

        We are responsible for and pay workers' compensation costs for our domestic temporary and regular employees and are self-insured for the deductible amount related to workers' compensation claims to a limit of $750,000 per claim for fiscal 2008 claims and $500,000 per claim for fiscal years 2007 and 2006. Typically, each policy year the terms of the agreement with the insurance carrier are renegotiated. The insurance carrier requires us to collateralize our obligations through the use of irrevocable standby letters of credit, surety bonds or cash.

        For our 2008 policy year insurance program, we made cash premium payments totaling $4.2 million paid in equal monthly installments, which commenced on November 4, 2007, as compared to $4.8 million paid during fiscal year ended November 3, 2007. Cash payments for 2008 policy year claims will be paid directly by us up to our deductible which was increased from $500,000 per claim to $750,000 per claim for fiscal 2008 claims. As of November 1, 2008, we had outstanding $27.3 million of letters of credit and paid an additional $1.0 million in cash to secure all estimated outstanding obligations under our workers' compensation program for all years except 2003, which is fully funded although subject to annual retroactive premium adjustments based on actual claims activity. We will also make ongoing cash payments for claims for all other open policy years (except for 2003 as noted above).

        We calculate the estimated liabilities associated with these programs based on our estimate of the ultimate costs to settle known claims as well as claims incurred but not yet reported to us ("IBNR claims") as of the balance sheet date. Our estimated liabilities are not discounted and are based on information provided by our insurance brokers, insurers and actuary, combined with our judgment

42

regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation and our claims settlement practices. We maintain stop-loss coverage with third party insurers to limit our total exposure for each of these programs. Significant judgment is required to estimate IBNR amounts as parties have yet to assert such claims. If actual claims trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

        We continue to evaluate other opportunities to further strengthen our financial position and improve our liquidity. For a discussion regarding going concern considerations, please see "Going Concern Considerations" above elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Off-Balance Sheet Arrangements

        None.

Contractual Obligations

        The following summarizes our contractual cash obligations in future fiscal years (in millions) as of November 1, 2008:

	Payment Due by Period
Contractual Obligations	Total		Less than one fiscal year		1 to 3 fiscal years		4 to 5 fiscal years		More than 5 fiscal years
Operating leases	$	5.5	$	2.3	$	3.2	$	—	$	—
Workers' compensation policy year 2009(3)		0.7		0.7		—		—		—
Promissory notes(2)		4.2		4.2		—		—		—
Capital leases—principal		0.8		0.6		0.2		—		—
Capital leases—interest		0.1		0.1		—		—		—
Discontinued operations—credit facilities(1)		4.6		4.6		—		—		—
Total Contractual Obligations	$	15.9	$	12.5	$	3.4	$	—	$	—

(1)

The Australian dollar facility agreement (see Note 7) was set to expire in May 2009. The debt has been classified as current liabilities held for sale in the consolidated balance sheet as of November 1, 2008 due to the agreement to sell the Australia subsidiary which was entered into as of September 27, 2008. In connection with the agreement, Westaff (USA), Inc. repaid the debt in full subsequent to year end.

(2)

Payments under the promissory notes are subject to certain restrictions regarding borrowing capacity and compliance within our senior secured credit facilities.

(3)

Workers' compensation obligations through February 2009 reflect the minimum amount due for premiums only. We self insure for workers' compensation and pay claims as incurred.

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

        We are exposed to certain market risks from transactions that are entered into during the normal course of business. Our primary market risk exposure relates to interest rate risk. At November 1, 2008 our outstanding debt for the US and Australia reporting units under variable-rate interest borrowings was approximately $9.1 million. A change of two percentage points in the interest rates would cause a change in interest expense of approximately $0.2 million on an annual basis. Our exposure to market risk for changes in interest rates is not significant with respect to interest income, as our investment portfolio is not material to our consolidated balance sheet. We currently have no plans to hold an investment portfolio that includes derivative financial instruments.

43

        We are exposed to foreign currency risk primarily due to our investments in foreign subsidiaries. Since the Company entered into a definitive agreement on September 27, 2008 to sell its Australia and New Zealand subsidiaries and the sale was not completed until November 10, 2008, there is a risk that the exchange rate will fluctuate and negatively impact the gain on the sale.

        We do not currently hold any market risk sensitive instruments entered into for hedging transaction risks related to foreign currencies. In addition, we have not entered into any transactions with derivative financial instruments for trading purposes.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        Our Financial Statements and Supplementary Data 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.

        None.

ITEM 9A(T).    CONTROLS AND PROCEDURES.

Management's Evaluation of Disclosure Controls and Procedures.

        We carried out an evaluation required by the 1934 Act, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of November 1, 2008 (the end of the period covered by this report), our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Management's Annual Report on Internal Control over Financial Reporting.

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that:

•

pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

44

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risks and controls that may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

        A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

        Our management assessed the effectiveness of our internal control over financial reporting at November 1, 2008, and in making this assessment, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework in accordance with the standards of the Public Company Accounting Oversight Board (United States).

        During each of the first three quarters of fiscal year 2008, we carried out an evaluation, under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon these evaluations, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the existence of a continuing material weakness relating to a lack of qualified resources within the accounting department as previously identified in our Quarterly Reports on Form 10-Q for the quarterly periods ended January 26, 2008, April 19, 2008 and July 12, 2008. These prior Quarterly Reports also identified several other weaknesses in our disclosure controls and procedures, which we believe have been remedied, including burdens placed on our existing accounting department by billing system implementation issues, since resolved, a delayed finalization of our fiscal year 2007 audit, since completed, and issues in completing account reconciliations on a timely basis, which the Company has since resolved.

        During the last quarter of fiscal year 2008, we carried out an evaluation, under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The material weakness identified in each of the first three quarters of fiscal year 2008 relating to lack of qualified resources has been remedied. Effective June 16, 2008, the Company underwent a change in management, by hiring a new Chief Operating Officer and Chief Financial Officer, both with significant industry and Company experience. Effective September 22, 2008, a new Vice President, Controller was hired who brings relevant financial knowledge and expertise to the Company. Additionally, a Senior Accounting Manager with over 12 years of experience with the Company was promoted to manage the accounting department.

        With the hiring of key, experienced executive personnel, resolution of previously identified control weaknesses, and the strengthening of internal controls and procedures, Management believes the material weakness previously assessed in each of the first three quarters of fiscal year 2008 has been remediated and conclude that our internal control over financial reporting was effective as of November 1, 2008.

        This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

ITEM 9B.    OTHER INFORMATION.

        None.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

        The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2009 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, in either case to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended November 1, 2008.

ITEM 11.    EXECUTIVE COMPENSATION.

        The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2009 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, in either case to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended November 1, 2008.

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

        The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2009 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, in either case to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended November 1, 2008.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

        The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2009 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, in either case to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended November 1, 2008.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES.

        The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2009 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, in either case to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended November 1, 2008.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)

The following documents have been filed as a part of this Annual Report on Form 10-K.

1.

Financial Statements

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets—As of the Fiscal Year Ended November 1, 2008 and November 3, 2007	F-3
Consolidated Statements of Operations—For Each of the Three Years in the Period Ended November 1, 2008	F-4
Consolidated Statements of Stockholders' Equity—For Each of the Three Years in the Period Ended November 1, 2008	F-5
Consolidated Statements of Cash Flow—For Each of the Three Years in the Period Ended November 1, 2008	F-6
Notes to Consolidated Financial Statements	F-7

2.

Financial Statement Schedules.

        All 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 filed as part of, or incorporated by reference into, this Annual Report:

Exhibit Number		Description
	2.1	Share Sale Agreement dated September 27, 2008 by and between the Company and Humanis Blue Pty Limited.
	2.1.1	Amendment Agreement to the Share Sale Agreement dated October 31, 2008 by and between the Company and Humanis Blue Pty Limited.
	3.1.	Fifth Amended and Restated Certificate of Incorporation.(31)
	3.2.4	Amended and Restated Bylaws, effective March 1, 2004.(6)
	3.2.5	Amendments to the Company's Amended and Restated Bylaws.(16)
	4.1.1	Form of Specimen Certificate for the Company's Common Stock.(2)
	10.1.1	Form of Indemnification Agreement between the Company and the Officers and Key Employees of the Company.(1)
	10.1.2	Governance Agreement dated as of April 30, 2007 by and among the Company, Michael T. Willis and W. Robert Stover.(18)
	10.1.3	Amendment No. 1 to the Governance Agreement dated as of June 2007 by and among the Company and DelStaff, LLC.(31)
	10.1.4	Amendment No. 2 to the Governance Agreement dated as of January 2008 by and among the Company and DelStaff, LLC.(31)
	10.1.5	Resignation letter of Jack D. Samuelson dated August 17, 2007.(25)
	10.2	Form of Indemnification Agreement between the Company and the Directors of the Company.(1)

47

Exhibit Number		Description
	10.3.9	Addendum made the 26th day of January 2005 to agreement between Westaff (UK) Limited ("the Company") and Patricia M. Newman ("the Employee") supplemental to an agreement made as of the 1st day of December 1998 between the Company and the Employee, an addendum made as of the 4th day of February 1999 between the Company and the Employee, a letter dated the 3rd day of April 2001 from Bob Stover to Employee; and a memorandum dated the 23rd day of February 2004 between the Company and the Employee.(8)
	10.3.9.1	Employment Agreement executed on April 7, 2005 between Westaff, Inc., Westaff Support, Inc. and Patricia M. Newman.(9)
	10.3.9.2	Transition and Release Agreement dated as of April 30, 2007 by and among Westaff Support, Inc., Westaff, Inc. and Patricia M. Newman.(23)
	10.3.9.3	Notice of Restricted Stock Award and Restricted Stock Agreement dated April 7, 2005.(9)
	10.3.9.4	Notices of Grant of Stock Option dated April 7, 2005 (replaces Exhibit 10.3.9.3).(9)
	10.3.9.5	First Amendment to Employment Agreement between Westaff, Inc., Westaff Support, Inc. and Patricia M. Newman.(10)
	10.3.11.1	Employment Agreement dated as of February 20, 2001, by and between John P. Sanders and the Company.(11)
	10.3.11.2	Key Employee Transition Compensation Plan, dated as of September 20, 2004, by and between John P. Sanders and the Company.(11)
	10.3.11.3	First Amendment to Employment Contract executed on April 21, 2006, by and between John P. Sanders and the Company.(13)
	10.3.11.4	Retention Agreement dated as of May 10, 2007 by and among Westaff, Inc., Westaff (USA), Inc., Westaff Support, Inc. and John P. Sanders.(23)
	10.3.13.1	Employment Agreement dated as of November 28, 2006 by and between Jeffrey A. Elias and Westaff Support, Inc.(15)
	10.3.13.2	Retention Agreement dated as of April 30, 2007 by and among Westaff, Inc., Westaff (USA), Inc., Westaff Support, Inc. and Jeffrey A. Elias.(23)
	10.3.13.3	First Amendment to Employment Agreement by and between Jeffrey A. Elias and Westaff Support, Inc. dated as of August 1, 2007.(24)
	10.3.13.4	Letter Agreement dated November 19, 2007 by and between Jeffrey A. Elias and the Company.(31)
	10.3.13.5	Settlement Agreement and Release in Full dated June 2, 2008 by and between Jeffrey A. Elias and the Company.(33)
	10.3.14.1	Employment Agreement dated as of August 14, 2006 by and between Westaff Support, Inc. and Eric Person.(15)
	10.3.14.2	Addendum to Employment Contract by and between Westaff Support, Inc. and Eric Person dated as of April 12, 2007.(17)
	10.3.14.3	Retention Agreement dated as of April 30, 2007 by and among Westaff, Inc., Westaff (USA), Inc., Westaff Support, Inc. and Peter Eric Person.(23)
	10.3.15	Executive Employment Agreement dated as of June 1, 2007 by and between Michael T. Willis and the Company.(22)
	10.3.15.1	First Amendment to Executive Employment Agreement Between Westaff Support, Inc., Westaff (USA), Inc. and Westaff, Inc. and Michael T. Willis effective as of June 1, 2007.(33)
	10.3.16.1	Employment Offer Letter dated August 2, 2007, by and between Dawn Jaffray and the Company.(31)
	10.3.16.2	Employment Contract dated as of August 2, 2007 by and between Westaff (USA), Inc./Westaff Support and Dawn Jaffray.(31)
	10.3.17	Employment Contract dated as of August 27, 2007 by and between Westaff (USA) Inc./Westaff Support, Inc. and Phillip Bland.(26)

48

Exhibit Number		Description
	10.3.18	Employment Agreement dated as of June 16, 2008 by and between Westaff Support, Inc. and Westaff (USA), Inc. and Stephen J. Russo.(34)
	10.3.19	Employment Agreement dated as of June 16, 2008 by and between Westaff Support, Inc. and Westaff (USA), Inc. and Christa C. Leonard.(34)
	10.3.20	Employment Offer Letter dated September 3, 2008 by and between Sean Wong and the Company.
	10.3.20.1	Employment Contract dated as of September 22, 2008 by and between Westaff (USA), Inc./Westaff Support and Sean Wong.
	10.7	Westaff, Inc. 1996 Stock Option/Stock Issuance Plan, as amended and restated.(7)
	10.8.26	Amended and Restated Unsecured Subordinated Note dated May 17, 2002.(4)
	10.8.28	Forbearance Agreement, Limited Waiver and Consent of Guarantors dated as of October 18, 2007 by and among the Company, General Electric Capital Corporation, and Bank of America, N.A.(27)
	10.8	Financing Agreement dated as of February 14, 2008.(28)
	10.8.29	First Amendment to Financing Agreement dated as of March 31, 2008.(28)
	10.8.30	Continuing Guaranty (Parent Guarantor) dated as of February 14, 2008(28)
	10.8.31	Continuing Guaranty (Subsidiaries) dated as of February 14, 2008.(28)
	10.8.32	Security Agreement dated as of February 14, 2008.(28)
	10.8.33	Stock Pledge Agreement dated as of February 14, 2008.(28)
	10.8.34	Trademark Security Agreement dated as of February 14, 2008.(28)
	10.8.35	Trademark Security Agreement dated as of February 14, 2008.(28)
	10.8.36	Forbearance Agreement dated as of July 31, 2008 by and among the Company, U.S. Bank National Association and Wells Fargo Bank, National Association.(35)
	10.8.37	Subordinated Loan Agreement entered into as of August 25, 2008.
	10.8.38	Subordinated Revolving Note dated August 25, 2008.
	10.8.39	Security Agreement dated August 25, 2008.
	10.8.40	Amended and Restated Forbearance Agreement dated as of August 26, 2008 by and among the Company, U.S. Bank National Association and Wells Fargo Bank, National Association.(36)
	10.8.41	Second Amended and Restated Forbearance Agreement dated as of September 30, 2008 by and among the Company, U.S. Bank National Association and Wells Fargo Bank, National Association.(37)
	10.8.42	Share Sale Agreement dated September 27, 2008 by and between the Company and Humanis Blue Pty Limited.
	10.8.43	Amendment Agreement to the Share Sale Agreement dated October 31, 2008 by and between the Company and Humanis Blue Pty Limited.
	10.11	Westaff, Inc. Employee Stock Purchase Plan.(3)
	10.11.3	International Employee Stock Purchase Plan.(3)
	10.11.4	Westaff, Inc. Employee Stock Purchase Plan (as Amended and Restated July 26, 2006).(14)
	10.11.5	Westaff, Inc. International Employee Stock Purchase Plan (as Amended and Restated July 26, 2006).(14)
	10.11.6	Westaff, Inc. Employee Stock Purchase Plan (as Amended and Restated April 16, 2008).(28)
	10.12	Westaff Key Employee Transition Compensation Plan.(7)
	10.13	Form of Employment Contract with Certain Named Executive Officers.(3)
	10.14.1	Westaff, Inc. 2006 Stock Incentive Plan.(12)
	10.14.2	Westaff, Inc. 2006 Non-Employee Director Option Program.(12)
	10.14.3	Form Notice of Stock Option Award and Stock Option Award Agreement.(12)
	10.14.4	Form Notice of Non-Qualified Stock Option Award and Stock Option Award Agreement.(12)

49

Exhibit Number		Description
	16.01	Letter dated May 15, 2007 regarding change in certifying accountant.(19)(20)(21)
	21.1	Subsidiaries of the Company.
	23.1	Consent of Independent Registered Public Accounting Firm—BDO Seidman, LLP
	23.2	Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP
	24.1	Power of Attorney (see signature page).
	31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
	31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
	32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated herein by reference to the exhibit with the same number filed with the 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 November 3, 2001.

(4)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the quarter ended April 20, 2002.

(5)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Annual Report on Form 10-K for the fiscal year ended November 2, 2002.

(6)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Current Report on Form 8-K dated March 1, 2004.

(7)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Current Report on Form 8-K dated September 20, 2004.

(8)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Annual Report on Form 10-K for the fiscal year ended October 30, 2004.

(9)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Current Report on Form 8-K dated April 7, 2005.

(10)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Annual Report on Form 10-K for the fiscal year ended October 29, 2005.

(11)

Incorporated herein by reference to Exhibits 10.1 and 10.2 filed with the Company's Current Report on Form 8-K dated March 24, 2006.

(12)

Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 and 10.4 filed with the Company's Current Report on Form 8-K dated April 19, 2006.

(13)

Incorporated herein by reference to Exhibits 10.1 filed with the Company's Current Report on Form 8-K dated April 21, 2006.

(14)

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, 2006.

50

(15)

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 20, 2007.

(16)

Incorporated herein by reference to Exhibit 3.1 filed with the Company's Current Report on Form 8-K dated April 12, 2007.

(17)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated April 12, 2007.

(18)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated April 30, 2007.

(19)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Current Report on Form 8-K dated May 9, 2007.

(20)

Incorporated herein by reference to Exhibit 16.01 filed with the Company's Current Report on Form 8-K/A dated May 17, 2007.

(21)

Incorporated herein by reference to Exhibit 16.01 filed with the Company's Current Report on Form 8-K/A dated May 24, 2007.

(22)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated June 29, 2007.

(23)

Incorporated herein by reference to Exhibit 10.3.9, 10.3.11, 10.3.13 and 10.3.14 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended July 7, 2007.

(24)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated August 1, 2007.

(25)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated August 15, 2007 and the Company's Current Report on Form 8-K/A dated August 15, 2007.

(29)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated August 27, 2007.

(30)

Incorporated herein by reference to Exhibit 10.8.20.11 filed with the Company's Current Report on Form 8-K dated October 18, 2007.

(31)

Incorporated herein by reference to the exhibits with the same numbers filed with the Company's Annual Report on Form 10-K for the fiscal year ended November 3, 2007.

(32)

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 19, 2008.

(33)

Incorporated herein by reference to the exhibit with the same number filed with the Company's Quarterly Report on Form 10-Q for the quarter ended July 12, 2008.

(34)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated June 16, 2008.

(35)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated July 31, 2008.

(36)

Incorporated herein by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated August 27, 2008.

(37)

Incorporated hereby by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K dated September 30, 2008.

51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Westaff, Inc.
Walnut Creek, California

        We have audited the accompanying consolidated balance sheets of Westaff, Inc. (the "Company") as of November 1, 2008 and November 3, 2007 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westaff, Inc. as of November 1, 2008 and November 3, 2007, and the results of its operations and its cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.

        We also have audited the reclassification to the consolidated statement of operations for the year ended October 28, 2006 related to certain bank charges from selling and administrative expenses to interest expense, as described in Note 1. We have also audited the reclassifications to the related consolidated statement of operations for the year ended October 28, 2006 for the retrospective reporting of discontinued operations as described in Note 5. In our opinion, such reclassifications are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the 2006 financial statements of the Company referred to above other than with respect to the reclassifications and, accordingly, we do not express an opinion or any other form of assurance on the 2006 financial statements taken as a whole. The reclassifications had no effect on net income (loss) or earnings (loss) per share.

        The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses, is out of compliance with its bank covenants and may be unable to obtain an extension of its workers compensation policy, that raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        As discussed in Note 2 to the consolidated financial statements, effective July 8, 2007, the Company changed its method of quantifying misstatements of prior year financial statements and adopted the dual method as required by the provisions of Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements."

BDO Seidman, LLP
San Francisco, California
February 11, 2009

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

        We have audited, before the effects of (i) the retrospective adjustments for the discontinued operations discussed in Note 5 to the consolidated financial statements and (ii) the reclassifications related to interest expense described in Note 1 to the consolidated financial statements, the consolidated statements of operations, stockholders' equity, and cash flows of Westaff, Inc. and subsidiaries (the "Company") for the year ended October 28, 2006 (the 2006 consolidated financial statements before the effects of the retrospective adjustments for the discontinued operations and the reclassifications to the consolidated financial statements are not presented herein) . These consolidated 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.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, 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 2006 consolidated financial statements, before the effects of (i) the retrospective adjustments for the discontinued operations discussed in Note 5 to the consolidated financial statements and (ii) the reclassifications related to interest expense described in Note 1 to the consolidated financial statements, present fairly, in all material respects, the results of operations and cash flows of Westaff, Inc. and subsidiaries for the year ended October 28, 2006, in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Notes 4 and 12 to the consolidated financial statements, effective October 30, 2005, the Company changed its method of accounting for share-based payment arrangements to conform to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

        We were not engaged to audit, review, or apply any procedures to (i) the retrospective adjustments for the discontinued operations discussed in Note 5 to the consolidated financial statements and (ii) the reclassifications related to interest expense described in Note 1 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments for the discontinued operations and reclassifications of interest expense are appropriate and have been properly applied. Those retrospective adjustments for the discontinued operations and the reclassifications of interest expense were audited by other auditors.

/s/ DELOITTE & TOUCHE LLP
Oakland, California
January 26, 2007

F-2

Westaff, Inc.

Consolidated Balance Sheets

			November 1, 2008			November 3, 2007
			(In thousands, except share and per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	86		$	3,277
	Restricted cash			5,048			—
	Trade accounts receivable, less allowance for doubtful accounts of $979 and $1,274			35,812			76,098
	Deferred income taxes			—			9,688
	Prepaid expenses			1,845			4,059
	Other current assets			1,733			1,833
	Current assets held for sale			13,930			—
		Total current assets		58,454			94,955
Property and equipment, net				9,583			16,186
Deferred income taxes				—			12,076
Goodwill				—			12,628
Intangible assets				3,504			3,695
Other long-term assets				1,923			1,752
Long term assets held for sale				1,527			—
		Total assets	$	74,991		$	141,292
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Borrowing under revolving credit facilities		$	—		$	6,837
	Current portion of capital lease obligations			587			544
	Notes payable to related parties			4,150			2,000
	Accounts payable			1,431			2,226
	Accrued expenses			16,499			34,147
	Short-term portion of workers compensation obligation			7,975			9,897
	Income taxes payable			379			113
	Current liabilities held for sale			8,956			—
		Total current liabilities		39,977			55,764
Long-term capital lease obligations				165			752
Long-term portion of workers compensation obligation				15,300			16,000
Other long-term liabilities				805			2,881
Long-term liabilities held for sale				125			—
		Total liabilities		56,372			75,397
Commitments and contingencies (Notes 4, 10 and 16)
Stockholders' equity:
	Preferred stock, $0.01 par value; authorized and unissued: 1,000,000 shares
	Common stock, $0.01 par value; authorized: 25,000,000 shares; issued and outstanding: 16,697,010 at November 1, 2008 and November 3, 2007			167			167
	Additional paid-in capital			39,727			39,561
	Retained earnings (accumulated deficit)			(21,943	)		24,355
	Accumulated other comprehensive income			668			1,812
		Total stockholders' equity		18,619			65,895
		Total liabilities and stockholders' equity	$	74,991		$	141,292

See accompanying notes to consolidated financial statements.

F-3

Westaff, Inc.

Consolidated Statements of Operations

			Fiscal Year Ended
			November 1, 2008			November 3, 2007			October 28, 2006
			(In thousands, except per share amounts)
Revenue			$	324,495		$	439,822		$	482,153
Costs of services				265,840			360,414			397,336
Gross profit				58,655			79,408			84,817
Franchise agents' share of gross profit				14,313			17,357			18,157
Selling and administrative expenses				52,575			61,291			59,106
Impairment of goodwill and intangibles				11,540			—			—
Restructuring expense (benefit)				(84	)		3,111			—
Depreciation and amortization				5,212			3,149			4,177
Operating (loss) income from continuing operations				(24,901	)		(5,500	)		3,377
Interest expense				2,465			2,414			1,965
Interest income				(140	)		(138	)		(93	)
Income (loss) from continuing operations before taxes				(27,226	)		(7,776	)		1,505
Income tax expense (benefit)				19,824			(3,469	)		84
Income (loss) from continuing operations				(47,050	)		(4,307	)		1,421
Discontinued operations:
	Income from discontinued operations			382			2,373			1,698
	Gain on sale, net of income taxes of $1,312			370			—			—
Total income from discontinued operations, net of income taxes				752			2,373			1,698
Net (loss) income			$	(46,298	)	$	(1,934	)	$	3,119
(Loss) earnings per share:
	Continuing operations—basic and diluted		$	(2.82	)	$	(0.26	)	$	0.09
	Discontinued operations—basic and diluted		$	0.05		$	0.14		$	0.10
	(Loss) earnings per share:
		Basic and diluted	$	(2.77	)	$	(0.12	)	$	0.19
Weighted average shares outstanding—basic				16,697			16,625			16,454
Weighted average shares outstanding—diluted				16,697			16,625			16,526

See accompanying notes to consolidated financial statements.

F-4

Westaff, Inc.

Consolidated Statements of Stockholders' Equity

			Common stock										Accumulated other comprehensive income (loss)
							Additional paid-in capital			Retained earnings						Deferred stock compensation
			Shares		Amount														Total
			(In thousands)
Balance at October 29,2005				16,378	$	164	$	37,803		$	24,151		$	(443	)	$	(54	)	$	61,621
	Comprehensive income:
		Net income		—		—		—			3,119			—			—
		Currency translation adjustments		—		—		—			—			399			—
	Total comprehensive income																			3,518
	Reclassification of deferred stock
		compensation		—		—		(54	)		—			—			54			—
	Stock issued under employee
		stock plans		184		2		563			—			—			—			565
	Tax benefits from employee stock
		plans		—		—		45			—			—			—			45
	Share-based compensation			—		—		260			—			—			—			260
Balance at October 28, 2006				16,562	$	166	$	38,617		$	27,270		$	(44	)	$	—		$	66,009
Cumulative effect of adjustment from the adoption of SAB No. 108, net of tax (Note 2)				—		—		—			(981	)		—			—			(981	)
	Comprehensive income:
		Net loss		—		—		—			(1,934	)		—			—
		Currency translation adjustments		—		—		—			—			1,856			—
	Total comprehensive loss																			(78	)
	Stock issued under employee
		stock plans (net of 204 shares used in cashless exercise)		135		1		350			—			—			—			351
	Other			—		—		(8	)					—			—			(8	)
	Share-based compensation			—		—		602			—			—			—			602
Balance at November 3, 2007				16,697	$	167	$	39,561		$	24,355		$	1,812		$	—		$	65,895
	Comprehensive income:
		Net loss		—		—		—			(46,298	)		—			—
		Currency translation adjustments		—		—		—			—			(1,144	)		—
	Total comprehensive loss																			(47,442	)
	Other			—		—		(9	)		—			—			—			(9	)
	Share-based compensation			—		—		175			—			—			—			175
Balance at November 1, 2008				16,697	$	167	$	39,727		$	(21,943	)	$	668		$	—		$	18,619

See accompanying notes to consolidated financial statements.

F-5

Westaff, Inc.

Consolidated Statements of Cash Flow

				Fiscal Year Ended
				November 1, 2008			November 3, 2007			October 28, 2006
				(In thousands)
Cash flows from operating activities
	Net (loss) income			$	(46,298	)	$	(1,934	)		3,119
	Adjustments to reconcile net (loss) income to net cash provided by operating activities:
		Deferred income taxes			21,388			(4,071	)		(1,174	)
		Impairment of goodwill and intangibles			11,743			—			—
		Depreciation and amortization			5,810			3,954			4,811
		Stock-based compensation			175			602			260
		Tax benefits from employee stock plans			—			—			21
		Provision for losses on doubtful accounts			859			964			192
		Note receivable bad debts			42			110			—
		Amortization of deferred gain on sale-leaseback			(744	)		(759	)		(745	)
		Amortization of debt issuance costs			659			284			370
		Gain on sale of discontinued operations, net of income taxes			(370	)		—			—
		Amortization of deferred gain from sales of affiliate operations			(618	)		(146	)		(305	)
		Loss on sale or disposal of assets			130			141			13
		Other			—			(11	)		—
		Changes in assets and liabilities:
			Trade accounts receivable		21,165			3,043			7,480
			Other assets		757			1,820			(1,675	)
			Accounts payable and accrued expenses		(11,233	)		(620	)		(1,699	)
			Income taxes payable		(971	)		(999	)		277
			Other liabilities		(1,134	)		518			2,285
Net cash provided by operating activities					1,360			2,896			13,230
Cash flows from investing activities
	Capital expenditures				(628	)		(4,093	)		(5,070	)
	Payments for the purchase of affiliate operations				—			—			(3,893	)
	Proceeds from sales of affiliate operations				—			—			161
	Proceeds from sale of discontinued operations, net of cash acquired by purchaser of $1,104				5,375			—			—
	Expenses related to sale of discontinued operations				(240	)		—			—
	Payments received on notes				154			402			—
	Issuance of notes receivable				(100	)		(311	)		—
	Payments for intangibles and other				—			(291	)		—
	Other, net				74			(44	)		(317	)
Net cash provided (used) by investing activities					4,635			(4,337	)		(9,119	)
Cash flows from financing activities
	Restricted cash under line of credit				(5,048	)		—			—
	Net borrowings (repayments) under line of credit agreements				(525	)		1,146			(3,872	)
	Principal payments on capital lease obligations				(544	)		(400	)		(339	)
	Payment of debt issuance costs				(1,381	)		(209	)		(22	)
	Proceeds from notes payable				2,150			—			—
	Proceeds from the issuance of common stock				—			351			565
	Excess tax benefits from stock based compensation				—			—			24
Net cash provided (used) by financing activities					(5,348	)		888			(3,644	)
Effect of exchange rate changes on cash					202			285			64
Net change in cash included in assets held for sale at end of year					(4,040	)		—			—
Net change in cash and cash equivalents					(3,191	)		(268	)		531
Cash and cash equivalents at beginning of year					3,277			3,545			3,014
Cash and cash equivalents at end of year				$	86		$	3,277		$	3,545
Supplemental disclosures of cash flow information
	Cash paid during the year for:
		Interest		$	2,739		$	2,184		$	1,996
		Income taxes paid, net			1,328			1,274			1,189
Supplemental schedule of noncash investing and
	financing activities:
	Accounts payable for capital expenditures			$	—			158			501
	Marketable security payment				(74	)		44			595
	Equipment purchased with capital leases				—			518			—

See accompanying notes to consolidated financial statements

F-6

Westaff, Inc.

Notes to Consolidated Financial Statements

1. Basis of Presentation

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

Translation of foreign currencies

        The functional currency for each of the Company's foreign operations is the applicable local currency. All assets and liabilities that are denominated in foreign currencies are translated into U.S. dollars at exchange rates as of the date of the balance sheet and all revenue and expense accounts are translated using weighted average exchange rates for the periods presented. Translation adjustments and gains or losses on intercompany loans that are of a long-term investment nature are included as a separate component of stockholders' equity. Aggregate transaction gains (losses) included in determining net income were ($1,701,000), $185,000 and ($9,000) for fiscal years 2008, 2007 and 2006, respectively, and are included in selling and administrative expenses. On September 27, 2008, the Company entered into a definitive agreement to sell its Australia and New Zealand subsidiaries. Due to the impending sale of the Australia and New Zealand subsidiaries, settlement of the intercompany loans is anticipated in the foreseeable future. Accordingly, the Company recorded a transaction loss which is included in selling and administrative expenses in the amount of $1.5 million on the foreign note receivable during the fiscal year ended November 1, 2008.

Discontinued operations and assets held for sale

        On March 31, 2008, the Company sold its United Kingdom (U.K.) operations and related subsidiary. See Note 5. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", the results of operations of the discontinued operations are separately stated in the accompanying consolidated statements of operations for the fiscal year ended November 1, 2008 and all prior years. The assets and liabilities of the discontinued U.K. operations have not been reclassified in the accompanying consolidated balance sheets and related notes as of November 3, 2007. The cash flows from discontinued operations are not separately classified in the Company's consolidated statements of cash flows.

        On September 27, 2008, the Company entered into a definitive agreement to sell its Australia and New Zealand subsidiaries (See Note 5 and Note 19). The sale was completed on November 10, 2008. In accordance with SFAS 144, a component of an entity that has been disposed of or held for sale is considered a discontinued operation. Accordingly, the Company has reflected the results of these subsidiaries as discontinued operations in the consolidated statement of operations for all years presented and assets and liabilities as of November 1, 2008 are shown in the balance sheet as held for sale. The cash flows from discontinued operations are not separately classified in the Company's consolidated statements of cash flows.

        Asset and liability balances as of November 3, 2007 and the statement of operations for the fiscal years ended 2008, 2007, and 2006 pertaining to the United Kingdom, Australia, and New Zealand subsidiaries are set forth in Note 5.

F-7

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

1. Basis of Presentation (Continued)

Reclassifications

        Accounts receivable as originally reported on the November 3, 2007 balance sheet have been increased by $962,000 to reflect unbilled amounts to customers related to services performed in the United Kingdom previously included in prepaid expenses. The Company's policy is to record as trade accounts receivables the amounts earned for the final week of the period but not billed to customers.

        The Company has included as part of interest expense certain amounts paid to financial institutions for letters of credit issued to the Company's insurance carrier to secure liabilities reflected on the balance sheet. These costs are charged based on a percentage of the outstanding letters of credit. These costs during the fiscal year 2006 that were originally classified as selling and administrative expenses have been reclassified to interest expense to conform to the fiscal year 2008 and 2007 presentations. The reclassifications had no change to net income or earnings per share and are shown below:

		Fiscal Year Ended
		October 28, 2006
		As originally reported as adjusted for discontinued operations		As reclassified		Change
		(In thousands)
Selling and administrative expenses			60,190		59,106		(1,084	)
Operating income
	from continuing operations		2,293		3,377		1,084
Interest expense			881		1,965		1,084
Net income			3,119		3,119		—

Going concern considerations

        The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from this uncertainty. Through November 1, 2008, the Company has experienced significant loss of revenue in its domestic business operations, continues to experience operating losses, and continues to be in default of certain covenants in its lending agreements with U.S. Bank. The Company's primary credit facility is a financing agreement that the Company has (through its wholly-owned subsidiary Westaff (USA), Inc.) with U.S. Bank National Association ("U.S. Bank"), as agent for itself and Wells Fargo Bank, National Association ("Wells Fargo"), as lenders, which provides for a five-year revolving credit facility (the "Financing Agreement"). As discussed in Note 7 the Company is currently in default under certain covenants of the Financing Agreement and has entered into a Forbearance Agreement with U.S. Bank and Wells Fargo that provides for a forbearance period ending on December 19, 2008. While the Company is negotiating with its lenders for a waiver or continued forbearance in respect of this default, there can be no assurances that a waiver or continued forbearance can be obtained. If the Company is unable to obtain a waiver or continued forbearance from U.S. Bank on acceptable terms, the Company may be unable to access the funds necessary for its liquidity requirements or may be unable to obtain letters of credit under the facility needed for the Company to obtain workers' compensation insurance.

        These liquidity issues raise substantial doubt about whether the Company will continue as a going concern. The Company has been in communication with its lender as to the steps it needs to take to

F-8

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

1. Basis of Presentation (Continued)

resolve this situation, but there can be no assurance that the lender will waive the Company's noncompliance with any one or more of the loan covenants. The Company's ability to continue as a going concern is dependent on the Company's ability to comply with the loan covenants and the lender's willingness to waive any noncompliance with such covenants.

        In response to the continued default, the Company secured a $3.0 million subordinated loan facility on August 25, 2008. The Company has used $2.2 million of this facility as of November 1, 2008 for their working capital and general business purposes.

        The Company has extended its workers' compensation insurance through April 1, 2009 which required $1.0 million in cash collateral as of November 1, 2008 and $0.3 million to be paid by February 28, 2009. In addition, the letter of credit supporting the workers' compensation insurance expires on February 28, 2009 and the insurance carrier has received a notice of non-renewal from the issuing Bank. The forbearance agreement expired on December 19, 2008 and has not been extended. Among other things, the Company has responded to these issues by reducing its headcount by approximately 60 positions in the corporate and field offices during fiscal year 2008 and 66 positions in the first quarter of fiscal year 2009. This was accomplished by a combination of attrition and a planned reduction in force. Total severance amounts paid in fiscal year 2008 were immaterial and are included as part of selling and administrative expenses. The Company continues to look and act on additional cost savings measures within the organization while it is exploring alternative financing arrangements and strategic partnering alternatives. See Note 19.

2. Adoption of Recent Pronouncements

        In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 requires registrants to use a combination of two approaches to evaluate the materiality of identified unadjusted errors: the "rollover" approach, which quantifies an error based on the amount of the error originating in the current year income statement, and the "iron curtain" approach, which quantifies an error based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year. SAB 108 permits companies to adjust for the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. The Company adopted SAB 108 during the fourth quarter of fiscal 2007.

        In the course of evaluating the provisions of SAB 108, the Company identified the following misstatements as of November 3, 2007. The adoption of SAB 108 resulted in a decrease to opening retained earnings as of October 28, 2006 of approximately $981,000, net of tax. Such errors, which management previously deemed immaterial, were related to the following (presented net of tax):

•

Overstated accounts receivable of $33,000, net of tax, related to system conversion error resulting from the accounts receivable ledger and general ledger being out of balance, which arose in fiscal 2006.

•

Understated state sales tax accrual of $148,000, net of tax, related to taxable services performed by Westaff employees on behalf of clients in certain states that assess sales tax on certain services, which arose ratably over fiscal 2003 through fiscal 2006.

F-9

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

2. Adoption of Recent Pronouncements (Continued)

•

Overstated deferred tax asset of $644,000 primarily representing Worker's Compensation insurance deferred tax asset adjustment related to fiscal 2003. Deferred tax assets were overstated as a result of Worker's Compensation temporary differences, representing future tax deductions. The gross deferred tax assets were fully reserved in all years prior to our fiscal year ended 2005.

•

Overstated recoverable federal payroll taxes of $101,000, net of tax, based on taxes initially paid in fiscal 2001. In 2004 this amount was no longer recoverable because of the statute of limitations.

•

The fiscal 2006 ending employee insurance liability accounts were understated by $122,000, net of tax, for underaccruals pertaining to fiscal year 2006 and 2005.

•

Overstatement of software maintenance expense due to an overaccrual of software maintenance costs of $32,000, net of tax, per year in fiscal years 2005 and 2006.

•

Costs related to services performed for a specific customer were erroneously accrued in 2005 and 2006 based on total business with that customer and not in accordance with the terms of the contract. The amount of erroneously accrued costs for those years resulted in an overstatement of expense of $35,000, net of tax.

        During the first quarter of fiscal year 2008, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48") effective November 4, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes", and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

        As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. The Company performed evaluations for the tax years ended 2007, 2006, 2005 and 2004, which were subject to examination by tax authorities, as well as the tax positions presented in the current year financial statements. During the current year the Company determined it had $0.9 million of uncertain tax positions. Of this amount, $0.3 million was recorded as a liability in its financial statements as of November 1, 2008.

        Upon implementation of FIN 48, the Company adopted a methodology for recognition of interest and penalties accruals related to unrecognized tax benefits and penalties within its provision for income taxes. The Company had no such interest and penalties accrued at November 1, 2008 as any amounts are immaterial.

3. Out of Period Adjustment

        During the second quarter of fiscal year 2008, the Company recorded $0.9 million in depreciation expense and accumulated depreciation, relating to assets purchased prior to fiscal year 2004, which should have been depreciated over a 4 year period. The depreciation expense and accumulated

F-10

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

3. Out of Period Adjustment (Continued)

depreciation, however, were not previously recorded. The Company reviewed this additional expense and considered the impact of the adjustment under Staff Accounting Bulletin No. 99 "Materiality". The Company concluded that reporting the $0.9 million as an adjustment to current period depreciation expense and accumulated depreciation is not material to the current fiscal year 2008 or prior fiscal years.

4. Summary of Significant Accounting Policies

Fiscal year

        The Company's fiscal year ends on the Saturday nearest the end of October and consists of either 52 or 53 weeks. The fiscal year ended November 1, 2008 consisted of 52 weeks while the fiscal year ended November 3, 2007 consisted of 53 weeks. For interim reporting purposes, the first three fiscal quarters are comprised of 12 weeks each while the fourth fiscal quarter consists of 16 or 17 weeks.

Accounting estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates included in the Company's financial statements include allowance for doubtful accounts, valuation of intangible assets, workers' compensation liabilities and income taxes.

Fair value of financial instruments

        The carrying amounts of cash, accounts receivable, accounts payable and all other accrued expenses approximate fair value at November 1, 2008 and November 3, 2007 because of the short maturity of these items. The fair value of the Company's debt with U.S. Bank, DelStaff LLC and GE Capital (See Note 7) approximates the carrying value due to the stated rates in these instruments approximating the fair value and the value of the collateral underlying these loans. The fair value of the Company's outstanding debt with its former Chairman of the Board of Directors is likely to be less than the carrying value, but the Company is not readily able to estimate the fair value since the note is in default and resolution is uncertain.

Cash and cash equivalents

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

Restricted cash

        As of November 1, 2008, the cash proceeds of $5.0 million from the sale of the U.K. operations was held as collateral for U.S. Bank related to the Financing Agreement, as described in Note 7.

F-11

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

4. Summary of Significant Accounting Policies (Continued)

Concentrations of credit risk

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

Revenue recognition

        Revenue from the sale of services is recognized at the time the service is performed. The Company maintains an allowance for doubtful accounts on accounts receivable for projected estimated losses. The Company also reserves for billing adjustments, principally associated with overbillings and client disputes, made after year end that relate to services performed during the fiscal year. The estimates are determined based on historical billing adjustment data as a percent of sales. The Company's revenue is derived from Company-owned operations and affiliate operations, which consist of franchise agents. Our service offerings are focused primarily on placing clerical/administrative and light industrial personnel into both temporary and permanent positions. Temporary personnel placement as a percent of revenue was 95.4%, 95.8% and 95.8% during fiscal years 2008, 2007 and 2006, respectively.

        The Company follows the guidance of Emerging Issues Task Force (EITF) 99-19, "Recording Revenue Gross as a Principal versus Net as an Agent", for its presentation of revenue and direct costs. This guidance requires the Company to assess whether it acts as a principal in the transaction or as an agent acting on behalf of others. Where the Company is the principal in the transaction and has the risks and rewards of ownership, the transactions are recorded gross in the statements of operations. Revenue and related costs of services generated by both Company-owned offices and franchise agents are included as part of the Company's consolidated revenue and costs of services, respectively, since the Company has the direct contractual relationships with the customers, holds title to the related customer receivables and is the legal employer of the temporary employees.

        The franchise agent acts as the Company's agent and local business representative in a similar manner as a branch manager in Company-owned locations. In the franchise arrangement, all advertising, signage, invoices and correspondence with the customer are in the Company's name. The Company has the direct contractual relationships with its customers and contracts with customers are binding to the Company. The Company is also the employer of all temporary employees in the franchise agents' operations and, as such, is obligated for the temporary employee payroll and related payroll taxes regardless of customer acceptance of the temporary labor services. These factors, among others, designate the Company as principal with respect to its franchise agent operations. Franchise agents' sales represented 40.1%, 35.8% and 35.1% of the Company's total revenue for fiscal 2008, 2007 and 2006, respectively. Franchise agents' share of gross profit represents the net distribution paid to the franchise agent for their services in marketing to customers, recruiting temporary employees and servicing customer accounts.

        The Company also previously had a licensing program which was discontinued in fiscal 2007 whereby the licensee had the direct contractual relationships with the customers, held title to the related customer receivables and was the legal employer of the temporary employees. Accordingly, sales and costs of services generated by the license operation are not included in the Company's consolidated financial statements. The Company advanced funds to the licensee for payroll, payroll taxes, insurance

F-12

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

4. Summary of Significant Accounting Policies (Continued)

and other related items. Fees are paid to the Company based either on a percentage of sales or gross profit generated by the licensee and such license fees are recorded by the Company as license fees and included in revenue. Advances to the licensee were secured by a pledge of the licensee's trade receivables, tangible and intangible assets and the license agreement. Advances due from the licensee bear interest at prime plus two percent but only to the extent the aggregate advances exceed the amount of qualified trade receivables securing the outstanding advances. The licensee had no pledged trade receivables at November 1, 2008 and November 3, 2007 as collateral for such advances. Sales generated by licensed offices (and excluded from the Company's revenue) were $0.7 million and $2.4 million for fiscal 2007 and 2006, respectively. There were no sales generated by licensed offices in fiscal 2008.

        The Company has the contractual right to charge an initial franchise or license fee that encompasses start-up supplies and material and training. The Company has not charged or collected such fees during the fiscal years ended 2007 and 2006 and there was no recorded fee income of this type included in the Consolidated Statements of Operations for those years. However, in fiscal year 2008 an initial franchise fee was recorded for the new franchise office opened in Madison, Wisconsin. The recorded fee was not material to the financial statements.

Accounts receivable and allowance for doubtful accounts

        The Company records an allowance for doubtful accounts based on historical experience. The Company provides allowances for estimated credit losses and billing adjustments at a level deemed appropriate to adequately provide for known and inherent risks related to such amounts. The allowances are based on reviews of its history of losses, adjustments, current economic conditions and other factors that warrant consideration in estimating potential losses including known information specific to each customer. A summary of changes in the reserve for fiscal years 2008, 2007 and 2006 is as follows:

Fiscal Year Ended	Balance at Beginning of Year		Additions Charged to Costs and Expenses		Deductions		Balance before adjustment for Assets Held for Sale		Assets Held for Sale at End of Year		Balance at End of Year
	(In thousands)
November 1, 2008	$	1,274		859		1,134		999		20	$	979
November 3, 2007	$	811		964		501		1,274		—	$	1,274
October 28, 2006	$	997		192		378		811		—	$	811

        While management uses the best information available in making its determination, the ultimate recovery of recorded amounts is also dependent on future economic and other conditions that may be beyond management's control.

F-13

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

4. Summary of Significant Accounting Policies (Continued)

Property, plant and equipment

        Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which are generally three to four years for computer hardware and software, and three to seven years for furniture, equipment and fixtures. Major improvements to leased office space are capitalized and amortized over the shorter of their useful lives or the terms of the leases, generally three years. The Company capitalizes internal and external costs incurred in connection with developing or obtaining internal use software in accordance with Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."

        Property, plant and equipment consists of the following:

	November 1, 2008			November 3, 2007
	(In thousands)
Computer hardware and software	$	40,659		$	41,534
Computer equipment under capital lease		3,291			3,292
Equipment, furniture and fixtures		7,601			16,389
		51,551			61,215
Less accumulated depreciation and amortization		(41,968	)		(45,029	)
	$	9,583		$	16,186

        The November 1, 2008 balances exclude assets held for sale. See Note 5. Included in computer hardware and software at November 3, 2007 is construction in process for information management systems of $6.0 million related to our billing and temporary payroll system which was placed in service and commenced depreciation in the first quarter of fiscal 2008.

        Depreciation and amortization expense from continuing operations was $5.2 million, $3.1 million and $4.2 million for fiscal years 2008, 2007 and 2006, respectively. Amortization of capital leased equipment included in depreciation expense was $491,000 for fiscal 2008, $417,000 for fiscal 2007 and $329,000 for fiscal 2006.

Goodwill and intangible assets

        The Company follows the provision of Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives are evaluated for impairment at a reporting unit level by applying a fair value based test. The primary other identifiable intangible assets of the Company with indefinite lives are reacquired franchise rights. The Company determined its reporting units as its operating segments under SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information".

        The first step in the impairment test compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the second step of the goodwill impairment is performed to determine the amount of any impairment loss by comparing the implied fair value of the reporting unit's goodwill with the respective carrying value.

F-14

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

4. Summary of Significant Accounting Policies (Continued)

        During the third quarter of fiscal 2008 the Company determined that there were impairment indicators present and performed an impairment evaluation. This resulted in the full impairment of the Domestic Business Services goodwill of $11.4 million and the impairment of the indefinite life intangible assets of $0.2 million. In the fourth quarter of fiscal 2008, the Company impaired its Australia goodwill by $0.2 million. See Note 6. No impairment was identified during fiscal 2007 and 2006.

Long-lived assets

        The Company accounts for its long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company's primary long-lived assets are property and equipment. SFAS No. 144 requires a company to assess the recoverability of its long-lived assets whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. Additionally, the standard requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date. No impairment charges were recorded in fiscal years 2008, 2007, or 2006 related to the Company's property and equipment.

Workers' compensation

        Domestically, the Company is responsible for and pays workers' compensation costs for its temporary and regular employees and is self-insured for the deductible amount related to workers' compensation claims to a limit of $750,000 per claim for policy year 2008, and $500,000 for policy years 2007 and 2006. The Company accrues the estimated costs of workers' compensation claims based upon the expected loss rates within the various temporary employment categories provided by the Company. At least annually, the Company obtains an independent actuarial valuation of the estimated costs of claims reported but not settled, and claims incurred but not reported, and may adjust the accruals based on the results of the valuations. As of November 1, 2008 and November 3, 2007 the workers' compensation liability estimates were $23.3 million and $25.9 million, respectively, of which $15.3 million at November 1, 2008 and $16.0 million at November 3, 2007 are included in other long-term liabilities on each of the respective balance sheets for obligations that are not expected to be paid in the following fiscal year.

        Periodically, the terms of the agreement with our workers compensation insurance carrier are renegotiated. The insurance carrier requires the Company to collateralize its recorded obligations under the workers' compensation insurance contracts with Travelers Indemnity Company through the use of irrevocable letters of credit, surety bonds or cash. As of November 1, 2008, the Company had $27.3 million of letters of credit and had paid $1.0 million in cash securing its domestic workers' compensation obligations. The Company has extended the coverage through April 1, 2009 and will pay $0.3 million in cash collateral. The carrier was notified on January 28, 2009 that the letters of credit issued in favor of the carrier that expire on February 28, 2009 would not be renewed. There is no assurance that the letters of credit will be further renewed or extended. The Company also maintains a certificate of deposit in the amount of $0.6 to secure its obligation in the state of Washington.

F-15

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

4. Summary of Significant Accounting Policies (Continued)

Recruiting promotion and advertising costs

        The Company expenses recruiting promotion and advertising costs as incurred or when the related campaign commences. The Company spent $1.5 million, $2.9 million, and $2.0 million on advertising and promotion during fiscal years 2008, 2007, and 2006, respectively.

Income taxes

        The Company records income taxes in accordance with SFAS 109 "Accounting for Income Taxes" which requires an asset and liability approach. This approach results in 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 it is more likely than not that a deferred tax asset is not realizable in the foreseeable future. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax law or rates.

Accounting for stock-based compensation

        In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment" (SFAS 123(R)). The statement establishes standards for accounting for share-based payment transactions. Share-based payment transactions are those in which an entity exchanges its equity instruments for goods or services or in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date (with limited exceptions). That cost will be recognized in the entity's financial statements over the period during which the employee is required to provide services in exchange for the award.

        The Company adopted SFAS 123(R) at the beginning of fiscal 2006 utilizing the modified prospective method, which does not require restatement of prior periods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock awards over the requisite service period (generally the vesting schedule). Prior to fiscal 2006, the Company measured compensation cost for employee stock options and similar equity instruments using the intrinsic value-based method of accounting prescribed by APB 25.

Recent accounting pronouncements

        In July 2006, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation Number (FIN) 48, "Accounting for Income Tax Uncertainties." FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. FIN 48 provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. Any differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the

F-16

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

4. Summary of Significant Accounting Policies (Continued)

amounts reported after adoption are accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company adopted FIN 48 during the first quarter of fiscal 2008. See Note 2.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB agreed to a one-year deferral for the implementation of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on its operating results and financial condition.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. The Company is evaluating the impact, if any, the adoption of SFAS No. 159 will have on its operating results and financial condition.

        In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements" (an Amendment of ARB 51). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure on the face of the consolidated statement of operations, of the amounts of consolidated net income (loss) attributable to the parent and to the non-controlling interest. In addition this statement establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 becomes effective for fiscal periods beginning after December 15, 2008. The Company is currently evaluating the impact of SFAS 160.

5. Assets Held for Sale and Results of Discontinued Operations

        In March 2008, the Company sold its former United Kingdom operations and related subsidiary to Fortis Recruitment Group Limited, a recruiting and staffing company headquartered in England, for cash payments of $6.3 million, net of transaction costs of $0.2 million. In the second quarter of fiscal 2008 the Company recorded a pre-tax gain of $2.0 million ($1.2 million net of tax). During the third quarter of fiscal year 2008, the Company reduced the gain on the sale by about $0.3 million ($0.2 million net of tax) as a result of an amendment to the original sales agreement to forgive Fortis Recruitment Group Limited of various payables and royalties due to Westaff in lieu of agreeing to any working capital adjustments. During the fourth quarter of fiscal year 2008, the Company further

F-17

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

5. Assets Held for Sale and Results of Discontinued Operations (Continued)

updated its gain calculation which still resulted in a pre-tax gain of $1.7 million but was $0.4 million net of tax. The reason for the change is that during the fourth quarter of fiscal 2008 the Company entered into an agreement to dispose of its two remaining foreign subsidiaries and it does not have any immediate plans to generate foreign source income in the foreseeable future. As a result, the Company determined it will likely not take the foreign tax credit in its income tax return for fiscal 2008 but rather will deduct the related foreign tax expenses in computing taxable income. In accordance with FASB Statement No. 144, the Company has reflected the results of the United Kingdom operations as discontinued operations for all years presented on the consolidated statements of operations.

        On September 27, 2008, the Company entered into a definitive agreement to sell its Australia and New Zealand subsidiaries to Humanis Blue Pty Ltd, an Australian company. The sale was completed on November 10, 2008. See Note 19. In accordance with FASB Statement No. 144, the Company reclassified the consolidated balance sheets as of November 1, 2008 to show the assets and liabilities of these subsidiaries as held for sale. The Company also reclassified the consolidated statements of operations for all years presented to show the results of these reportable operating segments as discontinued operations.

        Summarized financial data on discontinued operations is as follows:

	Fiscal Year Ended
	November 1, 2008		November 3, 2007		October 28, 2006
	(In thousands)
Revenue	$	126,109	$	148,894	$	132,797
Operating income from discontinued operations		855		2,790		2,252
Less: Income taxes and net interest expense		473		417		554
Income from discontinued operations, net of tax		382		2,373		1,698
Gain on sale, net of taxes of $1,312		370		—		—
Total income from discontinued operations, net of tax	$	752	$	2,373	$	1,698

		November 1, 2008		November 3, 2007(1)
Cash and cash equivalents			4,040	$	3,164
Trade accounts receivable, net			9,176		22,799
Prepaid expenses			291		1,226
Property and equipment, net			666		2,007
Other assets			1,284		2,052
	Assets of discontinued operations	$	15,457	$	31,248
Notes payable			4,578	$	5,241
Accounts payable			208		372
Accrued payroll and expenses			2,873		6,516
Other liabilities			1,422		4,668
	Liabilities of discontinued operations	$	9,081	$	16,797

(1)

These balances have not been reclassified as Held for Sale on the November 3, 2007 balance sheet.

F-18

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

6. Goodwill and Intangibles

        The Company's goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired at the date of acquisition. The primary other identifiable intangible assets of the Company with indefinite lives are reacquired franchise rights. These assets are not amortized but rather tested for impairment at least annually by applying a fair-value based test in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This test is generally performed by the Company during its fourth fiscal quarter or more frequently if the Company believes impairment indicators are present. The Company determined its reporting units to be the same as its operating segments under SFAS 131 "Disclosures about Segments of an Enterprise and Related Information". See Note 17.

        During the Company's second quarter of fiscal 2008, several factors led management to consider whether its goodwill and other intangibles might be impaired. These factors included three possible indicators of impairment, including: a) a decline in the market capitalization of the company to a level below the book carrying value of its equity; 2) the sale of its U.K. subsidiary below the fair value as determined at September 1, 2007; and 3) unexpected revenue declines for its U.S. domestic reporting unit through the end of its second fiscal quarter. As a result of these conditions, the Company performed the first step in the impairment test required by SFAS 142 which compares the fair value of a reporting unit to its carrying value, including goodwill and intangibles and concluded that the fair value of its US Domestic Reporting Unit exceeded the carrying value and market capitalization which indicated that the Company's goodwill was not impaired. Therefore the Company did not perform the second step of the impairment test and no impairment charge was recorded in the second quarter of fiscal 2008. In light of the continued decline in revenue and market capitalization for Westaff, the Company determined that an interim impairment test was again necessary during the third quarter of fiscal 2008.

        Prior to performing Step 1 of the goodwill impairment testing process for a reporting unit under SFAS 142, if there is reason to believe that other non-goodwill related intangible assets may be impaired, these other intangible assets must first be tested for impairment under SFAS 142 or SFAS 144. Assets governed by SFAS 144 require a recoverability test whereby the gross undiscounted cash flows are determined specific to the asset. For non-goodwill related indefinite-lived assets, a fair value determination is made. If the carrying value of the asset exceeds the fair value, then impairment occurs. The carrying values of these assets are impaired as necessary to provide the appropriate carrying value for the goodwill impairment calculation.

        Based on the impairment evaluation at the end of the third quarter 2008, it was determined that the indefinite life franchise right intangible was impaired by $171,000. Such an impairment charge was measured in accordance with SFAS 142 as the excess of the carrying value over the fair value of the asset.

        After completing the intangible asset impairments, the Company compared the fair value of the US Domestic Business Services reporting unit to its carrying value and determined that the reporting unit was impaired. Upon completion of step two of the impairment test, the Company recorded a goodwill impairment of $11.4 million in relation to its U.S. Domestic Business Services reporting unit. The fair value of the Australia and New Zealand reporting units were greater than the net book value and accordingly, no second step was required. The Company's impairment evaluations were performed

F-19

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

6. Goodwill and Intangibles (Continued)

by management. The evaluations for other goodwill and other intangible assets included reasonable and supportable assumptions and projections and were based on estimates of projected future cash flows.

        Given the continued decline in revenues, the Company in the fourth quarter of fiscal 2008 again performed an impairment test under SFAS 142 for its indefinite life franchise right intangibles and Australia goodwill. As a result, goodwill of the Australia subsidiary was impaired by $0.2 million. No material impairment was recognized on the indefinite life franchise right intangibles.

        The goodwill and intangible assets impairment charge is non-cash in nature and does not affect the Company's liquidity, cash flows from operating activities, or debt covenants, or have any impact on future operations. No impairment was identified in fiscal years 2007 and 2006.

F-20

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

6. Goodwill and Intangibles (Continued)

        The following tables show the change to goodwill and intangible assets during fiscal 2007 and 2008:

	Gross goodwill and intangible assets
	Year End October 28, 2006		2007 Additions		Impairments 2007		Year End November 3, 2007		Accumulated Amortization			Effects of Foreign Currency		Reclass to Assets Held for Sale		Net Amount
	(In thousands)
Domestic Business Services amortized intangible assets—Non-compete agreements	$	174	$	3	$	—	$	177	$	(140	)	$	—	$	—	$	37
Domestic Business Services indefinite life intangible assets—Franchise rights		3,370		288		—		3,658		—			—		—		3,658
Total intangible assets		3,544		291				3,835		(140	)		—				3,695
Domestic Business Services goodwill		11,369		—		—		11,369		—			—		—		11,369
Australia goodwill		998		—		—		998		—			261		—		1,259
Total goodwill		12,367		—		—		12,367		—			261		—		12,628
Total goodwill and intangible assets	$	15,911	$	291	$	—	$	16,202	$	(140	)	$	261	$	—	$	16,323

	Gross goodwill and intangible assets
	Year End November 3, 2007		2008 Additions		Impairments 2008			Year End November 1, 2008		Accumulated Amortization			Effects of Foreign Currency			Reclass to Assets Held for Sale			Net Amount
	(In thousands)
Domestic Business Services amortized intangible assets—Non-compete agreements	$	177	$	—	$	—		$	177	$	(160	)	$	—		$	—		$	17
Domestic Business Services indefinite life intangible assets—Franchise rights		3,658		—		(171	)		3,487		—			—			—			3,487
Total intangible assets		3,835				(171	)		3,664		(160	)		—						3,504
Domestic Business Services goodwill		11,369		—		(11,369	)		—		—			—			—			—
Australia goodwill		1,259		—		(186	)		1,073		—			(437	)		(636	)		—
Total goodwill		12,628		—		(11,555	)		1,073		—			(437	)		(636	)		—
Total goodwill and intangible assets	$	16,463	$	—	$	(11,726	)	$	4,737	$	(160	)	$	(437	)	$	(636	)	$	3,504

        Total estimated amortization expense for fiscal year 2009 is $17,000.

F-21

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

7. Credit Agreements

        On February 14, 2008, the Company (through its wholly-owned subsidiary Westaff (USA), Inc.) entered into a financing agreement with U.S. Bank National Association ("U.S. Bank"), as agent, and the lenders thereto, which provides for a five-year revolving credit facility that previously provided for an aggregate commitment of up to $50.0 million, including a letter of credit sub-limit of $35.0 million (the "Financing Agreement"). Borrowings under the Financing Agreement bear interest, at the Company's election, at either U.S. Bank's prime rate or at LIBOR plus an applicable LIBOR rate margin ranging from 1.25% to 2.00%. The Financing Agreement provides that a default rate would apply on all loan obligations in the event of default under the Financing Agreement and related documents, at a rate per annum of 2.0% above the applicable interest rate. Interest is payable on a monthly basis. The Company has $27.3 million of letters of credit supporting workers' compensation obligations outstanding under the U.S. Bank Credit facility at November 1, 2008, but no cash borrowings.

        On May 23, 2008, the Company received a notice of default from U.S. Bank National Association ("U.S. Bank") (as agent for itself and Wells Fargo Bank, National Association ("Wells Fargo"), as lenders, stating that (1) an Event of Default (as defined in the Financing Agreement) had occurred due to the Company's failure to achieve a minimum required Fixed Charge Coverage Ratio (as defined in the Financing Agreement) for the fiscal period ended April 19, 2008; and (2) as a result of the Event of Default, effective May 21, 2008, U.S. Bank increased the rate of interest to the default rate of interest on the borrowings outstanding under the Financing Agreement.

        On July 31, 2008, the Company entered into a Forbearance Agreement with U.S. Bank and the lenders. Pursuant to the terms of the Forbearance Agreement, (i) the lenders agreed to forbear from exercising any of their default rights and remedies in response to the occurrence and continuance of the Event of Default commencing on the date of the Forbearance Agreement and ending on August 26, 2008, (ii) the Company agreed to a reduction in the aggregate amount of the commitments under the Financing Agreement from $50.0 million to $33.0 million effective as of June 23, 2008, and (iii) U.S. Bank agreed to maintain a reserve against the revolving credit availability to cover the Company's payroll and payroll tax obligations.

        On August 26, 2008, the Company entered into an Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to forbear from exercising any of their default rights and remedies through September 30, 2008 so long as no additional Events of Default occur. In addition, pursuant to the terms of the Amended and Restated Forbearance Agreement, (i) the parties agreed that U.S. Bank and the lenders shall continue to maintain a reserve against the revolving credit availability to cover the Company's payroll and payroll tax obligations, (ii) the Company agreed to continue to use its best efforts to have one of its undrawn letters of credit in the face amount of $27.0 million returned in exchange for cash collateral security, (iii) the Company agreed to pay to U.S. Bank and the lenders a one-time forbearance fee in the aggregate amount of $25,000. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through September 30, 2008.

        On September 30, 2008, the Company entered into a Second Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to forbear from exercising any of their default rights and remedies through November 21, 2008, so long as no additional Events of Default occur. In addition, pursuant to the terms of the Second Amended and Restated Forbearance Agreement, (i) the parties agreed to amend the Financing Agreement to add a minimum EBITDA

F-22

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

7. Credit Agreements (Continued)

financial covenant in respect of the next five 4-week fiscal periods, (ii) the parties agreed that U.S. Bank and the lenders shall continue to maintain a reserve against the revolving credit availability to cover the Company's payroll and payroll tax obligations, (iii) the Company agreed to continue to use its best efforts to have one of its undrawn letters of credit in the face amount of $27.0 million returned in exchange for cash collateral security, (iv) the Company agreed to comply with certain additional covenants relating to the pending sale of its shares in Westaff (Australia) Pty Limited and Westaff NZ Limited, dated as of September 27, 2008; (v) the Company agreed to provide U.S. Bank and the lenders with evidence that it has renewed its existing workers' compensation insurance policy or obtained a replacement, and (vi) the Company agreed to pay to U.S. Bank and the lenders a one-time forbearance fee in the aggregate amount of $25,000. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through November 21, 2008.

        On November 20, 2008, the Company entered into a First Amendment to the Second Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to forbear from exercising any of their default rights and remedies through December 5, 2008, so long as no additional Events of Default occur. The Company consented to the revision of certain additional covenants relating to the sale of its shares in Westaff (Australia) Pty Limited and Westaff NZ Limited, completed as of November 10, 2008. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through December 5, 2008.

        On December 3, 2008, the Company entered into a Second Amendment to the Second Amended and Restated Forbearance Agreement with U.S. Bank and the lenders, and the lenders agreed to forbear from exercising any of their default rights and remedies through December 19, 2008, so long as no additional Events of Default occur. The interest rates applicable to the loans made pursuant to the Financing Agreement will continue at the default rate through December 19, 2008.

        The Company is currently in discussions with U.S. Bank in order to seek a waiver or continued forbearance in respect of the Event of Default. There can be no assurance that the Company will be able to obtain a waiver or continued forbearance or that such a waiver or continued forbearance would be on terms acceptable to the Company. If the Company is unable to obtain a waiver or continued forbearance and the lenders elect to pursue remedies under the Financing Agreement, such as limiting or terminating the Company's right to borrow under the Financing Agreement or electing not to renew letters of credit, it would have a material adverse effect on the Company's business, financial condition, results of operations,, cash flows and ability to continue our operations as a going concern. Under these circumstances, and unless the pending merger with Koosharem is completed, we may be required to seek alternative transactions, raise additional capital and/or consider filing for bankruptcy protection.

        On August 25, 2008, the Company secured a $3.0 million subordinated loan facility with its principal stockholder, Delstaff, LLC. This facility may be used by the Company for working capital and general business purposes during the term of the facility. The unpaid principal balance under the Subordinated Loan bears interest at an annual rate of twenty percent (20%). Interest is payable-in-kind and accrues monthly in arrears on the first day of each month as an increase in the principal amount of the Subordinated Loan. A default rate applies on all obligations under the Subordinated Loan Agreement from and after the Maturity Date (August 15, 2009) and also during the existence of an Event of Default (as defined in the Subordinated Loan Agreement) at an annual rate of ten percent (10%) also payable-in-kind over the then-existing applicable interest rate. If principal is not repaid on the Maturity Date, an additional 5% of outstanding principal must be paid along with the default rate

F-23

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

7. Credit Agreements (Continued)

interest. The obligations under the Subordinated Loan Agreement are secured by a security interest in substantially all of the existing and future assets (the "Subordinated Collateral") of the Company. The lien granted to the Subordinated Lender in the Subordinated Collateral is subordinated to the lien in that same collateral granted to U.S. Bank. Borrowings in excess of $1.0 million require the Subordinated Lender approval. The Subordinated Loan may be prepaid without penalty, subject to approval by U.S. Bank and the terms of an Intercreditor Agreement. Under certain circumstances, the Company must prepay all or a portion of any amounts outstanding under the Subordinated Loan Agreement, subject to the terms of the Intercreditor Agreement. The outstanding loan balance at November 1, 2008 was $2.2 million, which includes a $0.2 million facility fee that was added to the loan balance upon receipt of the initial advance. Accrued and unpaid interest on this note at November 1, 2008 was $40,000. Subsequent to year end on each date, January 7, 2009 and January 29, 2009, the Company was advanced an additional $500,000 from Delstaff, LLC for a total of $1.0 million. See Note 19.

        The Company's former Australian subsidiary maintains an A$12 million Australian dollar facility agreement (the "A$ Facility Agreement") with GE Capital, as primary agent, set to expire in May 2009. The A$ Facility Agreement includes a letter of credit sub-facility. The outstanding balance on the Australia Facility Agreement at November 1, 2008 was $4.6 million at 8.17% rate per annum.            The debt has been classified as current liabilities held for sale in the consolidated balance sheet as of November 1, 2008 due to the agreement to sell the Australia subsidiary which was entered into as of September 27, 2008. In connection with the agreement, the GE Capital debt was paid in full subsequent to year end.

        The Company has an unsecured subordinated promissory note in an amount of $2.0 million, dated May 17, 2002 and payable to the former Chairman of the Board of Directors. The note, matured on August 18, 2007, is now past due and has an interest rate equal to an indexed rate as calculated under the Company's credit facilities plus seven percent, compounded monthly and payable 60 calendar days after the end of each of the Company's fiscal quarters. The effective interest rate on November 1, 2008 was 11.0%. Payment of interest is contingent on the Company meeting minimum availability requirements under its credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the credit facilities. U.S. Bank, which is the agent and a lender under our primary credit facility, has exercised its right to prohibit repayment of the note. Accrued and unpaid interest on this note at November 1, 2008 was $0.4 million and is included in accrued expenses in the Company's consolidated balance sheets.

F-24

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

8. Accrued Expenses

        Accrued expenses consist of the following:

	November 1, 2008		November 3, 2007
	(In thousands)
Accrued payroll and payroll taxes	$	7,030	$	16,356
Checks outstanding in excess of book cash balances		2,949		4,753
Accrued insurance and general liability		2,085		3,151
Taxes other than income taxes		242		4,120
Franchise commissions payable		831		1,599
Restructuring accrual (Note 14)		300		1,146
Other		3,062		3,022
	$	16,499	$	34,147

9. Income Taxes

        In the second quarter of fiscal 2008 the Company established a valuation allowance of $23.2 million on all of the deferred tax assets except for $0.8 million related to the estimated federal and Australian net operating loss because it believed these assets were more likely than not of being realized in fiscal 2008. During the third quarter of fiscal 2008, the federal net operating loss was carried back for a cash refund of $0.5 million and reinstatement tax credits of $0.3 million. The foreign deferred tax assets relate to net operating losses in jurisdictions which had not experienced cumulative losses in recent periods. However, since the Australia subsidiary was sold as of November 10, 2008 all of the Company's remaining net deferred tax assets were offset with a valuation allowance of $29.9 million at November 1, 2008 as it is more likely than not that all of the deferred tax assets will not be realizable in the foreseeable future. For the year ended November 1, 2008, the Company had an income tax provision from continuing operations of approximately $19.8 million on a pre-tax loss from continuing operations of $27.2 million, which represents an effective tax rate of - -72.8%. The tax provision was primarily generated from the establishment of a valuation allowance in fiscal year 2008.

F-25

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

9. Income Taxes (Continued)

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

	Fiscal Year Ended
	November 1, 2008			November 3, 2007			October 28, 2006
	(In thousands)
Current:
Federal		(490	)		308			944
State and local		70			238			229
Foreign		75			206			116
Total current provision		(345	)		752			1,289
Deferred:
Federal		17,238			(4,204	)		(1,457	)
State and local		2,931			(257	)		252
Foreign		—			240			—
Total deferred provision		20,169			(4,221	)		(1,205	)
Total provision (benefit) for income taxes from continuing operations	$	19,824		$	(3,469	)	$	84

        A reconciliation of income taxes provided at the statutory federal rate of (35%) and income taxes reported in the Consolidated Statements of Operations is as follows:

	Fiscal Year Ended
	November 1, 2008			November 3, 2007			October 28, 2006
	(In thousands)
Income tax provision (benefit) computed at federal statutory rate(1)		(9,033	)		(2,007	)		1,044
State taxes net of federal benefit		(1,093	)		(9	)		315
Permanent differences		1,573			981			649
Tax credits		(1,745	)		(2,538	)		(1,802	)
Goodwill impairment		340			—			—
Valuation allowances		29,852			—			—
Prior year tax return to provision true-up		(240	)		(92	)		(236	)
Withholding taxes		75			206			116
Other		95			(10	)		(2	)
Income tax provision (benefit)	$	19,824		$	(3,469	)	$	84

(1)

The income tax provision is based on income that includes intercompany royalties and interest.

F-26

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

9. Income Taxes (Continued)

        The approximate tax effect of temporary differences and carryforwards that give rise to deferred tax balances are as follows:

	Fiscal Year Ended
	November 1, 2008			November 3, 2007			October 28, 2006
	(In thousands)
Workers' compensation	$	9,714		$	10,633		$	10,300
Tax credits		9,414			6,977			3,633
Federal, state and foreign net operating loss carryforwards		6,506			2,075			805
Accumulated depreciation and amortization		4,153			1,443			2,124
Sales of property		306			882			1,257
Accruals relating to discontinued operations		—			9			1
Other liabilities and accruals		(241	)		(255	)		118
Gross deferred tax assets		29,852			21,764			18,238
Less: Valuation allowance		(29,852	)		—			—
Net deferred tax asset	$	—		$	21,764		$	18,238

        At November 1, 2008, the Parent had no cumulative undistributed earnings from foreign subsidiaries as these amounts are at a deficit balance. The Company sold its remaining foreign operations on November 10, 2008. Income taxes have not been provided on the undistributed earnings because the Company has deemed the earnings of its foreign subsidiaries as permanently reinvested. These earnings could become subject to additional tax if they were remitted as dividends, or if foreign earnings were lent to the Company. However, to the extent that these earnings were previously taxed in foreign jurisdictions, the Company anticipates the resulting tax amount would qualify for a domestic tax credit.

        The Company's deferred tax assets resulting from net operating loss carryforwards expire at varying future dates, with $17,000 expiring during fiscal 2009, $13,000 expiring during fiscal 2010, and $6.4 million expiring through fiscal 2028. The Company's deferred tax assets resulting from Work Opportunity Tax Credits and foreign tax credit carryforwards in the amount of $9.4 million expire through 2028.

        As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. The Company performed evaluations for the tax years ended 2007, 2006, 2005 and 2004, which are subject to examination by tax authorities, as well as the tax positions presented in the current year financial statements. During the current year the Company determined it had $869,000 of uncertain tax positions. Of this amount, $309,000 was recorded as a liability in its financial statements as of November 1, 2008.

F-27

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

9. Income Taxes (Continued)

        The following table summarizes the activity related to the Company's unrecognized tax benefits (amounts in thousands) during the current year:

	Total
Balance at November 3, 2007	$	—
Gross increases related to prior year tax positions		—
Gross decreases related to prior year tax positions		—
Gross increases related to current year tax positions		869
Settlements/Lapse in statute of limitation		—
Balance at November 1, 2008	$	869

        The Company does not anticipate any material changes in its liability for uncertain tax positions during the next 12 months.

        If the Company's positions are sustained by the taxing authority in favor of the Company, approximately $309,000 of uncertain tax position liabilities would favorably impact the Company's effective tax rate. If the remaining $560,000 is recorded as a liability in the financial statements in future periods it too would favorably impact the Company's effective tax rate if sustained upon audit.

        Effective upon adoption of FIN 48, the Company adopted the method to recognize interest and penalties accrued related to unrecognized tax benefits and penalties within its provision for income taxes. The Company had no such interest and penalties accrued at November 1, 2008 as such amounts are immaterial.

        The Company is currently subject to income tax examination in two states for the years 2004 to 2007. The Company is not currently subject to income tax examination in any other jurisdiction.

10. Leases

        The Company leases real and personal property under operating leases with terms generally ranging from one to five years. Some of these leases have renewal options and contain provisions for escalation based on increases in certain costs incurred by the landlord and on Consumer Price Index adjustments. Rental expense from continuing operations, including month-to-month rentals, amounted to $2.8 million in fiscal 2008, $4.7 million in fiscal 2007, and $3.6 million in fiscal 2006. The Company also receives rental income from subleases which expire on various dates. Sublease income was not material to the Company's results of operations for any periods presented.

        In fiscal 2003, the Company entered into a sale-leaseback transaction whereby the Company sold and leased back its administrative offices' land and buildings. The lease, which is being accounted for as an operating lease, has a term of seven years. In connection with the lease agreement, the Company issued a $700,000 irrevocable standby letter of credit as a security deposit.

F-28

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

10. Leases (Continued)

        Future minimum lease payments for all non-cancelable operating leases at November 1, 2008 are as follows:

Minimum Lease Payments:			(In thousands)
		2009	$	2,321
		2010		1,781
		2011		1,055
		2012		346
		2013		6
	Thereafter			—
Total Minimum Lease Payments			$	5,509

        The table above includes future minimum lease payments on restructured properties. See Note 14.

        The following is a summary of future minimum payments under capitalized leases, primarily for information technology equipment, at November 1, 2008:

Minimum lease payments:		(In thousands)
	Fiscal 2009	$	649
	Fiscal 2010		174
Total minimum lease payments			823
	Less amount representing interest		(71	)
Present value of net minimum lease payments			752
	Less current portion of capital lease obligation		(587	)
Long-term capital lease obligation		$	165

11. (Loss) Earnings per Share

        Basic (loss) earnings per share of common stock is computed as (loss) earnings divided by the weighted average number of common shares outstanding for the period. Diluted (loss) earnings per share of common stock is computed as (loss) earnings divided by the weighted average number of common shares and potentially dilutive common stock equivalents outstanding during the period. Diluted (loss) earnings per share reflects the potential dilution that could occur from common stock

F-29

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

11. (Loss) Earnings per Share (Continued)

issuances as a result of stock option exercises. The following table sets forth the computation of basic and diluted (loss) earnings per share:

			Fiscal Year Ended
			November 1, 2008			November 3, 2007			October 28, 2006
			(In thousands, except per share amounts)
(Loss) income from continuing operations			$	(47,050	)	$	(4,307	)	$	1,421
(Loss) income from discontinued operations, net of tax				752			2,373			1,698
Net (loss) income			$	(46,298	)	$	(1,934	)	$	3,119
Denominator for basic earnings per share-
		—weighted average shares		16,697			16,625			16,454
Effect of dilutive securities: stock options and awards				—			—			72
Denominator for diluted earnings per share—adjusted
		weighted average shares and assumed conversions		16,697			16,625			16,526
(Loss) earnings per share from continuing operations
	Basic		$	(2.82	)	$	(0.26	)	$	0.09
	Diluted			(2.82	)		(0.26	)		0.09
Earnings per share from discontinued operations
	Basic		$	0.05		$	0.14		$	0.10
	Diluted			0.05			0.14			0.10
(Loss) earnings per share
	Basic		$	(2.77	)	$	(0.12	)	$	0.19
	Diluted		$	(2.77	)	$	(0.12	)	$	0.19
Antidilutive weighted shares excluded from diluted earnings
per share				474			445			260

12. Stockholder's Equity

        Treasury Stock    From time to time, the Company has repurchased shares of its common stock on the open market and may do so in the future subject to limitations contained in our financing agreement with U.S. Bank.

        Employee Stock Purchase Plan.    In July 2006, the Board of Directors adopted and approved an amendment and restatement of the Company's 1996 Employee Stock Purchase Plan to (i) bifurcate the Purchase Plan into the Company's Employee Stock Purchase Plan and the Company's International Employee Stock Purchase Plan, (together the "Purchase Plans"), (ii) extend the term of the Purchase plans to the last business day of January 2017, (iii) expand the actions that we can take in connection with a "Corporate Transaction" and (iv) modify the participating subsidiaries to these Purchase Plans to cover the employees of certain of our subsidiaries. In addition, effective for purchase periods commencing on and after August 1, 2006, the purchase price for shares purchased under the Purchase Plans will equal 90% of the lower of (i) the fair market value at the beginning of the purchase period or (ii) the fair market value on the last day of the purchase period. Additionally, on April 16, 2008, the

F-30

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

12. Stockholder's Equity (Continued)

Board of Directors approved an amendment and restatement of the Company's 2006 Employee Stock Purchase Plan (the "ESPP") to increase the number of shares of the Company's Common Stock, $0.01 par value ("Common Stock") available for purchase under the ESPP from 612,500 shares to 1,362,500 shares and expand the ability of the Board of Directors to amend the ESPP without stockholder approval. Under the Purchase Plans, eligible employees may authorize payroll deductions of up to 10% of eligible compensation for the purchase of the Company's common stock during each semiannual purchase period. As of November 1, 2008, shares issued under the Purchase Plans totaled 663,457.

        Restricted Stock Units.    On May 30, 2008, the Company granted 90,000 restricted stock units to certain employees. Each grant entitles the recipient to convert units to shares of common stock subject to terms of the awards. The maximum units to be awarded, if all performance conditions are met, are 135,000 units. The restricted stock units will vest, if all conditions are met, 50% on October 30, 2010 and 50% on October 29, 2011. Besides the condition that the recipient must complete a period of continuous service to the Company through and including the vest dates, there is a performance condition and a market condition, both of which must be met. First, for each of three fiscal years, beginning with fiscal 2008, the company must meet an EBITDA target and second, the company's stock price must meet certain requirements as compared to a designated "peer" group's average stock price. As of November 1, 2008, the achievement of performance based criteria is not probable; therefore no compensation expense has been recognized.

        Stock Based Compensation.    The Company's 1996 Stock Option/Stock Issuance Plan terminated in April 2006. As of November 1, 2008, 56,500 shares remained outstanding under the plan. In April 2006, the stockholders approved the 2006 Stock Incentive Plan. The 2006 Stock Incentive Plan provides for the granting of incentive and non-qualified stock options, restricted stock awards and stock appreciation rights. Incentive stock options may be granted at a price not less than 100% of the fair market value of the Company's common stock at the date of grant. Although non-qualified options may be granted at a price not less than 85% of the fair market value of the Company's common stock at the date of grant, the Company has historically issued option grants with exercise prices equal to fair market value on the date of grant. The options' vesting schedules vary subject to the participant's period of future service or to the Company's or the option holder's attainment of designated performance goals, or otherwise at the discretion of the Board of Directors. Standard vesting is over four years with 25% of the options vesting upon completion of one year of service from the vesting commencement date, and the remaining options vesting in 36 equal monthly installments. No option may have a term in excess of 10 years. As of November 1, 2008 there were 1.5 million shares available for issuance under this plan and 527,500 options or stock appreciation rights were outstanding under this plan.

        In April 2005, the Company granted 20,000 restricted shares of its common stock to its former President and Chief Executive Officer under the 1996 Stock Option/Stock Issuance Plan. The original terms of the grant provided that 5,000 shares were to vest at the end of each of the Company's fiscal years 2006 and 2007 provided certain performance criteria were met, with the remainder vesting in fiscal 2008. The terms of the grant for 2006 were not met for fiscal 2006 and were originally deferred to fiscal 2008. In May, 2007 as part of the shareholder transaction the restrictions associated with the 20,000 shares granted to the former President and Chief Executive Officer were lifted and the 20,000 shares were issued. The Company also accelerated the vesting of all outstanding options to the former President and Chief Executive Officer which were exercised in the fourth quarter of fiscal 2007, resulting in expense of $373,000 recorded as restructuring expense in fiscal 2007.

F-31

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

12. Stockholder's Equity (Continued)

        The following table summarizes the stock option transactions under the Company's plan:

		November 1, 2008					November 3, 2007					October 28, 2006
		Shares			Weighted average exercise price		Shares			Weighted average exercise price		Shares			Weighted average exercise price
		(In thousands, except for exercise prices)
Options outstanding, beginning of year			445		$	4.23		417		$	3.39		640		$	3.69
	Granted at market value		333			1.28		366			4.37		9			4.05
	Exercised		—			—		(314	)		3.19		(143	)		3.04
	Cancelled		(194	)		4.40		(24	)		5.42		(89	)		6.17
Options outstanding, end of year			584		$	2.47		445		$	4.23		417		$	3.39
Options exercisable, end of year			121		$	3.83		89		$	3.64		242		$	3.42
Options available for grant, end of year			973					1,144					1,500
Total options authorized			1,557					1,589					1,917
Weighted average fair value of options granted during the year:					$	0.70				$	2.70				$	3.68

Adoption of SFAS 123(R)

        Effective with the beginning of the first quarter of fiscal 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment ("SFAS 123(R)") using the modified prospective method of adoption. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock awards over the requisite service period (generally the vesting schedule). Prior to fiscal 2006, the Company measured compensation cost for employee stock options and similar equity instruments using the intrinsic value-based method of accounting prescribed by APB 25.

        The determination of the fair value of stock options, using the Black-Scholes model, is affected by the Company's stock price as well as assumptions as to the Company's expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behavior, the risk-free interest rate, and expected dividends.

        The Company has applied the provisions of SAB 107 and SAB 110 in electing the simplified method for determining the expected life of options granted subsequent to the date of the shareholder transaction in February 2007 when the Company's former founder and Chairman of the Board sold all of his common stock in Westaff to DelStaff, LLC. The Company estimates the volatility of the common stock by using historical volatility over a period equal to the award's expected term. The risk-free interest rates that are used in the valuation models are based upon yields of the U.S. Treasury constant maturities at the time of grant having a term that approximates the expected life of the options. Dividend yield is zero as the Company did not declare or pay dividends during fiscal years 2008, 2007, or 2006 and its current credit facilities prohibit payment of dividends. The Company does not currently have plans to declare dividends in future years.

        SFAS 123(R) requires companies to estimate future expected forfeitures at the date of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS 123(R), the Company had recognized the impact of forfeitures as they occurred.

F-32

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

12. Stockholder's Equity (Continued)

Under SFAS 123(R), the Company uses historical data to estimate pre-vesting forfeiture rates in determining the amount of stock-based compensation expense to recognize. During the fiscal year 2008, the Company increased its forfeiture rate by analyzing historic forfeiture rates and reviewing outstanding unvested option grants which resulted in a decrease to stock-based compensation expense.

        The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model that uses the weighted average assumptions noted in the following table:

	Years Ended
	November 1, 2008			November 3, 2007			October 28, 2006
Expected life (years)		5			5			6
Risk-free interest rate		3.7	%		4.6	%		4.9	%
Volatility		61	%		71	%		133	%
Dividend yield		None			None			None

        In a private transaction in February 2007, W. Robert Stover, Westaff's founder and former Chairman of the Board of Directors, sold all of his common stock in Westaff, representing approximately 49.6% of the outstanding common stock to DelStaff, LLC, a Delaware limited liability company ("DelStaff"). Prior to the sale the Company used historical data to estimate the options' expected term, which represented the period of time that options granted were expected to be outstanding. Subsequent to the sale, the Company accelerated the options of the former President and Chief Executive Officer who held 225,000 of the outstanding options at the beginning of the year. These options were exercised late in fiscal year 2007. An additional 93,000 options of the 417,000 outstanding at the beginning of the year were also exercised or cancelled. 337,500 of the 366,000 options granted in fiscal year 2007 were issued following the sale to DelStaff. These new options to selected employees typically have a seven year life while the options issued prior to the sale typically had a 10 year life.

        There were no options exercised during the year ended November 1, 2008. The total intrinsic value of options exercised was $248,000 and $148,000 during the years ended November 3, 2007 and October 28, 2006, respectively. The Company issues new shares upon the exercise of options.

        The following table summarizes information about stock options outstanding or exercisable as of November 1, 2008:

	Options outstanding						Options exercisable
Range of exercise prices	Shares		Weighted average remaining contractual life		Weighted average exercise price		Shares		Weighted average exercise price
	(In thousands, except for years and exercise prices)
$0.85 - 0.85		13	$	6.80	$	0.85		—	$	—
$1.05 - 1.05		250		6.65		1.05		—		—
$2.07 - 3.81		120		2.79		2.49		50		2.90
$4.02 - 4.05		56		6.11		4.02		19		4.03
$4.34 - 5.69		145		8.14		4.45		52		4.66
$0.85 - 5.69		584	$	6.18	$	2.47		121	$	3.83

F-33

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

12. Stockholder's Equity (Continued)

        The stock options outstanding and stock options exercisable as of November 1, 2008 had no intrinsic value. The intrinsic value is calculated as the difference between the market value as of November 1, 2008 and the exercise price of the shares. The market value as of November 1, 2008 was $0.40 as reported by the NASDAQ Global Market System. As of November 1, 2008, total deferred compensation cost related to unvested stock options and awards not yet recognized is $381,000, which is expected to be recognized over a weighted-average remaining term of 3.3 years. There are no in-the-money options exercisable as of November 1, 2008.

        During fiscal 2008, the Company recognized $175,000 in compensation expense related to options granted to employees and directors. Stock based compensation expense is included in selling and administrative expenses. During fiscal 2007, the Company recognized $602,000 in compensation expense related to option grants to employees and directors. $373,000 of the amount recognized in fiscal 2007 related to the acceleration of options granted to the former President and Chief Executive Officer and are included in restructuring expenses. The remaining balance of stock-based compensation expense in fiscal 2007 of $229,000 is included in selling and administration expense.

        All stock-based compensation awards are amortized on a straight-line basis over the requisite service periods of the awards.

F-34

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

13. Savings Plans

        The Company has a 401(k) savings plan for eligible domestic employees. Under the plan for fiscal year 2008 and fiscal year 2007, employees can elect to contribute up to 60% of their eligible annual compensation subject to statutory limits. The Company currently is not providing employer matching contributions. The non-qualified deferred savings plan for highly compensated employees was terminated effective October 7, 2008.

14. Company Restructuring

        In the third quarter of fiscal 2007, the Company approved a restructuring plan to, among other things, reduce its workforce and consolidate facilities. Restructuring charges have been recorded to align the Company's cost structure with changing market conditions and to create a more efficient organization. The Company's restructuring charges have been comprised primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities.

        The Company accounted for each of these costs in accordance with FASB 146, "Accounting for Costs Associated with Exit or Disposal Activities." In the third quarter of fiscal 2007, the Company started a series of changes to its operations that management believes will significantly reduce its costs. The Company terminated 86 positions at field and corporate offices and closed 26 branch offices. The customers served by these closed offices have been transferred to other offices within the proximity of the closed offices. The detail is as follows:

		Total			Employee reduction			Unrecoverable assets			Facilities
Accrual balance at October 28, 2006		$	—		$	—		$	—		$	—
	Severence and termination payments		1,626			1,626			—			—
	Non-cash severence and termination benefits		373			373			—			—
	Rent expense under non-cancellable leases reduced by estimated sublease income		1,232			—			—			1,232
	Unrecoverable assets		68			—			68			—
Total restructuring expense			3,299			1,999			68			1,232
Less: Amounts paid			(2,153	)		(1,999	)		(68	)		(86	)
Accrual balance at November 3, 2007		$	1,146		$	—		$	—		$	1,146
Less: Amounts paid			(762	)		—			—			(762	)
Restructuring benefit			(84	)		—			—			(84	)
Accrual balance at November 1, 2008		$	300		$	—		$	—		$	300

        During the 2008 fiscal year, the Company successfully negotiated early termination agreements for nine locations and entered into a sublease for four locations, the effects of which resulted in a $0.1 million reduction in our estimated accrual. The Company is still responsible for lease payments on seven locations that have lease terms that extend to 2012 and is actively negotiating early terminations, where possible, and sublease opportunities to mitigate its obligation. The restructuring accrual, representing rent expense under non-cancellable leases has been reduced for any contractual subleases. The Company has not reduced the November 1, 2008 liability by any estimated future sublease income

F-35

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

14. Company Restructuring (Continued)

as the Company does not believe the remaining offices will be subleased. Our minimum lease commitments in Note 10 includes our commitments on these facilities.

15. Related Party Transactions

        The Company has an unsecured subordinated promissory note in an amount of $2.0 million, dated May 17, 2002 and payable to the former Chairman of the Board of Directors. The note matured on August 18, 2007, is now past due and has an interest rate equal to an indexed rate as calculated under the Company's credit facilities plus seven percent, compounded monthly and payable 60 calendar days after the end of each of the Company's fiscal quarters. The effective interest rate on November 1, 2008 was 11.0%. Payment of interest is contingent on the Company meeting minimum availability requirements under its credit facilities. Additionally, payments of principal or interest are prohibited in the event of any default under the credit facilities. U.S. Bank, which is the agent and a lender under our primary credit facility, has exercised its right to prohibit repayment of the note. There were no interest payments on this note during fiscal 2008. Interest paid on this note during fiscal 2007 and fiscal 2006 was $0.2 million and $0.3 million, respectively. Accrued and unpaid interest on this note at November 1, 2008 was $0.4 million and is included in accrued expenses in the Company's consolidated balance sheets.

        On August 25, 2008, the Company secured a $3.0 million subordinated loan facility with its principal stockholder, Delstaff, LLC. This facility may be used by the Company for working capital and general business purposes during the term of the facility. The unpaid principal balance under the Subordinated Loan bears interest at an annual rate of twenty percent (20%). Interest is payable-in-kind and accrues monthly in arrears on the first day of each month as an increase in the principal amount of the Subordinated Loan. A default rate applies on all obligations under the Subordinated Loan Agreement from and after the Maturity Date (August 15, 2009) and also during the existence of an Event of Default (as defined in the Subordinated Loan Agreement) at an annual rate of ten percent (10%) also payable-in-kind over the then-existing applicable interest rate. If the principal is not repaid on the Maturity Date, an additional 5% of outstanding principal must be paid along with the default rate interest. The obligations under the Subordinated Loan Agreement are secured by a security interest in substantially all of the existing and future assets (the "Subordinated Collateral") of the Company. The lien granted to the Subordinated Lender in the Subordinated Collateral is subordinated to the lien in that same collateral granted to U.S. Bank. Borrowings in excess of $1.0 million require the Subordinated Lender approval. The Subordinated Loan may be prepaid without penalty, subject to approval by U.S. Bank and the terms of an Intercreditor Agreement. Under certain circumstances, the Company must prepay all or a portion of any amounts outstanding under the Subordinated Loan Agreement, subject to the terms of the Intercreditor Agreement. The outstanding loan balance at November 1, 2008 was $2.2 million, which includes a $0.2 million facility fee that was added to the loan balance upon receipt of the initial advance. Accrued and unpaid interest on this note at November 1, 2008 was $40,000. There were no interest payments on this note during fiscal 2008. Subsequent to year end on January 7, 2009 and January 29, 2009, the Company was advanced an additional $500,000 from Delstaff, LLC for a total of $1.0 million. See Note 19.

16. Commitments and Contingencies

        In the ordinary course of its business, the Company is periodically threatened with or named as a defendant in various lawsuits, including, among other, litigation brought by former franchisees or

F-36

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

16. Commitments and Contingencies (Continued)

licensees, and administrative claims and lawsuits brought by employees or former employees. The Company insures itself to cover principal risks like workers' compensation, general liability, automobile liability, property damage, alternative staffing errors and omissions, fiduciary liability and fidelity losses. Management believes there are no matters that will have a material adverse effect on the Company's consolidated financial statements.

        During the fourth quarter of fiscal 2005, we were notified by the California Employment Development Department ("EDD") that our domestic operating subsidiaries unemployment tax rates would be increased retroactively for both calendar years 2005 and 2004. The total assessment by the EDD of additional unemployment taxes for both years, net of applied overpayments, is approximately $1.5 million including interest at applicable statutory rates. Management believes that it has properly calculated its unemployment insurance tax and is in compliance with all applicable laws and regulations. The Company has timely appealed the ruling by the EDD and is working with the outside counsel to resolve this matter. Additionally, management contends that the notification by the EDD of the 2004 assessment was not timely and holds the position that the assessment is procedurally invalid. Consequently, at November 1, 2008, the Company has no reserve for the 2004 assessment and has accrued the assessment for 2005 of $0.3 million, including interest and net of an applied overpayment. Although we believe that we have properly calculated our unemployment insurance tax and are in compliance with all applicable laws and regulations, there can be no assurances this will be settled in our favor. Management believes the Company is well positioned to defend against the un-accrued portion and the ultimate resolution of this matter will not have a material adverse effect on the Company's consolidated financial statements.

17. Operating Segments

        The Company has four reportable segments; however, only its domestic subsidiary is currently in our results of continuing operations. On March 31, 2008, the Company sold its former United Kingdom operations and related subsidiary. On September 27, 2008, the Company entered into a definitive agreement to sell its Australia and New Zealand subsidiaries. The sale was completed on November 10, 2008. In accordance with SFAS 144 , assuming no significant continuing involvement, a component of an entity that has been disposed of or held for sale is considered a discontinued operation. Accordingly, the Company has reflected the results of these subsidiaries as discontinued operations in the consolidated statement of operations for all years presented. See Note 5.

        Prior to the sale of the subsidiaries, the Company's four reportable segments included Domestic Business Services, United Kingdom, Australia and New Zealand. Domestic Business Services provides a variety of temporary staffing and permanent placement services, primarily in clerical and light industrial positions, through a network of Company-owned and franchise agent offices. The segment consists of four geographically diverse company regions under the direction of regional vice presidents and one combined franchise region, which together comprise a single reportable operating segment as such term is defined under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Revenue from the Domestic Business Services operating segment is derived wholly from the United States and its territories. The international operating segments were comprised of Company-owned offices, primarily providing clerical and light industrial temporary staffing and permanent placement services. Prior to the sale of those subsidiaries, the Company employed a managing director who oversaw operations in the United Kingdom, Australia and New Zealand. Revenue is attributed to each country based on the location of the respective country's principal offices.

F-37

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

17. Operating Segments (Continued)

        The Company evaluates the performance of and allocates resources to the reportable segments based on operating income. The accounting policies of the segments are the same as those described in Note 4. Certain operating expenses of the Company's corporate headquarters, which are included in the Domestic Business Services, are charged to the international entities in the form of royalties. Domestic assets relating to the generation of the royalties, primarily property, plant and equipment, have not been allocated due to impracticality and are not considered material for purposes of assessing performance and making operating decisions.

        The following summarizes reporting segment data for Domestic Business Services and the Discontinued Operations:

	Fiscal Year Ended November 1, 2008
	Domestic Business Svcs			Discontinued Operations		Adjustments(1)			Total
	(In thousands)
Revenue	$	324,495		$	126,109				$	450,604
Restructuring expenses	$	(84	)	$	—				$	(84	)
Operating income (loss)(2)	$	(24,901	)	$	855				$	(24,046	)
Depreciation and amortization	$	5,212		$	598				$	5,810
Purchases of fixed assets	$	389		$	239				$	628
Total long-lived assets	$	13,087		$	1,301				$	14,388
Total assets	$	61,819		$	15,772	$	(2,600	)	$	74,991

	Fiscal Year Ended November 3, 2007
	Domestic Business Svcs			Discontinued Operations		Adjustments(1)			Total
	(In thousands)
Revenue	$	439,822		$	148,894				$	588,716
Restructuring expenses	$	3,111		$	188				$	3,299
Operating income (loss)(2)	$	(5,500	)	$	2,790				$	(2,710	)
Depreciation and amortization	$	3,149		$	805				$	3,954
Purchases of fixed assets	$	3,343		$	750				$	4,093
Total long-lived assets	$	29,245		$	3,264				$	32,509
Total assets	$	116,543		$	31,564	$	(6,815	)	$	141,292

F-38

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

17. Operating Segments (Continued)

	Fiscal Year Ended October 28, 2006
	Domestic Business Svcs		Discontinued Operations		Adjustments(1)			Total
	(In thousands)
Revenue	$	482,153	$	132,797				$	614,950
Operating income (loss)(2)	$	3,377	$	2,252				$	5,629
Depreciation and amortization	$	4,177	$	634				$	4,811
Purchases of fixed assets	$	4,390	$	680				$	5,070
Total long-lived assets	$	27,995	$	2,788				$	30,783
Total assets	$	118,753	$	26,919	$	(6,407	)	$	139,265

(1)

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

(2)

Includes elimination of intercompany royalties and interest.

F-39

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

18. Quarterly Financial Information (Unaudited)

        The following is a summary of the unaudited quarterly financial information for the fiscal years ended November 1, 2008 and November 3, 2007.

		First Quarter			Second Quarter			Third Quarter			Fourth Quarter
		(In thousands, except per share amounts)
Fiscal year ended November 1, 2008(1)(2)
Revenue		$	81,048		$	75,245		$	71,894		$	96,308
Gross profit		$	14,532		$	12,729		$	12,696		$	18,698
Loss from continuing operations(3)		$	(2,065	)	$	(25,979	)	$	(15,283	)	$	(3,723	)
Total discontinued operations, net of income tax(3)		$	170		$	766		$	210		$	(394	)
Net loss		$	(1,895	)	$	(25,213	)	$	(15,073	)	$	(4,117	)
Basic and diluted earnings (loss) per share
	Loss from continuing operations	$	(0.12	)	$	(1.56	)	$	(0.92	)	$	(0.22	)
	Discontinued operations	$	0.01		$	0.05		$	0.02		$	(0.03	)
	Net loss	$	(0.11	)	$	(1.51	)	$	(0.90	)	$	(0.25	)
Fiscal year ended November 3, 2007(4)
Revenue		$	97,202		$	98,329		$	99,401		$	144,890
Gross profit		$	17,238		$	17,704		$	18,048		$	26,418
Income (loss) from continuing operations(3)		$	(19	)	$	(885	)	$	(3,321	)	$	(82	)
Income (loss) from discontinued operations(3)		$	423		$	221		$	402		$	1,327
Net income (loss)		$	404		$	(664	)	$	(2,919	)	$	1,245
Basic and diluted earnings (loss) per share
	Income (loss) from continuing operations	$	(0.00	)	$	(0.05	)	$	(0.20	)	$	(0.01	)
	Discontinued operations	$	0.02		$	0.01		$	0.02		$	0.09
	Net income (loss)	$	0.02		$	(0.04	)	$	(0.18	)	$	0.08

(1)

Second quarter of fiscal year 2008 includes $23,200 due to the establishment of a valuation allowance for deferred tax assets.

(2)

Third quarter of fiscal year 2008 includes $11,540 of impairment of goodwill and intangibles.

(3)

Includes elimination of intercompany royalties and interest.

(4)

Third quarter of fiscal year 2007 includes $2,300 and fourth quarter of fiscal year 2007 includes $999 of restructuring expense.

19. Subsequent Events

        On November 10, 2008, the Company sold its Australia and New Zealand subsidiaries to Humanis Blue Pty Ltd, an Australian staffing company for A$19 million (Australian dollars). The buyer paid A$13 million at closing, the seller funded A$3 million of the purchase price, and the remaining A$3 million will be payable in the form of a deferred payment due one year after closing. As part of the agreement the sale proceeds were received net of the amount outstanding on the Australian GE

F-40

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

19. Subsequent Events (Continued)

Capital debt facility totaling A$7.8 million and transaction costs of approximately A$0.6 million. Cash payments received totaled A$7.6 million converted to approximately $5.0 million US dollars. In connection with the final GE Capital settlement, the Company overpaid the debt by A$0.6 million and that amount was refunded on February 10, 2009. The purchase price is subject to a post-closing adjustment based on the net operating assets of the subsidiaries at closing. The parties are currently in discussion regarding the calculation of the adjustment. The approximate gain on the sale is $1.4 million, net of fees and tax of $0.1 million.

        During the first quarter of fiscal year 2009, in response to the downturn in the demand for its services, the Company reduced the workforce by 66 positions in the corporate and field offices by using a combination of attrition and a planned reduction-in-force.

        On January 7, 2009 and January 29, 2009, the Company was advanced a loan in an aggregate principal amount of $500,000 for a total of an additional $1.0 million from DelStaff, LLC under the previously-announced loan agreement, dated as of August 25, 2008 (the "Subordinated Loan Agreement"), among DelStaff, LLC and the Borrowers.

        On January 28, 2009, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Koosharem Corporation, a California corporation doing business as Select Staffing ("Koosharem") and Select Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Koosharem ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation and a wholly-owned subsidiary of Koosharem (the "Merger"), in accordance with and subject to the terms and conditions set forth in the Merger Agreement. Concurrently with the execution of the Merger Agreement, our principal stockholder, DelStaff, LLC ("DelStaff"), entered into a Stock & Note Purchase Agreement with Koosharem (the "Purchase Agreement"), pursuant to which Koosharem will purchase, immediately prior to the effective time of the Merger: (1) all of the Company common stock that DelStaff then owns in exchange for first lien term loan debt to be issued by Koosharem under Koosharem's first lien credit facility bearing a face amount of $40,000,000 and (2) all of the then outstanding subordinated notes (the "DelStaff Subordinated Notes") issued by the Company to DelStaff under the Subordinated Loan Agreement, dated as of August 25, 2008, by and among the Company, Westaff (USA), Inc., Westaff Support, Inc., MediaWorld International (as borrowers) and DelStaff in exchange for first lien term loan debt to be issued by Koosharem under Koosharem's first lien credit facility bearing a face amount equal to the actual principal amount of the DelStaff Subordinated Notes then outstanding, but not to exceed $3,000,000.

        Pursuant to the terms and conditions of the Merger Agreement, at the effective time of the Merger: (1) each outstanding share of Company common stock (other than those owned by the Company, Koosharem, Merger Sub or any subsidiary of the Company, Koosharem or Merger Sub, and other than those shares with respect to which dissenters rights are properly exercised) will be cancelled and converted into the right to receive $1.25 per share in cash (the "Merger Consideration") and (2) each outstanding stock option to purchase shares of Company common stock, whether or not then exercisable or vested, will be cancelled and converted into the right to receive, within ten business days following the effective time of the Merger, an amount in cash (subject to applicable withholding taxes) equal to (a) the excess, if any, of the Merger Consideration over the per share exercise price of the stock option, multiplied by (b) the number of shares of Company common stock subject to the stock option.

F-41

Westaff, Inc.

Notes to Consolidated Financial Statements (Continued)

19. Subsequent Events (Continued)

        Consummation of the Merger is subject to the satisfaction of various conditions, including, among others, the receipt by Koosharem and Merger Sub of the financing pursuant to and on the terms contemplated by the applicable commitment letters, the consummation of the transactions under the Purchase Agreement, the requisite approval by the Company's stockholders, a requirement for the Company to hold a minimum of $9.5 million in cash and equivalents immediately prior to the closing date, the lack of any legal impediment to the Merger, and the lack of any Material Adverse Effect as specified in the Merger Agreement. Upon the recommendation of a special committee of independent members of the Company's board of directors (the "Special Committee"), all of the members of the Company's board of directors not affiliated with DelStaff approved the Merger Agreement and the Purchase Agreement. Robert W. Baird & Co. Incorporated provided a fairness opinion to the Special Committee. The Merger Agreement contains certain termination rights for both the Company, on the one hand, and Koosharem and Merger Sub, on the other hand. Upon any termination of the Merger Agreement, under specified circumstances, the Company may be required to pay Koosharem and Merger Sub a $2.0 million termination fee, and under other specified circumstances, Koosharem and Merger Sub may be required to pay the Company a $2.0 million termination fee.

        In January 2009, Westaff Australia received a ruling from the Tasmanian Workplace Ombudsmen stating that Westaff Australia owed $40,000 in back wages to employees related to the fiscal year 2008. This amount was subsequently paid. Additionally, Westaff Australia has received a "Notice of Investigation" from the Workplace Ombudsmen (Melbourne) with respect to the Workplace Relations Act. To date, there has been no assessment and no accrual. While Australian management is cooperating fully with the investigation and believe they are in compliance with the provisions of the Act, there can be no assurances that this matter will be settled in our favor. In the case of an unfavorable outcome, management believes this will not have a material adverse effect on the Company's consolidated financial statements.

        In February 2009, Westaff was notified by NASDAQ Stock Market ("NASDAQ") that the closing bid price of the Company's common stock has been at $1.00 per share or greater for at least 10 consecutive business days. Accordingly, the Company has regained compliance with Marketplace Rule 4450(a)(5) and the matter of the common stock possibly being delisted is now closed.

F-42

SIGNATURES

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

Date: February 11, 2009	WESTAFF, INC.
	By:	/s/ MICHAEL T. WILLIS Michael T. Willis Chief Executive Officer

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS:

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

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

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

Signature	Title	Date
/s/ MICHAEL T. WILLIS Michael T. Willis	Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)	February 11, 2009
/s/ STEPHEN J. RUSSO Stephen J. Russo	President and Chief Operating Officer (Principal Operations Officer)	February 11, 2009
/s/ CHRISTA C. LEONARD Christa C. Leonard	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	February 11, 2009
/s/ SEAN P. WONG Sean P. Wong	Vice President, Controller (Principal Accounting Officer)	February 11, 2009
/s/ JOHN G. BALL John G. Ball	Director	February 11, 2009

IV-1

Signature	Title	Date
/s/ JOHN R. BLACK John R. Black	Director	February 11, 2009
/s/ JANET M. BRADY Janet M. Brady	Director	February 11, 2009
/s/ WALTER W. MACAULEY Walter W. MaCauley	Director	February 11, 2009
/s/ MICHAEL R. PHILLIPS Michael R. Phillips	Director	February 11, 2009
/s/ DON K. RICE Don K. Rice	Director	February 11, 2009
/s/ RONALD D. STEVENS Ronald D. Stevens	Director	February 11, 2009
/s/ GERALD E. WEDREN Gerald E. Wedren	Director	February 11, 2009

IV-2

EX-2.1

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Exhibit 2.1

[MALLESONS STEPHEN JAQUES LETTERHEAD]

Share Sale Agreement

Dated 27 September 2008


Westaff Inc ("Seller")
Humanis Blue Pty Limited ("Buyer")

Mallesons Stephen Jaques
Level 50
Bourke Place
600 Bourke Street
Melbourne Vic 3000
Australia
T +61 3 9643 4000
F +61 3 9643 5999
DX 101 Melbourne
www.mallesons.com

Details		6
General terms		8
1	Interpretation	8
1.1	Definitions	8
1.2	References to certain general terms	16
1.3	Next Business Day	17
1.4	Headings	17
2	Sale and purchase of Shares	17
2.1	Sale and purchase	17
2.2	Free from Encumbrance	17
3	Purchase Price and deposit	17
3.1	Purchase Price	17
3.2	Payment of deposit	17
3.3	Release of deposit	17
4	Conditions Precedent	18
4.1	Conditions Precedent	18
4.2	Reasonable endeavours	18
4.3	Waiver	19
4.4	Termination of agreement by either party	19
4.5	Termination by Seller	19
4.6	Effect of termination	19
4.7	Deemed satisfaction of Conditions Precedent	20
5	Completion	20
5.1	Time and place of Completion	20
5.2	Seller's obligations	20
5.3	Transfers to be held in escrow	20
5.4	Buyer's obligations	21
5.5	Simultaneous actions at Completion	21
5.6	Post-Completion obligations	21
5.7	Post-Completion access	21
6	Payment of the Purchase Price	21
6.1	Payment on Completion	21
6.2	Subsequent payment	21
6.3	Adjustment Statement	22
6.4	Contents of Adjustment Statement	22
6.5	Preparation of Adjustment Statement	22
6.6	Payment of Adjustment Amount	22
6.7	Resolution of disputes on Adjustment Statement	22
6.8	Consideration does not include GST	23
6.9	Recovery of GST	23
6.10	Time of payment	23
6.11	Adjustment of additional amount	23
6.12	Reimbursement	24
6.13	Method of payment	24

2

7	Conduct of business pending Completion	24
7.1	Restricted activities	24
7.2	Transfer of trade marks	25
8	Conduct of business after Completion	25
8.1	Acknowledgement in relation to Seller Marks	25
8.2	Exclusion of directors and officers from liability	25
8.3	BAS returns	25
8.4	Software licenses	25
9	Warranties and representations	26
9.1	Accuracy	26
9.2	Matters disclosed	26
9.3	Buyer's acknowledgement	26
9.4	Buyer's representation	27
9.5	Seller's acknowledgment	27
10	Limitations of Liability	28
10.1	Notice of Claims	28
10.2	Third party Claims	28
10.3	Seller to consider Claims	28
10.4	Seller to defend Claim	29
10.5	Buyer's election to defend claim	29
10.6	Seller not liable	29
10.7	Recovery	29
10.8	Reduction in Purchase Price	30
10.9	Time limit on Claims	30
10.10	Minimum amount of Claim	30
10.11	Maximum liability—aggregate	30
10.12	Maximum liability—tax warranties	30
10.13	Exclusion of consequential liability	30
10.14	Insured Claim or loss	31
10.15	Act or omission after Completion	31
10.16	Later recoveries	31
10.17	Obligation to mitigate	31
10.18	Tax benefit	31
11	Buyer's warranties	31
11.1	Buyer's warranties	31
11.2	Indemnity	32
12	Default	32
12.1	Failure by a party to Complete	32
12.2	Specific performance or termination	32
12.3	Termination of agreement	32
13	Confidential Information and privacy	32
13.1	Confidential Information	32
13.2	Disclosure of Confidential Information	33
13.3	Use of Confidential Information	33

3

13.4	Excluded Information	33
13.5	Delivery of materials	33
13.6	Disclosure to other potential buyers	33
13.7	Disclosure prior to the date of this agreement	33
13.8	Enforcement by Companies	33
13.9	Privacy	33
13.10	Application of clause 13.9	34
13.11	Use of Personal Information by Seller after Completion	34
13.12	Survival of termination	34
14	Announcements	34
14.1	Public announcements	34
14.2	Public announcements required by Law	34
15	Costs and stamp duty	35
15.1	Legal costs	35
15.2	Stamp duty	35
16	Notices and other communications	35
16.1	Form—all communications	35
16.2	Form—communications sent by email	35
16.3	Delivery	35
16.4	When effective	36
16.5	When taken to be received	36
16.6	Receipt outside business hours	36
17	Assignment	36
18	Miscellaneous	36
18.1	Discretion in exercising rights	36
18.2	Partial exercising of rights	36
18.3	No liability for loss	36
18.4	Approvals and consents	37
18.5	Conflict of interest	37
18.6	Remedies cumulative	37
18.7	Rights and obligations are unaffected	37
18.8	Variation and waiver	37
18.9	No merger	37
18.10	Indemnities	37
18.11	Further steps	37
18.12	Entire agreement	37
18.13	Construction	37
18.14	Knowledge and belief	38
19	Governing Law, jurisdiction and service of process	38
19.1	Governing Law	38
19.2	Serving documents	38
20	Counterparts	38
Schedule 1—Shares
Schedule 2—Form of directors release

4

Schedule 3—Warranties
Schedule 4—Adjustment Statement Principles
Schedule 5—Adjustment Statement Schedule
Schedule 6—Intellectual Property
Schedule 7—Contracts and leases
Signing page	42
Annexure A: Financial Statements
Annexure B: Reference Balance Sheet
Annexure C: Licence Agreement
Annexure D: Corporate and security structure

5

Details

Parties	Seller and Buyer
Seller	Name	Westaff Inc
	Incorporated in	Delaware, USA
	Address	298 N. Wiget Lane, Walnut Creek, California 94598
	Telephone	+1 925 930 5300
	Fax	+1 949 481 7083
	Email	jryan@westaff.com
	Attention	Legal and Corporate Secretary
Buyer	Name	Humanis Blue Pty Limited
	ACN	132 703 907
	Incorporated in	Commonwealth of Australia
	Address	Level 6, 31 Queen Street, Melbourne VIC 3000
	Telephone	61 411 050 634
	Fax	+61 3 8677 9903
	Email	amason@cashelhousegroup.com.au
	Attention	Angus Mason, Director
Recitals	A	Westaff (Australia) Pty Limited (ABN 71 007 654 131) is a company incorporated in Australia and has its registered office at Level 3, 100 Albert Road South Melbourne VIC 3205 ("Westaff Australia").
	B	Westaff NZ Limited (Company Number 71919) is a company incorporated in New Zealand and has its registered office at 182 Great South Road Remuera Auckland ("Westaff NZ").
	C	Westaff Australia has issued 591 shares and Westaff NZ has issued 21,000 shares.
	D	Westaff Support Inc is the registered and beneficial owner of all of the ordinary shares of Westaff NZ.
	E	Westaff Support Inc is the beneficial owner of 466 ordinary shares of Westaff Australia.

6

	F	Willard Robert Stover is the registered owner of 125 ordinary shares of Westaff Australia.
	G	Joan Cote Stover and Willard Robert Stover, jointly, are the registered owners of 466 ordinary shares of Westaff Australia.
	H	The Seller has agreed to sell its interests in the Shares and to procure the sale of the remaining interests in the Shares, and the Buyer has agreed to buy the Shares, on the terms of this agreement.
Governing law	Victoria, Australia
Date of agreement	See Signing page

7

General terms

1      Interpretation

1.1   Definitions

These meanings apply unless the contrary intention appears.

Accounting Standards means:

(a)

accounting standards as that term is defined in the Corporations Act; and



(b)

to the extent not inconsistent with paragraph (a) generally accepted Australian accounting principles which are consistently applied; and



(c)

for a corporation which is incorporated outside Australia, all accepted accounting principles which are generally applicable in the place of incorporation of that corporation.

Action means an action, dispute, Claim, demand, investigation, inquiry, prosecution, litigation, proceeding, arbitration, mediation or dispute resolution.

Adjustment Amount means an amount determined from the Adjustment Statement, in accordance with clause 6.5 ("Preparation of Adjustment Statement").

Adjustment Statement means a statement showing Net Operating Assets in the format set out in Schedule 5.

Adjustment Statement Principles means the principles, policies and procedures set out in Schedule 4.

Agreed Net Operating Assets means the figure as set out in Column A of Schedule 5.

Amount of Consideration means:

(a)

the amount of any payment in connection with a supply; and



(b)

in relation to non-monetary consideration in connection with a supply, the GST exclusive market value of that consideration as reasonably determined by the Supplier.

Assets means the assets from time to time of the Companies.

Auditor means BDO Kendalls Audit & Assurance (NSW-VIC) Pty Limited of the Rialto, 525 Collins Street, Melbourne, Victoria, 3000.

Authorised Officer means, in respect of a party, a director or secretary of the party or a person appointed by the party to act as an Authorised Officer under this agreement.

Business means the business of providing integrated staffing services in Australia and New Zealand, which includes providing temporary staffing services including permanent placement, replacement, supplemental and on-site temporary programs, as it is presently being conducted.

Business Day means a day other than a Saturday, Sunday or public holiday in Melbourne, Victoria.

Business Premises means all the land and buildings leased, occupied, owned or otherwise used by either Company.

Cash means cash held in bank account and on deposit by the Companies.

Citrix Hardware means the licence server that facilitates the use of the Citrix Software.

8

Citrix Software means the software that Westaff Support Inc is licensed to use under a license from Citrix as at the date of this agreement.

Claim means any allegation, debt, cause of action, Liability, claim, proceeding, suit or demand of any nature howsoever arising and whether present or future, fixed or unascertained, actual or contingent, whether at Law, in equity, under statute or otherwise.

Company or Companies mean Westaff Australia and Westaff NZ, as the context requires.

Companies Act means the Companies Act 1993 (NZ).

Completion Balance Sheet means the balance sheet of the Group as at Completion Date in the same format as the Reference Balance Sheet in Annexure B which is used to calculate the Net Operating Assets.

Completion means completion of the sale and purchase of the Shares in accordance with clause 5 ("Completion") and Complete has a corresponding meaning.

Completion Date means the business day that falls 7 days after the Conditions Precedent are satisfied or any other date agreed by the Seller and the Buyer.

Conditions Precedent means the conditions precedent set out in clause 4 ("Conditions Precedent").

Confidential Information means all Information disclosed to the Receiving Party or any Related Body Corporate or Representative of the Receiving Party, under or in connection with this agreement, including:

(a)

information which, either orally or in writing, is designated or indicated as being the proprietary or confidential information of the Disclosing Party or any of its Related Bodies Corporate; and



(b)

information derived or produced partly or wholly from the Information including any calculation, conclusion, summary or computer modelling,

whether the Information was disclosed:

(c)

orally, in writing or in electronic or machine readable form;



(d)

before, on or after the date of this agreement;



(e)

as a result of discussions between the parties concerning or arising out of the acquisition of the Business; or



(f)

by the Disclosing Party or any of its Representatives, any of its Related Bodies Corporate, any Representatives of its Related Bodies Corporate or by any third person.

Controller has the meaning it has in the Corporations Act.

Corporations Act means the Corporations Act 2001 (Cwlth).

CP Date means the date which falls 30 Days after the Signing Date or such other date the parties agree in writing.

Deposit Amount means $250,000.

Details means the section of this agreement headed "Details".

Disclosing Party means the party disclosing Confidential Information.

Disclosure Material means all of the information and material which was provided by the Seller to the Buyer during its due diligence investigations, the record of which is contained on the CD

9

Roms and has been initialled for identification by the Buyer and the Seller on the date of this agreement.

Due Diligence means the enquiries and investigations into the Group carried out by the Buyer and its Representatives.

Duty means any stamp, transaction or registration duty or similar charge imposed by any Government Agency and includes any interest, fine, penalty, charge or other amount imposed in respect of them but excludes Tax.

Employees means all of the employees of each of the Companies at Completion.

Encumbrance means any:

(a)

security for the payment of money or performance of obligations, including a mortgage, charge, lien, pledge, trust, power, title retention or flawed deposit arrangement; or



(b)

right, interest or arrangement which has the effect of giving another person a preference, priority or advantage over creditors including any right of set-off; or



(c)

right that a person (other than the owner) has to remove something from land (known as a profit à pendre), easement, public right of way, restrictive or positive covenant, lease, or licence to use or occupy; or



(d)

third party right or interest or any right arising as a consequence of the enforcement of a judgment,

or any agreement to create any of them or allow them to exist.

Excluded Information means Confidential Information which:

(a)

is in or becomes part of the public domain other than through breach of this agreement or an obligation of confidence owed to the Disclosing Party or any Related Body Corporate of the Disclosing Party;



(b)

the Receiving Party can prove by contemporaneous written documentation was already known to it at the time of disclosure by the Disclosing Party or its Related Bodies Corporate or Representatives (unless such knowledge arose from disclosure of information in breach of an obligation of confidentiality); or



(c)

the Receiving Party acquires from a source other than the Disclosing Party or any Related Body Corporate or Representative of the Disclosing Party where such source is entitled to disclose it.

External Debt means:

(a)

the aggregate amount as at the Completion Date of all financial indebtedness (including accrued but unpaid interest on such financial indebtedness but excluding trade creditors and Intercompany Balances) of the Companies arising:



(i)

from borrowings from any bank or other financial institution; or



(ii)

under any finance lease or hire purchase agreement to which either Company is party,

less:

(b)

the aggregate amount as at the Completion Date of pre-paid interest in respect of the financial indebtedness referred to in paragraph (a).

Financial Reporting Act means the Financial Reporting Act 1993 (NZ).

10

Financial Statements mean, for Westaff Australia, each of the:

(a)

audited balance sheet of Westaff Australia as at 3 November 2007;



(b)

audited profit and loss statement of Westaff Australia for the 52 week period ending on 3 November 2007;



(c)

audited statement of cash flows of Westaff Australia for the 52 week period ending on 3 November 2007;



(d)

applicable notes to each of the above required by the Accounting Standards;



(e)

any other information necessary to give a true and fair view of the financial position and performance of Westaff Australia; and



(f)

a directors' declaration regarding the financial statements for Westaff Australia (taken together) containing the information and opinions required by the Corporations Act,

and for Westaff NZ, each of the:

(g)

audited balance sheet of Westaff NZ as at 4 November 2007;



(h)

audited profit and loss statement of Westaff NZ for the year ending on 4 November 2007;



(i)

audited statement of cash flows of Westaff NZ for the year ending on 4 November 2007;



(j)

applicable notes to each of the above required by the Accounting Standards;



(k)

any other information necessary to give a true and fair view of the financial position and performance of Westaff NZ; and



(l)

financial statements that have been signed by the directors of Westaff NZ in accordance with the Financial Reporting Act,

copies of which are attached as Annexure A ("Financial Statements").

Government Agency means any government, governmental, semi-governmental, administrative, fiscal or judicial body department, commission, authority, tribunal, agency or entity.

Group means the group comprised of Westaff Australia and Westaff NZ.

GST means a goods and services or similar tax imposed in Australia.

GST Act means the A New Tax System (Goods and Services Tax) Act 1999 (Cwlth).

Incoming Directors means the persons nominated by the Buyer to be directors of a Company from Completion.

Independent Expert means the person appointed as expert jointly by the Seller and the Buyer or if they do not agree on the person to be appointed within seven days of one party requesting appointment, the accountant appointed by the President of the Australian Institute of Chartered Accountants at the request of either the Seller or the Buyer.

Information means all information regardless of its Material Form relating to or developed in connection with:

(a)

the business, technology or other affairs of the Disclosing Party or any Related Body Corporate of the Disclosing Party, or in the case of the Seller only, the Companies; or



(b)

any systems, technology, ideas, concepts, know-how, techniques, designs, specifications, blueprints, tracings, diagrams, models, functions, capabilities and designs (including computer software, manufacturing processes or other information embodied in drawings or

11

specifications), intellectual property or any other information which is marked "confidential" or is otherwise indicated to be subject to an obligation of confidence owned or used by or licensed to the Disclosing Party or a Related Body Corporate of the Disclosing Party, or in the case of the Seller only, the Companies.

Input Tax Credit has the meaning it has in the GST Act.

A person is Insolvent if:

(a)

it is (or states that it is) an insolvent under administration or insolvent (each as defined in the Corporations Act); or



(b)

it is in liquidation, in provisional liquidation, under administration or wound up or has had a Controller appointed to any of its property; or



(c)

it is subject to any arrangement, assignment, moratorium or composition, protected from creditors under any statute or dissolved (in each case, other than to carry out a reconstruction or amalgamation while solvent on terms approved by the other parties to this agreement); or



(d)

an application or order has been made (and in the case of an application, it is not stayed, withdrawn or dismissed within 30 days), resolution passed, proposal put forward, or any other action taken, in each case in connection with that person, which is preparatory to or could result in any of (a), (b) or (c) above; or



(e)

it is taken (under section 459F(1) of the Corporations Act) to have failed to comply with a statutory demand; or



(f)

it is the subject of an event described in section 459C(2)(b) or section 585 of the Corporations Act (or it makes a statement from which another party to this agreement reasonably deduces it is so subject); or



(g)

it is otherwise unable to pay its debts when they fall due; or



(h)

something having a substantially similar effect to (a) to (g) happens in connection with that person under the Law of any jurisdiction.

Intercompany Balances means any intercompany receivables and payables between Westaff Australia and Westaff New Zealand on the one hand, and Westaff Inc. or other parties related to Westaff Inc. on the other hand, as at Completion.

Interest Rate means:

(a)

for the first 12 months from the Completion Date, the rate of interest applying to each daily balance which is the rate 4% per annum above the 90 day Bank Bill Swap Reference Rate last published on or before that day in The Australian Financial Review; and



(b)

from the first anniversary of the Completion Date, the rate of interest applying to each daily balance which is the rate 8% per annum above the 90 day Bank Bill Swap Reference Rate last published on or before that day in The Australian Financial Review.

Last Balance Date means 3 July 2008.

Law includes:

(a)

any law, regulation, authorisation, ruling, judgment, order or decree of any Government Agency; and



(b)

any statute, regulation, proclamation, ordinance or by-law in:



(i)

Australia; or

12

(ii)

any other jurisdiction.

Liability means any liability or obligation (whether actual, contingent or prospective), including for any Loss irrespective of when the acts, events or things giving rise to the liability occurred.

Licence Agreement means the agreement of that name between Westaff Support Inc and each Company under which Westaff Support Inc licences certain Seller Marks to the Companies in the form set out in Annexure C.

Loss means all damage, loss, cost and expense (including legal costs and expenses of whatsoever nature or description).

Mark includes a reference to a trade mark, logo, symbol, get up, domain name, business name, service mark, brand name and similar rights whether registered or unregistered.

Material Contract means a contract requiring payments over the term of the contract in excess of $100,000 or for a term of more than 5 years.

Material Form includes any form (whether visible or not) of storage from which reproductions can be made.

Microsoft Software means the following programs that are licensed to Westaff Support Inc as at the date of this agreement under a Microsoft Volume Licence:

(a)

MS Pro Desktop;



(b)

MS Exchange Server Enterprise;



(c)

MS Terminal Server Standard CAL;



(d)

MS Windows Server Standard;



(e)

MS Visio Standard; and



(f)

MS Project Standard.

Net Operating Assets means the net assets as at Completion identified in the Adjustment Statement and includes the following:

(a)

the current assets of the Group, comprising:



(i)

accounts receivable (net of specific provision and a fixed $150,000 general provision for bad debts);



(ii)

prepayments; and



(iii)

accrued income (if any);

less:

(b)

the current liabilities of the Group, comprising:



(i)

trade creditors and unpresented cheques held by the Group relating to external trade creditors; and



(ii)

accrued expenses including labour and other accrued expenses of an operating nature; and



(iii)

any other Liability excluding employee entitlement provisions and Intercompany Balances.

For the avoidance of doubt Net Operating Assets excludes any allowances for any deferred tax asset or liabilities, External Debt, Intercompany Balances or Income Tax Liabilities.

13

Ordinary Course of Business means continued trading activity of the Businesses or such other actions or activities to maintain or operate the Business consistent with prudent management practices or consistent with the current method of conducting the Business.

Personal Information means information or an opinion (including information or an opinion forming part of a database), whether true or not, and whether recorded in a Material Form or not, about an individual whose identity is apparent, or can reasonably be ascertained, from the information or opinion.

Privacy Laws means:

(a)

the Privacy Act 1988 (Cwlth);



(b)

the Privacy Act 1993 (NZ);



(c)

any other requirement under Australian or (where applicable) New Zealand Law, industry code, policy or statement relating to the handling of Personal Information.

Purchase Price means the aggregate consideration payable for the Shares calculated in accordance with this agreement.

Receiving Party means the recipient of Confidential Information.

Records means originals and copies, in any Material Form, of all books, files, reports, records, correspondence, documents and other material of or relating to or used in connection with either Company and may include:

(a)

minute books, statutory books and registers, books of account and copies of taxation returns;



(b)

sales literature, market research reports, brochures and other promotional material (including printing blocks, negatives, sound tracks and associated material);



(c)

all sales and purchasing records, contracts, designs and working papers;



(d)

all trading and financial records; and



(e)

lists of all regular suppliers and customers.

Recovered Sum means the amount recovered by the Buyer under clause 10.7 ("Recovery").

Reference Balance Sheet means the balance sheet of the Group as at the Reference Date as set out in Annexure B which was used to calculate the Agreed Net Operating Assets.

Reference Date means 3 July 2008.

Related Body Corporate:

(a)

in relation to Westaff Australia, has the meaning it has in the Corporations Act;



(b)

in relation to Westaff NZ, means a "Related Company" as defined in the Companies Act.

Representative of a party includes an employee, agent, officer, director, auditor, adviser, partner, associate, consultant, joint venturer or sub-contractor of that party or of a Related Body Corporate of that party.

Retiring Directors means:

(a)

in the case of Westaff Australia—Michael T Willis;



(b)

in the case of Westaff NZ—Michael T Willis.

Securities means shares, debentures, stocks, bonds, notes, interests in a managed investment scheme, units, warrants, options, derivative instruments or any other securities.

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Security Documentation means:

(a)

a guarantee and indemnity between Humanis Group Limited and the Seller;



(b)

a fixed and floating charge between the Buyer and the Seller; and



(c)

a vendor intercreditor deed between the Buyer, St George Bank Limited and the Seller,

in a form agreed by the relevant parties between the date of this agreement and Completion.

Seller Mark means any Mark which is owned or used by the Seller.

Seller Management means Michael Willis, Christa Leonard and Steve Russo.

Shares means the issued shares in the capital of each Company agreed to be sold under this agreement and Share means any one of those shares.

Signing Date means the date of execution of this agreement by the Seller and the Buyer.

St George Term Sheet means the Summary of Credit Approved Structure and Terms between the Buyer and St George Corporate & Acquisition Finance as provided to the Seller dated July 2008.

Tax means income tax, capital gains tax, recoupment tax, sales tax, payroll tax, fringe benefits tax, prescribed payments tax, goods and services tax, customs duties and workcover contributions together with any related interest, penalties, fines and other statutory charges whether accruing before or after Completion, but excludes Duty.

Tax Act means:

(a)

the Income Tax Assessment Act 1936 ("Cwlth") or the Income Tax Assessment Act 1997 (Cwlth), as the context requires;



(b)

in relation to Westaff NZ, the Income Tax Act 2007, the Goods and Services Tax Act 1985 or the Tax Administration Act 1994, as the context requires.

Tax Authority means any governmental authority responsible for Tax.

Tax Claim means an assessment notice (including a notice of adjustment of a loss claimed by the Companies in a manner adversely affecting the Business, demand or other document issued or action taken by or on behalf of a Tax Authority, whether before or after the date of this agreement, which relates to the period ending on the Completion Date or any previous financial year as a result of which the Companies are liable to make a payment for Tax or is deprived of any credit, rebate, refund, relief, allowance, deduction or loss carried forward.

Tax Invoice has the meaning it has in the GST Act.

Tax Law means any law relating to either Tax or Duty as the context requires.

Trade Practices Act means:

(a)

in relation to Westaff Australia, the Trade Practices Act 1974 ("Cwlth"); and



(b)

in relation to Westaff NZ, the Commerce Act 1986 and the Fair Trading Act 1986.

Warranties means the warranties and representations in this agreement including clause 9 ("Warranties and representations") and schedule 3 ("Warranties") and Warranty has a corresponding meaning.

Westaff Australia means Westaff (Australia) Pty Limited (ABN 71 007 654 131), a company incorporated in Australia which has its registered office at Level 3, 100 Albert Road South Melbourne VIC 3205.

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Westaff Intellectual Property means any intellectual property rights (including all current registered and unregistered rights in respect of copyright, designs, circuit layouts, know-how, confidential information, patents, inventions and discoveries and all other intellectual property as defined in article 2 of the convention establishing the World Intellectual Property Organisation 1967) which are owned or used by Westaff Australia or Westaff NZ or licensed by the Seller to them.

Westaff NZ means Westaff NZ Limited (Company Number 71919), a company incorporated in New Zealand which has its registered office at 182 Great South Road Remuera Auckland.

1.2   References to certain general terms

Unless the contrary intention appears, a reference in this agreement to:

(a)

(clauses, annexures and schedules) a clause, annexure or schedule is a reference to a clause in or annexure or schedule to this agreement;



(b)

(variations or replacements) a document (including this agreement) includes any variation or replacement of it;



(c)

(reference to statutes) a statute, ordinance, code or other Law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them;



(d)

(singular includes plural) the singular includes the plural and vice versa;



(e)

(person) the word "person" includes an individual, a firm, a body corporate, a partnership, joint venture, an unincorporated body or association, or any Government Agency;



(f)

(executors, administrators, successors) a particular person includes a reference to the person's executors, administrators, successors, substitutes (including persons taking by novation) and assigns;



(g)

(two or more persons) an agreement, representation or Warranty in favour of two or more persons is for the benefit of them jointly and each of them individually;



(h)

(jointly and individually) an agreement, representation or Warranty by two or more persons binds them jointly and each of them individually;



(i)

(dollars) Australian dollars, dollars, $ or A$ is a reference to the lawful currency of Australia;



(j)

(calculation of time) a period of time dating from a given day or the day of an act or event, it is to be calculated exclusive of that day;



(k)

(reference to a day) a day is to be interpreted as the period of time commencing at midnight and ending 24 hours later;



(l)

(accounting terms) an accounting term is a reference to that term as it is used in Accounting Standards;



(m)

(reference to a group of persons) a group of persons or things is a reference to any two or more of them jointly and to each of them individually;



(n)

(meaning not limited) the words "include", "including", "for example" or "such as" when introducing an example, do not limit the meaning of the words to which the example relates to that example or examples of a similar kind;



(o)

(time of day) time is a reference to Melbourne, Australia time.

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1.3   Next Business Day

If an event must occur on a stipulated day which is not a Business Day then the stipulated day will be taken to be the next Business Day.

1.4   Headings

Headings (including those in brackets at the beginning of paragraphs) are for convenience only and do not affect the interpretation of this agreement.

2      Sale and purchase of Shares

2.1   Sale and purchase

The Seller agrees to:

(a)

transfer all of its right, title and interest in the Shares to the Buyer;



(b)

procure that Westaff Support Inc transfer all of its right, title and interest in the share capital of Westaff NZ to the Buyer;



(c)

procure that Willard Robert Stover transfer all of his right, title and interest in the Shares to the Buyer; and



(d)

procure that Willard Robert Stover and Joan Cote Stover, jointly, transfer all of their right, title and interest in the Shares to the Buyer,

and the Buyer agrees to pay the Seller, on the terms and conditions of this agreement.

2.2   Free from Encumbrance

The Shares must be transferred free from any Encumbrance and with all rights attached or accruing to them on and from the date of this agreement.

3      Purchase Price and deposit

3.1   Purchase Price

The price payable to the Seller for the Shares is $19,000,000, on the basis that the Buyer acquires the Companies inclusive of $1 million in Cash, free of External Debt, income tax liabilities and Intercompany Balances in accordance with clause 6 ("Payment of Purchase Price"). The Purchase Price payable is calculated, and will be adjusted, in the manner set out in clause 6.

3.2   Payment of deposit

The Buyer agrees to pay to the Mallesons Stephen Jaques Trust Account the Deposit Amount on signing of this agreement.

3.3   Release of deposit

The parties agree that:

(a)

if:



(i)

the Buyer fails to Complete on the Completion Date (except in the circumstances described in paragraph (b)); or



(ii)

this agreement is terminated by the Seller in accordance with clause 4.5; or



(iii)

Completion occurs,

17

then Mallesons Stephen Jaques must pay the deposit to the Seller;

(b)

if the Buyer is ready and willing to Complete (and has the financing in place to do so) on the Completion Date, but Completion does not occur due to:



(i)

the non-satisfaction of a Condition Precedent which is expressed to be for the benefit of the Buyer (and which has not been waived by the Buyer) and this agreement is terminated by the Buyer under clause 4.4; or



(ii)

the parties' failure to agree and execute the Security Documentation and this agreement is terminated by the Buyer or Seller under clause 4,

then Mallesons Stephen Jaques must pay the deposit to the Buyer.

4      Conditions Precedent

4.1   Conditions Precedent

Completion is conditional on:

(a)

(Licence Agreement) execution of the Licence Agreement;



(b)

(Contractual consents) the Seller obtaining consents to the change in control of Westaff Australia or Westaff NZ (as applicable) from the counterparties to the contracts listed in Part A of Schedule 7;



(c)

(Landlord consents) the Seller obtaining consents to the change in control of Westaff Australia or Westaff NZ (as applicable) from the lessors of the properties listed in Part B of Schedule 7;



(d)

(Correction of ASIC Register and Cancellation of Redeemable Preference Shares) the Seller correcting the ASIC register to reflect the correct number of redeemable preference shares on issue and cancelling the redeemable preference shares;



(e)

(Security Documentation) execution of the Security Documentation;



(f)

(repayment of Intercompany Balances) the repayment or cancellation of any Intercompany Balances;



(g)

(repayment of External Debt) the repayment of any External Debt and the release of any associated security; and



(h)

(Cash) the Seller providing evidence that the amount of Cash in the Group is at least $1 million.

4.2   Reasonable endeavours

(a)

Each party must use its reasonable endeavours to obtain the satisfaction of the Conditions Precedent. The parties must keep each other informed of any circumstances which may result in any Condition Precedent not being satisfied in accordance with its terms.



(b)

The Seller must use its reasonable endeavours to obtain consents to a change in control of Westaff Australia or Westaff New Zealand (as applicable) from the lessors of the properties listed in Part C of Schedule 7.



(c)

The Buyer must provide all reasonable assistance requested by the Seller to obtain the consents contemplated by clauses 4.1(b) and (c) and clause 4.2(b), including, but not limited to, disclosing the capital structure and debt levels of the Buyer.

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4.3   Waiver

The Conditions Precedent in:

(a)

clauses 4.1(a), (b), (c), (d), (f), (g) and (h) are for the benefit of the Buyer; and



(b)

clause 4.1(e) is for the benefit of the Seller.

If a Condition Precedent is expressed to be for the benefit of the Buyer or the Seller, the relevant party may at any time waive that Condition Precedent by notice given to the other party.

4.4   Termination of agreement by either party

The Conditions Precedent are inserted for the benefit of the Buyer or the Seller and if any of the Conditions Precedent are not satisfied on the CP Date (and have not been waived in accordance with clause 4.3) then, if the party who wishes to terminate this agreement has complied with clause 4.2 ("Reasonable endeavours"), this agreement may be terminated at any time before Completion by notice given by the Buyer or the Seller to the other of them.

4.5   Termination by Seller

If Completion does not occur on the Completion Date for any reason other than the Seller's default, act or omission, then the Seller may terminate this agreement upon 5 business days notice to the Buyer.

4.6   Effect of termination

If this agreement is terminated under clause 4.4 ("Termination of agreement by either party"), clause 4.5 ("Termination by Seller") or clause 12.2 ("Specific performance or termination") then, in addition to any other rights, powers or remedies provided by Law:

(a)

each party is released from its obligations under this agreement other than in relation to clauses 13 ("Confidential Information and privacy") and 15.1 ("Legal costs");



(b)

each party retains the rights it has against any other party in connection with any breach or Claim that has arisen before termination; and



(c)

the Buyer must return to the Seller all documents and other materials in any medium in its possession, power or control which contain any information relating to either Company, including the Records.

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4.7   Deemed satisfaction of Conditions Precedent

The parties agree that the Conditions Precedent contained in clauses 4.1(b) and 4.1(c) will be automatically deemed to have been satisfied in the event that those conditions are no longer conditions precedent to financing under the St George Term Sheet.

5      Completion

5.1   Time and place of Completion

Completion will take place at 10:00am on the Completion Date at the offices of Mallesons Stephen Jaques, Solicitors, Level 50, 600 Bourke Street, Melbourne, Victoria, Australia or any other time and place agreed between the Seller and the Buyer.

5.2   Seller's obligations

On Completion, the Seller must deliver to the Buyer:

(a)

(transfers and Share certificates) subject to clause 5.3, executed transfers in favour of the Buyer (or as it may direct) of all the Shares, the share certificates for the Shares (if any) and any consents which the Buyer reasonably requires to obtain registration of those transfers;



(b)

(Records and common seal) the Records and the common seal (if any) of each Company except that if the Seller is required to retain any of the documents for legal or internal record keeping purposes, the Seller may deliver copies of those documents to the Buyer;



(c)

(bank authority) duly completed bank authorities directed to the bankers of each Company authorising the operation of each of its bank accounts by nominees of the Buyer and terminating the authority of each of the present signatories;



(d)

(resignations) written resignations of the Retiring Directors;



(e)

(directors resolution of each Company) a certified copy of a resolution of directors of each Company resolving that:



(i)

subject to the payment of stamp duty (if any) by the Buyer, the transfer of the Shares will be registered; and



(ii)

each of the Incoming Directors be appointed to the board of directors of the relevant Company, and the resignation of the Retiring Directors from the board be accepted, all with effect from Completion, but so that a properly constituted board of directors is in existence at all times;



(f)

(release of guarantees) evidence satisfactory to the Buyer that each Company has been released from any guarantee, indemnity or similar obligation which it has given for the benefit of the Seller or any Related Body Corporate of the Seller;



(g)

(Conditions Precedent) evidence that the Conditions Precedent set out in clause 4.1 have been satisfied; and



(h)

(release in favour of former directors and officers) a release executed by each Company in favour of each of the pre-Completion directors and officers in the form set out in schedule 2 ("Form of director's release").

5.3   Transfers to be held in escrow

The Seller's obligation under clause 5.2(a) to deliver executed transfers to the Buyer will be satisfied by the Seller delivering the executed transfers to Mallesons Stephen Jaques and

20

instructing them to release the executed transfers to the Buyer upon receipt of funds in accordance with clause 6.1.

5.4   Buyer's obligations

On Completion the Buyer must:

(a)

(payment) pay the Seller in accordance with clause 6.1 ("Payment on Completion") if the Seller complies with clause 5.2 ("Seller's obligations");



(b)

(Security Documentation) deliver the executed Security Documentation to the Seller as security for the payment due under clause 6.2 ("Subsequent payment"); and



(c)

(consents to act) deliver executed consents to act by the Incoming Directors.

5.5   Simultaneous actions at Completion

In respect of Completion:

(a)

the obligations of the parties under this agreement are interdependent; and



(b)

unless otherwise stated, all actions required to be performed by a party at Completion are taken to have occurred simultaneously on the Completion Date.

5.6   Post-Completion obligations

(a)

The Buyer will:



(i)

change the name of each of the Companies to a name not including 'Westaff' (or any similar name) in accordance with the Licence Agreement and provide the Seller with evidence that this change has been made and notified to ASIC; and



(ii)

otherwise procure compliance by the Licensee of all of its obligations under the Licence Agreement.



(b)

Each party will immediately give to the other party all payments, notices, correspondence, information or enquiries in relation to the Company which it receives after Completion and which belong to the other party.

5.7   Post-Completion access

For a period of 24 months from Completion, the Buyer will provide the Seller with such reasonable access to the Records of the Companies as is required to enable the Seller to satisfy its internal and statutory reporting requirements.

6      Payment of the Purchase Price

6.1   Payment on Completion

On Completion, the Buyer agrees to pay to the Seller to the Mallesons Stephen Jaques Trust Account (or otherwise as the Seller directs, provided that such direction has been given by the CP Date) the Purchase Price of $16,000,000, less the Deposit Amount.

6.2   Subsequent payment

(a)

On the first anniversary of Completion, the Buyer agrees to pay to the Seller (or as the Seller directs) the sum of $3,000,000 less any judgment in favour of the Buyer, or any amount payable by the Seller, in respect of breach of Warranty.

21

(b)

Interest will be payable to the Seller on the unpaid portion of the Purchase Price at the applicable Interest Rate monthly until the full Purchase Price has been paid by the Buyer to the Seller.

6.3   Adjustment Statement

Within six weeks of Completion, the Buyer must procure that:

(a)

an Adjustment Statement will be prepared by Westaff Australia;



(b)

the Adjustment Statement will be reviewed by the Auditor, who will be instructed by the Seller to provide an opinion that the Adjustment Statement has been prepared in accordance with clauses 6.4 ("Contents of Adjustment Statement") and 6.5 ("Preparation of Adjustment Statement"); and



(c)

the Seller and Buyer will be provided access to the Adjustment Statement work papers prepared by Westaff Australia and the Adjustment Statement review work papers prepared by the Auditor.

6.4   Contents of Adjustment Statement

The Adjustment Statement must show the Net Operating Assets.

6.5   Preparation of Adjustment Statement

(a)

The Adjustment Statement must be prepared in accordance with the Adjustment Statement Principles and be in the format set out in Schedule 5.



(b)

The Buyer must ensure that each Company provides the Auditor with such reasonable access, assistance and facilities as it requires to audit the Adjustment Statement. The Seller will bear the costs of preparing the Adjustment Statement.

6.6   Payment of Adjustment Amount

Subject to clause 6.7, if Net Operating Assets plus cash, less accrued income tax liability is:

(a)

less than the Agreed Net Operating Assets plus $1,000,000 Cash, then the Seller must pay to the Buyer the difference; or



(b)

greater than the Agreed Net Operating Assets plus $1,000,000 Cash, then the Buyer must pay to the Seller the difference,

within fifteen days after the Adjustment Statement has been audited by the Auditor in accordance with clause 6.3 ("Adjustment Statement"). In the event the Seller fails to pay any amount due to the Buyer under (i) of this clause, the Buyer may set that amount off against any payment to the Seller under clause 6.2.

6.7   Resolution of disputes on Adjustment Statement

(a)

(Independent Expert) If the Seller and the Buyer cannot agree on all (or part of) an item referred to in the Adjustment Statement within 21 days of the delivery of the Adjustment Statement, then either of them may within a further 21 days refer the disagreement to the Independent Expert with the request that the Independent Expert make a decision on the disagreement as soon as practical after receiving any submissions from the Seller and the Buyer. Those submissions must be made in writing within 30 days (or such other time as may be agreed) after the Independent Expert is appointed. A copy must be made available to each party.

22

(b)

(Decision binding) The decision of the Independent Expert is, in the absence of manifest error, conclusive and binding on the parties for the purposes of determining the amount payable in respect of the relevant item (or part of it) in determining the Adjustment Amount payable under this agreement.



(c)

(Payment) If this clause applies in respect of all or part of any item referred to in the Adjustment Statement, the amount to be paid under clause 6.6 ("Payment of Adjustment Amount") will exclude the item (or the relevant part of it) in dispute. Payment in respect of that item (or the relevant part of it) must be made within seven days after the Independent Expert's report under this clause 6.7 has been delivered. Payment of the amount not in dispute must be made within the seven day period referred to in clause 6.6 ("Payment of Adjustment Amount").



(d)

(Costs) The Seller and the Buyer agree to each pay one half of the Independent Expert's costs and expenses in connection with the reference. The Independent Expert will be appointed as an expert and not as an arbitrator. The procedures for determination are to be decided by the Independent Expert in its discretion.

6.8   Consideration does not include GST

The consideration specified in this agreement does not include any amount:

(a)

in relation to Westaff Australia, for GST; and



(b)

in relation to Westaff NZ, for goods and services tax levied under the Goods and Services Act 1985 (NZ), it being acknowledged that the transfer of the Shares is exempt for GST purposes in New Zealand.

6.9   Recovery of GST

If a supply under this agreement is subject to GST, the recipient must pay to the supplier an additional amount equal to the Amount of Consideration multiplied by the applicable GST rate.

6.10 Time of payment

The additional amount in respect of GST is payable by the recipient to the supplier at the same time as the consideration for the supply is payable or is to be provided. However, the additional amount need not be paid until the supplier gives the recipient a Tax Invoice.

6.11 Adjustment of additional amount

If there is an adjustment event in relation to a supply which results in the amount of GST on a supply being different from the amount in respect of GST already recovered by the supplier, as appropriate, the supplier:

(a)

may recover from the recipient the amount by which the amount of GST on the supply exceeds the amount already recovered; or



(b)

must refund to the recipient the amount by which the amount already recovered exceeds the amount of GST on the supply; and



(c)

must issue an Adjustment Note in relation to the supply to the recipient within 28 days of the adjustment event where the recipient is not required to issue an Adjustment Note in relation to the supply.

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6.12 Reimbursement

If a party is entitled to be reimbursed or indemnified under this agreement, the amount to be reimbursed or indemnified does not include any amount for GST for which the party is entitled to an Input Tax Credit.

6.13 Method of payment

Each payment referred to in this clause 6 must be made by, at the option of the recipient, bank cheque or direct deposit of cleared funds to the credit of a bank account specified in writing by the recipient before Completion.

7      Conduct of business pending Completion

7.1   Restricted activities

Subject to clause 7.2, except to the extent required to comply with the obligations under this agreement (including the satisfaction of any Conditions Precedent), the Seller covenants and undertakes to the Buyer that, between the date of this agreement and the Completion Date, except with the prior written consent of the Buyer, it will or will ensure that each of Westaff Australia and Westaff NZ will:

(a)

manage and conduct the respective Businesses as a going concern and in an efficient and business-like manner;



(b)

ensure the Businesses will not in any material way depart from the Ordinary Course of Business;



(c)

not dispose of its business assets except for disposal made in the Ordinary Course of Business;



(d)

not increase, reduce, or otherwise change the issued capital of either of Westaff Australia or the rights attaching to the Shares;



(e)

not issue any shares, stock units, debentures, convertible securities or other equity interests in Westaff NZ (including options or rights to acquire or subscribe for shares or other equities in the capital of Westaff NZ);



(f)

not redeem or buy back the Shares nor agree to do so;



(g)

not change the constitution of either of the Companies;



(h)

not give or agree to give any guarantee, indemnity or bond in respect of or to secure the obligations of any person except in the Ordinary Course of Business;



(i)

not grant or agree to grant any debenture, mortgage, charge or other security over its assets except in the Ordinary Course of Business;



(j)

not enter into any new arrangement, or give another person any new option to share income or profits of the Business (including any joint venture, partnership or other profit sharing arrangement);



(k)

not undertake any capital expenditure or enter into any commitment to do so except in the Ordinary Course of Business;



(l)

not grant an option to purchase or right of first refusal over the Business or the Shares;



(m)

not enter into any new loan agreement or make any other new financial accommodation;



(n)

not borrow any money under any new facility or accept any form of new financial accommodation;

24

(o)

not make any change to the terms and conditions of employment, remuneration or superannuation benefits of its directors, employees, commission agents or sales personnel other than in the Ordinary Course of Business;



(p)

not make any offers of employment other than in the Ordinary Course of Business;



(q)

not acquire or dispose of any fixed assets other than in the Ordinary Course of Business; and



(r)

not be wound up and there will be no appointment of an administrator or controller over either of the Companies or the assets of the Business.

7.2   Transfer of trade marks

Notwithstanding clause 7.1, nothing prevents Westaff Australia or Westaff NZ transferring the intellectual property described in Schedule 6 to the Seller or any of its Related Bodies Corporate prior to Completion.

8      Conduct of business after Completion

8.1   Acknowledgement in relation to Seller Marks

The Buyer acknowledges that, from Completion, it and the Companies will have the right in or to use any Seller Mark or Westaff Intellectual Property, only as set out in the Licence Agreement.

8.2   Exclusion of directors and officers from liability

From Completion, the Buyer, to the maximum extent permitted by law, will ensure that each Company does not take any Action or proceeding or make any Claim or demand against any member of Seller Management or any of the present or former directors or officers of either Company in respect of any act or omission on the part of such director or officer before Completion, other than any matter arising from the wilful misconduct or dishonesty of that director or officer.

The Buyer acknowledges that this clause is for the benefit of those members of Seller Management, present or former directors and officers of either Company, and is held on trust for them by the Seller.

8.3   BAS returns

In respect of the tax period in which Completion occurs, the Seller must ensure that it gives to the Buyer, as requested by the Buyer, on a timely basis, all information that the Seller holds that is needed to lodge the BAS return for the Company or any subsidiary for that tax period and a future six tax periods as may be required.

8.4   Software licenses

The Seller grants the Buyer (on behalf of Westaff Australia), from Completion, sub licences to use:

(a)

the Microsoft Software for a period of 3 months; and



(b)

the Citrix Software and Citrix Hardware for a period of 4 months.

Upon expiry of the sub licences, the Buyer must procure that Westaff Australia obtains its own licence to use the Microsoft Software and the Citrix Software, to the extent that it continues to use the Microsoft Software and the Citrix Software.

25

9      Warranties and representations

9.1   Accuracy

The Seller represents and warrants to the Buyer that each Warranty is correct and not misleading in any respect on the date of this agreement and will be correct and not misleading in any respect on the Completion Date as if made on and as at each of those dates.

9.2   Matters disclosed

Each Warranty is to be read down and qualified by any information:

(a)

disclosed to the Buyer by the Seller in the Disclosure Material;



(b)

which is otherwise within the actual knowledge of the Buyer;



(c)

disclosed in writing to the Buyer during the course of the Due Diligence; or



(d)

that would have been disclosed to the Buyer had the Buyer conducted searches prior to Completion of records open to public inspection maintained by:



(i)

in the case of Westaff Australia, the Australian Securities and Investments Commission, the Trade Marks Office, the Land Titles Office in each Australian State and Territory, any Government Agency or utilities, the High Court, the Federal Court and the Supreme Courts in every State and Territory in Australia; and



(ii)

in the case of Westaff NZ, the New Zealand Companies Office, Land Information New Zealand, the Intellectual Property Office of New Zealand, the Personal Property Securities Register and any Court in New Zealand,

which is or may be inconsistent with that Warranty and, to the extent that any Warranty is incorrect or misleading having regard to any such information, that Warranty is deemed not to have been given. No amount will be recoverable by the Buyer in respect of any breach of Warranty to the extent that the breach arises by reason of or in relation to any such information.

9.3   Buyer's acknowledgement

The Buyer acknowledges and agrees that:

(a)

in entering into this agreement and in proceeding to Completion, the Buyer does not rely on any statement, representation, warranty, condition, forecast or other conduct which may have been made by or on behalf of the Seller, except the Warranties;



(b)

it has had the opportunity to conduct a Due Diligence;



(c)

irrespective of whether or not the Due Diligence was as full or exhaustive as the Buyer would have wished, it has nevertheless independently and without the benefit of any inducement, representations or warranty (other than the Warranties) from the Seller or its agents determined to enter into this agreement;



(d)

the disclosures regarding each Company (including, the information, forecasts and statements of intent contained in material provided to the Buyer in the Disclosure Material or made in management presentations or discussions) are accepted by the Buyer and that neither the Seller nor any of its agents, directors, officers, employees or advisers has made or makes any representation or warranty as to the accuracy or completeness of those disclosures or that information;

26

(e)

neither the Seller nor any of its agents, directors, officers or employees:



(i)

accepts any duty of care in relation to the Buyer in respect of any disclosure or the provision of any information referred to in clause 9.3(d); or



(ii)

is to be liable to the Buyer if, for whatever reason, any such information is or becomes inaccurate, incomplete or misleading in any particular way; and



(f)

subject to any Law to the contrary and except as provided in the Warranties, all terms, conditions, warranties and statements, whether express, implied, written, oral, collateral, statutory or otherwise, are excluded, and the Seller disclaims all Liability in relation to them, to the maximum extent permitted by Law.

9.4   Buyer's representation

The Buyer represents that, on the basis of the Due Diligence and other information of which it is aware at the date of this agreement, it does not have knowledge or belief of any matter which is, or would with the passage of time become, a material breach of any Warranty other than any potential breaches of a Warranty disclosed in the Disclosure Material.

9.5   Seller's acknowledgment

The Seller acknowledges that the representation given by the Buyer in clause 9.4 ("Buyer's representation") does not give the Seller a cause of Action against the Buyer and may only be raised by the Seller as a defence to any Claim by the Buyer.

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10    Limitations of Liability

10.1 Notice of Claims

If the Buyer becomes aware of any matter or circumstance that may give rise to a Claim under or in relation to or arising out of this agreement, including a breach of a Warranty:

(a)

the Buyer must give notice of the Claim to the Seller; and



(b)

the notice must contain:



(i)

the facts, matters or circumstances that may give rise to the Claim;



(ii)

if it is alleged that the facts, matters or circumstances referred to in sub-clause (i) constitute a breach of this agreement, including a breach of a Warranty, the basis for that allegation; and



(iii)

an estimate of the amount of the Loss, if any, arising out of or resulting from the Claim or the facts, matters or circumstances that may give rise to the Claim.

10.2 Third party Claims

If the matter or circumstance that may give rise to a Claim against the Seller under or in relation to or arising out of this agreement, including a breach of a Warranty, is a result of or in connection with a Claim by or liability to a third party then:

(a)

the Buyer must within 3 Business Days give notice of the Claim to the Seller;



(b)

the notice must contain:



(i)

the facts, matters or circumstances that may give rise to the Claim;



(ii)

if it is alleged that the facts, matters or circumstances referred to in sub-clause (i) constitute a breach of this agreement including a breach of a Warranty, the basis for that allegation; and



(iii)

an estimate of the amount of the Loss, if any, arising out of or resulting from the Claim or the facts, matters or circumstances that may give rise to the Claim;



(c)

at the expense and direction of the Seller, the Buyer must either:



(i)

take such Action (including legal proceedings or making claims under any insurance policies) as the Seller may require to avoid, dispute, resist, defend, appeal, compromise or mitigate the Claim; or



(ii)

offer the Seller the option to assume defence of the Claim; and



(d)

the Buyer must not (and must procure that the Companies do not) settle, make any admission of liability or compromise any Claim, or any matter which gives or may give rise to a Claim, without the prior consent of the Seller which consent may be withheld by the Seller at its absolute discretion.

10.3 Seller to consider Claims

The Seller must notify the Buyer within 15 Business Days of receipt of a notice of a Claim under clause 10.1 ("Notice of Claims") or clause 10.2 ("Third party Claims") indicating whether it admits or denies the Claim (in whole or in part) (or, in the case of third party Claims, whether it exercises the option in clause 10.2(c)(ii) ("Third party Claims")).

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10.4 Seller to defend Claim

Subject to clause 10.5 ("Buyer's election to defend claim") if the Seller exercises the option in clause 10.2(c)(ii) ("Third party Claims"), then:

(a)

the Buyer agrees to co-operate with the Seller and do all things reasonably requested by the Seller in respect of the Claim;



(b)

the Seller agrees, at its own expense, to defend the Claim;



(c)

the Seller may settle or compromise the Claim with the consent of the Buyer, such consent not to be unreasonably withheld; and



(d)

the Seller agrees to consult with the Buyer in relation to the conduct of the Claim and not take or persist in any course that might reasonably be regarded as harmful to the goodwill, reputation, affairs or operation of the Buyer or a Company.

10.5 Buyer's election to defend claim

The Buyer may elect to conduct the defence (or settlement) of a third party Claim in which case clause 10.4 will not apply and the Seller will have no liability in respect of any Warranty to the extent it relates to such Claim.

10.6 Seller not liable

The Seller is not liable to the Buyer (or any person deriving title from the Buyer) for any Claim under or in relation to or arising out of this agreement including a breach of a Warranty:

(a)

if the Buyer has failed to comply with clause 10.1 ("Notice of Claims") or clause 10.2 ("Third party Claims") as the case may be;



(b)

if the Claim is wholly as a result of or in consequence of any voluntary act, omission, transaction or arrangement of or on behalf of the Buyer after Completion;



(c)

if the Claim is as a result of or in respect of any legislation not in force at the date of this agreement (including legislation which takes effect retrospectively);



(d)

to the extent that the Claim arises or is increased as a result only of an increase in the rates, or scope of taxation after Completion;



(e)

to the extent that the Claim arises or is increased as a result of any change in Accounting Standards after Completion;



(f)

to the extent that provision has been made for any fact, matter or circumstance giving rise to a Claim in the Financial Statements; or



(g)

if the Buyer was informed by the Seller on or before the date of this agreement of any fact, matter or circumstance, which gives rise to or forms the basis of the Claim.

10.7 Recovery

Where the Buyer is or may be entitled to recover from some other person any sum in respect of any matter or event which could give rise to a Claim, the Buyer will:

(a)

use its best endeavours to recover that sum before making the Claim;



(b)

keep the Seller at all times fully and promptly informed of the conduct of such recovery; and



(c)

reduce the amount of the Claim by the amount of the Recovered Sum.

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If the recovery is delayed until after the Claim has been paid by the Seller to the Buyer the Recovered Sum will be paid to the Seller.

10.8 Reduction in Purchase Price

If payment is made for a breach of any Warranty, the payment is to be treated as an equal reduction in the purchase price of each Share.

10.9 Time limit on Claims

The Buyer may not make any Claim under this agreement including for a breach of Warranty unless:

(a)

full details of the Claim have been notified to the Seller in accordance with clause 10.1 ("Notice of Claims") or clause 10.2 ("Third party Claims") within 1 year from the Completion Date; and



(b)

full details of any Tax Claim have been notified to the Seller in accordance with Clause 10.1 or 10.2 within 6 years of the Completion Date.

A Claim will not be enforceable against the Seller and is to be taken for all purposes to have been withdrawn unless any legal proceedings in connection with the Claim are commenced within twelve months after written notice of the Claim is served on the Seller in accordance with clause 10.1 ("Notice of Claims") or clause 10.2 ("Third party Claims").

10.10  Minimum amount of Claim

The Buyer may not make any Claim under this agreement including for a breach of Warranty:

(a)

if the amount of the Claim is less than $50,000; and



(b)

unless and until the aggregate amount of all Claims properly made under this agreement exceeds $300,000,

10.11  Maximum liability—aggregate

The Seller's total liability for loss or damage of any kind not excluded by clause 10.13 ("Exclusion of consequential liability") however caused (including in respect of the warranties contained in section 8 of Schedule 3 which are subject to the cap in clause 10.12), in contract, tort, (including negligence), under any statute or otherwise from or relating in any way to this agreement or its subject matter is limited in aggregate for any and all Claims to $5,000,000.

10.12  Maximum liability—tax warranties

The Seller's total liability for loss or damage of any kind not excluded by clause 10.13 ("Exclusion of consequential liability") relating in any way to the taxation warranties contained in section 18 of Schedule 3 is limited in aggregate for any and all such Claims to $1,000,000.

10.13  Exclusion of consequential liability

The Seller excludes all liability for indirect and consequential loss or damage (including for loss of profit (whether direct, indirect, anticipated or otherwise), loss of expected savings, opportunity costs, loss of business (including loss or reduction of goodwill), damage to reputation and loss or corruption of data regardless of whether any or all of these things are considered to be indirect or consequential losses or damage) in contract, tort (including negligence), under any statute or otherwise arising from or related in any way to this agreement or its subject matter.

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10.14  Insured Claim or loss

The Seller will not be liable for any Claim under or in relation to or arising out of this agreement including a breach of a Warranty unless the Buyer has first caused the relevant Company to make a Claim under any insurance policy held by that Company which may cover that Claim and that Claim has been denied in whole or in part by the relevant insurer. If the Buyer has still incurred some damage or Loss, that remaining amount will be the amount of the Buyer's Loss for the purposes of this agreement.

10.15  Act or omission after Completion

The Seller's liability to the Buyer for loss or damage of any kind in contract, tort (including negligence), under any statute or in relation to or arising out of this agreement including a breach of a Warranty will be reduced to the extent that the Claim arises as a result of or in connection with any act or omission after Completion by the Buyer or a Company (unless such act or omission was, or was not, undertaken in reliance of a Warranty).

10.16  Later recoveries

If, after the Seller has made a payment to the Buyer pursuant to a Claim under or in relation to or arising out of this agreement, including a breach of a Warranty, the Buyer, either Company receives a payment in relation to the fact, matter or circumstance to which the Claim related, then the Buyer must repay to the Seller the amount received from the Seller or, if less, the amount of the payment or benefit which was received by the Buyer, or either Company (as the case may be).

10.17  Obligation to mitigate

Nothing in this clause 10 ("Limitations of Liability") in any way restricts or limits the general obligation at Law of the Buyer to mitigate any Loss or damage which it may incur in consequence of any breach by the Seller of the terms of this agreement including a breach of a Warranty.

10.18  Tax benefit

In calculating the Liability of the Seller for a Claim arising under, in relation to or arising out of this agreement, including a breach of any Warranty, any tax benefit or reduction received by the Buyer as a result of the loss or damage arising from that breach must be taken into account.

11    Buyer's warranties

11.1 Buyer's warranties

The Buyer represents and warrants to the Seller that each of the following statements is correct and not misleading in any material respect on the date of this agreement and will be correct and not misleading as at the Completion Date as if made on each of those dates:

(a)

it has the power to enter into and perform this agreement and has obtained all necessary consents and authorisations to enable it to do so;



(b)

the entry into and performance of this agreement by it does not constitute a breach of any obligation (including any statutory, contractual or fiduciary obligation), or default under any agreement or undertaking by which it is bound;



(c)

this agreement constitutes valid and binding obligations upon it enforceable in accordance with its terms by appropriate legal remedy;

31

(d)

this agreement and Completion do not conflict with or result in a breach of or default under any applicable Law, any provision of its constitution or any material term or provision of its constitution or any material term or provision of any agreement or deed or writ, order or injunction, judgment, Law, rule or regulation to which it is a party or is subject or by which it is bound;



(e)

no voluntary arrangement has been proposed or reached with any creditors of the Buyer;



(f)

the Corporate and Security Structure contained in Annexure D is complete and accurate; and



(g)

the Buyer is able to pay its debts as and when they fall due.

11.2 Indemnity

The Buyer indemnifies the Seller against any Loss that the Seller may incur to the extent caused by any breach of the representations and warranties in clause 11.1 ("Buyer's warranties").

12    Default

12.1 Failure by a party to Complete

If a party does not Complete, other than as a result of default by the other party, the non-defaulting party may give the defaulting party notice requiring it to Complete within 5 Business Days of receipt of the notice.

12.2 Specific performance or termination

If the defaulting party does not Complete within the period specified in clause 12.1 ("Failure by a party to Complete") the non-defaulting party may choose either to proceed for specific performance or terminate this agreement. In either case, the non-defaulting party may seek damages for the default.

12.3 Termination of agreement

If this agreement is terminated then clause 4.6 ("Effect of termination") will apply with the necessary changes. A termination of this agreement under this clause will not affect any other rights the parties have against one another at Law or in equity.

13    Confidential Information and privacy

13.1 Confidential Information

Subject to clauses 13.6 ("Disclosure to other potential buyers"), 13.8 ("Enforcement by Companies") and 13.9 ("Privacy") no Confidential Information may be disclosed by the Receiving Party to any person except:

(a)

to Representatives of the Receiving Party or its Related Bodies Corporate requiring the information for the purposes of this agreement;



(b)

with the consent of the Disclosing Party;



(c)

if the Receiving Party is required to do so by Law, a stock exchange or any regulatory authority; or



(d)

if the Receiving Party is required to do so in connection with legal proceedings relating to this agreement.

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13.2 Disclosure of Confidential Information

If the Receiving Party discloses information under clause 13.1(a) or (b) ("Confidential Information") the Receiving Party must use its reasonable endeavours to ensure that recipients of the Confidential Information do not disclose the Confidential Information except in the circumstances permitted in clause 13.1 ("Confidential Information").

13.3 Use of Confidential Information

The Buyer must not use any Confidential Information except for the purpose of performing its obligations under this agreement.

13.4 Excluded Information

Clauses 13.1 ("Confidential Information"), 13.2 ("Disclosure of Confidential Information") and 13.3 ("Use of Confidential Information") do not apply to Excluded Information.

13.5 Delivery of materials

The Receiving Party must, on the request of the Disclosing Party, immediately deliver to the Disclosing Party or otherwise destroy all documents or other materials containing or referring to Confidential Information of the Disclosing Party which are:

(a)

in the Receiving Party's possession, power or control; or



(b)

in the possession, power or control of persons who have received Confidential Information under clause 13.1(a) or (b) ("Confidential Information").

13.6 Disclosure to other potential buyers

The Buyer acknowledges that the Seller may have disclosed to other potential buyers of the Shares information which may be of a confidential nature and that clause 13.1 ("Confidential Information") does not apply to any such disclosure.

13.7 Disclosure prior to the date of this agreement

The Buyer acknowledges that the Seller has disclosed information prior to the date of this agreement which may be of a confidential nature and that clause 13.1 ("Confidential Information") does not apply to any such disclosure prior to the date of this agreement.

13.8 Enforcement by Companies

Nothing in this clause 13 ("Confidential Information and privacy") will prevent either Company from enforcing any confidentiality agreement entered into by potential buyers of the Shares before the date of this agreement, to the extent that the confidentiality agreement was for the benefit of and is enforceable by the Company.

13.9 Privacy

The Buyer agrees:

(a)

to comply with all Privacy Laws;



(i)

by which it is bound; and



(ii)

by which the Seller is bound and notifies the Buyer

33

in connection with Personal Information collected, used or disclosed in connection with this agreement;

(b)

to notify the Seller immediately after it becomes aware that a disclosure of Personal Information may be required by Law before Completion;



(c)

not to do anything with the Personal Information that may cause the Seller to be in breach of a Privacy Law of which the Seller has notified the Buyer;



(d)

to notify the Seller of any request the Buyer receives before Completion for access to Personal Information which the Seller has disclosed to the Buyer;



(e)

not to give access to, or copies of, Personal Information disclosed by the Seller to the Buyer to anyone except to the individual to whom the Personal Information relates without the Seller's consent unless the Buyer is required to do so under a Privacy Law; and



(f)

to the Seller retaining Personal Information which is part of the Confidential Information because it is an Excluded Asset or otherwise required to be retained by the Seller pursuant to this agreement.

13.10  Application of clause 13.9

Clause 13.9 ("Privacy") prevails over the balance of this clause 13 ("Confidential information and privacy") to the extent of any inconsistency in respect of Personal Information which is also Confidential Information.

13.11  Use of Personal Information by Seller after Completion

If the Seller is required by this agreement or by Law to retain any Personal Information which is part of the Confidential Information, the Seller may use and disclose that Personal Information for the purpose for which it is required to be retained under this agreement or as required by that other Law or by any Privacy Laws.

13.12  Survival of termination

This clause 13 ("Confidential information and privacy") will survive termination of this agreement.

14    Announcements

14.1 Public announcements

Subject to clause 14.2 ("Public announcements required by Law"), no party may, before or after Completion, make or send a public announcement, communication or circular concerning the transactions referred to in this agreement unless it has first obtained the written consent of the other parties which consent is not to be unreasonably withheld or delayed.

However, the Buyer may make or send communications or circulars to communicate on a private basis with customers, employees and stakeholders for the sole purpose of satisfying its obligations under clause 4.2.

14.2 Public announcements required by Law

Clauses 13.1 ("Confidential Information") and 14.1 ("Public announcements") do not apply to a public announcement, communication or circular required by Law or a regulation of a stock exchange.

34

15    Costs and stamp duty

15.1 Legal costs

The Seller and the Buyer agree to pay their own legal advisory consultants and other costs and expenses in connection with the negotiation, preparation, execution and completion of this agreement and other related documentation, except for:

(a)

stamp duty which the Buyer is liable for in accordance with clause 15.2; and



(b)

all legal and other costs associated with the negotiation, preparation and registration of all Security Documentation and guarantees in relation to the payment of the balance of the Purchase Price as contemplated by clause 6.2 which the Buyer is liable for and agrees to pay.

15.2 Stamp duty

The Buyer agrees to pay all stamp duty (including fines and penalties) chargeable, payable or assessed in relation to this agreement and the transfer of the Shares to the Buyer.

16    Notices and other communications

16.1 Form—all communications

Unless expressly stated otherwise in this agreement, all notices, certificates, consents, approvals, waivers and other communications in connection with this agreement must be:

(a)

in writing;



(b)

signed by the sender (if an individual) or an Authorised Officer of the sender; and



(c)

marked for the attention of the person identified in the Details or, if the recipient has notified otherwise, then marked for attention in the way last notified.

16.2 Form—communications sent by email

Communications sent by email need not be marked for attention in the way stated in clause 16.1 ("Form—all communications"). However, the email:

(a)

must state the first and last name of the sender; and



(b)

must be in plain text format or, if attached to an email must be an Adobe Portable Document Format.

Communications sent by email are taken to be signed by the named sender.

16.3 Delivery

Communications must be:

(a)

left at the address set out or referred to in the Details;



(b)

sent by prepaid ordinary post (airmail if appropriate) to the address set out or referred to in the Details;



(c)

sent by fax to the fax number set out or referred to in the Details; or



(d)

sent by email to the address set out or referred to in the Details; or



(e)

given in any other way permitted by Law.

35

However, if the intended recipient has notified a changed address, fax number or email address then the communication must be to that address, fax number or email address.

16.4 When effective

Communications take effect from the time they are received or taken to be received under clause 16.5 ("When taken to be received") (whichever happens first) unless a later time is specified.

16.5 When taken to be received

Communications are taken to be received:

(a)

if sent by post, three days after posting (or seven days after posting if sent from one country to another); or



(b)

if sent by fax, at the time shown in the transmission report as the time that the whole fax was sent; or



(c)

if sent by email;



(i)

when the sender receives an automated message confirming delivery; or



(ii)

four hours after the time sent (as recorded on the device from which the sender sent the email) unless the sender receives an automated message that the email has not been delivered,

whichever happens first.

16.6 Receipt outside business hours

Despite clauses 16.4 ("When effective") and 16.5 ("When taken to be received"), if communications are received or taken to be received under clause 16.5 after 5.00pm in the place of receipt or on a non-Business Day, they are taken to be received at 9.00am on the next Business Day and take effect from that time unless a later time is specified.

17    Assignment

No party may assign or otherwise deal with its rights under this agreement or allow any interest in them to arise or be varied in each case without the consent of the other party, which consent must not be unreasonably withheld or delayed.

18    Miscellaneous

18.1 Discretion in exercising rights

A party may exercise a right or remedy or give or refuse its consent in any way it considers appropriate (including by imposing conditions), unless this agreement expressly states otherwise.

18.2 Partial exercising of rights

If a party does not exercise a right or remedy fully or at a given time, the party may still exercise it later.

18.3 No liability for loss

A party is not liable for Loss caused by the exercise or attempted exercise of, failure to exercise, or delay in exercising a right or remedy under this agreement.

36

18.4 Approvals and consents

By giving its approval or consent a party does not make or give any warranty or representation as to any circumstance relating to the subject matter of the consent or approval.

18.5 Conflict of interest

The parties' rights and remedies under this agreement may be exercised even if it involves a conflict of duty or a party has a personal interest in their exercise.

18.6 Remedies cumulative

The rights and remedies provided in this agreement are in addition to other rights and remedies given by Law independently of this agreement.

18.7 Rights and obligations are unaffected

Rights given to the parties under this agreement and the parties' liabilities under it are not affected by anything which might otherwise affect them by Law.

18.8 Variation and waiver

A provision of this agreement or a right created under it may not be waived or varied except in writing, signed by the party or parties to be bound.

18.9 No merger

The Warranties, undertakings and indemnities in this agreement including those contained in clause 11 ("Buyer's warranties") do not merge and are not extinguished on Completion and will survive after Completion.

18.10  Indemnities

Subject to this agreement, the indemnities in this agreement are continuing obligations, independent from the other obligations of the parties under this agreement and continue after this agreement ends. It is not necessary for a party to incur expense or make payment before enforcing a right of indemnity under this agreement.

18.11  Further steps

Each party agrees, at its own expense, to do anything the other party asks (such as obtaining consents, signing and producing documents and getting documents completed and signed) as may be necessary or desirable to give full effect to the provisions of this agreement and the transactions contemplated by it.

18.12  Entire agreement

This agreement constitutes the entire agreement of the parties about its subject matter and supersedes all previous agreements, understandings and negotiations on that subject matter other than the Licence Agreement.

18.13  Construction

No rule of construction applies to the disadvantage of a party because that party was responsible for the preparation of, or seeks to rely on, this agreement or any part of it.

37

18.14  Knowledge and belief

Any statement made by a party on the basis of its knowledge, information, belief or awareness, is made on the basis that the party has, in order to establish that the statement is accurate and not misleading in any material respect, made all reasonable enquiries of its officers, managers and employees who could reasonably be expected to have information relevant to matters to which the statement relates.

19    Governing Law, jurisdiction and service of process

19.1 Governing Law

This agreement is governed by the Law in force in the place specified in the Details. Each party submits to the non-exclusive jurisdiction of the courts of that place.

19.2 Serving documents

Without preventing any other method of service, any document in an Action may be served on a party by being delivered to or left at that party's address in the Details.

20    Counterparts

This agreement may consist of a number of copies, each signed by one or more parties to the agreement. If there are a number of signed copies they are treated as making up the one document and the date on which the last counterpart is executed will be the date of the agreement.

EXECUTED as an agreement

38

1      Interpretation

These meanings apply unless the contrary intention appears:

Action means an action, dispute, Claim, demand, investigation, inquiry, prosecution, litigation, proceeding, arbitration, mediation or dispute resolution.

Buyer means Humanis Blue Pty Limited.

Claim means any allegation, debt, cause of action, liability, claim, proceeding, suit or demand of any nature howsoever arising and whether present or future, fixed or unascertained, actual or contingent whether at law, in equity, under statute or otherwise and which either party has or may have against the other in connection with the cessation of the Officer's employment with the Company.

Seller means Westaff Inc.

2      Release of Officer

To the maximum extent permitted by law, the Company agrees:

(a)

to unconditionally release the Officer from all rights and Claims relating to his employment or his engagement by the Company; and



(b)

not to issue any proceedings in respect of rights and Claims relating to their employment or their engagement by the Company.

The Officer may plead this deed in bar to any Claim or proceedings by the Company or any person claiming on their behalf in respect of Claims or any matter related thereto other than a Claim in relation to a breach of this deed by the Officer.

3      Indemnity

To the maximum extent permitted by law the Company will indemnify the Officer against all Claims which the Company or any shareholder of the Company has or may have at any time against the Company in respect of his employment with the Company and any conduct of the Officer involving or relating in any way whatsoever to other shareholders of the Company as at Completion.

4      Severability

If the whole or any part of a provision of this deed is void, unenforceable or illegal in a jurisdiction it is severed for that jurisdiction. The remainder of this deed has full force and effect and the validity or enforceability of that provision in any other jurisdiction is not affected. This clause has no effect if the severance alters the basic nature of this deed or is contrary to public policy.

5      Entire agreement

This deed constitutes the entire agreement of the parties about its subject matter and supersedes all previous agreements, understandings and negotiations on that subject matter.

6      General

6.1   Partial exercising of rights

If a party does not exercise a right or remedy fully or at a given time, the party may still exercise it later.

39

6.2   Remedies cumulative

The rights and remedies provided in this deed are in addition to other rights and remedies given by law independently of this agreement.

6.3   Rights and obligations are unaffected

Rights given to the parties under this deed and the parties' liabilities under it are not affected by anything which might otherwise affect them by law.

6.4   Variation and waiver

A provision of this deed or a right created under it, may not be waived or varied except in writing, signed by the party or parties to be bound.

6.5   Costs

Each party will pay its reasonable legal costs and expenses in connection with the preparation, execution and completion of this deed.

6.6   Supervening legislation

Any present or future legislation which operates to vary the obligations of a party in connection with this deed with the result that another party's rights, powers or remedies are adversely affected (including, by way of delay or postponement) is excluded except to the extent that its exclusion is prohibited or rendered ineffective by law.

6.7   Counterparts

This deed may be executed in counterparts. All counterparts when taken together are to be taken to constitute one instrument.

7      Governing law

7.1   Governing law

This deed is governed by the law in force in Melbourne, Victoria, Australia. Each party submits to the non-exclusive jurisdiction of the courts of that place.

7.2   Jurisdiction

Each party submits to the non-exclusive jurisdiction of the courts of Victoria, Australia and courts of appeal from them. Each party waives any right it has to object to an Action being brought in those courts including, without limitation, by claiming that the Action has been brought in an inconvenient forum or that those courts do not have jurisdiction.

7.3   Serving documents

Without preventing any other method of service, any document in an Action may be served on a party by being delivered or left at that party's address in the Details.

40

EXECUTED as a deed.

DATED:

EXECUTED by [COMPANY NAME] in accordance with section 127(1) of the Corporations Act 2001 (Cwlth) by authority of its directors:	) ) ) )
Signature of director	) ) ) ) )	Signature of director/company secretary* *delete whichever is not applicable
	)
Name of director (block letters)	) ) )	Name of director/company secretary* (block letters) *delete whichever is not applicable
SIGNED, SEALED AND DELIVERED by [OFFICER NAME] in the presence of:	) ) ) ) )
Signature of witness	) ) )
Name of witness (block letters)	) ) )	Signature of [OFFICER NAME]

41

Signing page

DATED: 27 September 2008

SIGNED by MICHAEL WILLIS as authorised representative for WESTAFF INC in the presence of:	) ) ) ) )
/s/ M. Johnson Signature of witness	) ) ) )
M Johnson Name of witness (block letters)	) ) ) ) ) ) )	/s/ Michael Willis By executing this agreement the signatory warrants that the signatory is duly authorised to execute this agreement on behalf of WESTAFF, INC
EXECUTED by HUMANIS BLUE PTY LIMITED in accordance with section 127(1) of the Corporations Act 2001 (Cwlth) by authority of its directors:	) ) ) ) ) ) )
/s/ Angus Mason Signature of director	) ) ) ) ) )	Signature of director/company secretary* *delete whichever is not applicable
Angus Mason Name of director (block letters)	) ) ) ) )	Name of director/company secretary* (block letters) *delete whichever is not applicable

42

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Exhibit 2.1

EX-2.1.1

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Exhibit 2.1.1

[HUMANIS GROUP LETTERHEAD]

Humanis Group Limited
ABN 76128 826 982
Level 6
31 Queen Street
Melbourne Victoria 3000
Australia

Private and Confidential

31 October 2008

Mr Michael Willis
298 N. Wiget Lane
Walnut Creek,
California 94598

Amendment Agreement

        Further to the Share Sale Agreement dated the 29^th September 2008, on the condition the following occurs Humanis will waive any conditions precedent for settlement and our right to terminate:

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Subject to GE enabling Westaff (Australia) will electronically transfer $3 million to the trust account of Mallesons Stephen Jacques (BSB 083 026 Account Number 515191168) for immediate use against the settlement of Westaff Australia and New Zealand,

        On receipt and evidence of these funds with Mallesons Stephen Jacques, Humanis will initiate settlement procedures and do so within 3 working days. On this assumption this occurs Monday, settlement will take place on Thursday the 6^th of November or earlier.

Yours sincerely	Accepted by
/s/ JEFF JONES Jeff Jones Director Humanis Group	/s/ MICHAEL WILLIS Michael Willis CEO & President Westaff Inc

Mr Nigel Haworth
Managing Director
Westaff (Australia) Pty Ltd
100 Albert Road
South Melbourne Victoria

31 October 2008

Payment Authority.

        Please pay immediately $3 million from drawings against the GE Facility to the trust account of Mallesons Stephen Jacques, BSB 063 026 Account Number 515191168.

Yours sincerely

/s/ MICHAEL WILLIS
Michael Willis
CEO & President
Westaff Inc

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Exhibit 2.1.1
Humanis Group Limited ABN 76128 826 982 Level 6 31 Queen Street Melbourne Victoria 3000 Australia

Amendment Agreement
Payment Authority.

EX-10.3.20

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Exhibit 10.3.20

[WESTAFF LOGO]

August 28, 2008

Sean Wong
spwongcpa@hotmail.com

Dear Sean:

        This letter is to confirm our verbal offer of employment to you as VP, Controller in Westaff's Corporate office in Walnut Creek California, reporting to me Christa Leonard, SVP and CFO. Your official start date will be Monday, September 22, 2008, with a starting salary of $175,000 per year with a sign on bonus of $17,500 on your start date and $17,500 in 90 days. You are also eligible for participation in the Company's annual bonus plan program commensurate to your position level and no less then 25% of your base salary. You will be eligible for three weeks of vacation per year based upon the standard vacation accrual of the company's vacation policy.

        In addition to the above, upon successful completion of the following you will be eligible for a $17,500 dollar bonus:

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Consultant-free in the accounting department by an agreed upon date;

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Year end audit completed timely;

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Timely and accurate completion of the 10K;

        Pending Board approval, you will also be eligible to participate in the Company Stock Incentive Plan. It is anticipated that you will be awarded 75,000 Stock Options.

        Should you be terminated from the company within your first 12 months of employment due to the company relocating its headquarters further than a 35 mile radius of 298 N. Wiget Lane, Walnut Creek, CA or following a company change your job is eliminated, you will receive 6 months of base pay as severance pay.

        This offer is contingent upon a satisfactory pre-employment evaluation which includes reference verification and a background investigation.

        Westaff engages in fair competition. We have no interest in any confidential information or trade secrets that belong to your former employers. We ask that you not share such information and secrets with us.

        Sean, we look forward to your formal acceptance of this offer by signing and returning a copy of this letter to me. We believe that you will enjoy your association with Westaff and that you will be a significant contributor to our team. Meanwhile, if you have any questions, please contact Debra Banks, Human Resource Representative at (925) 952-2540.

Sincerely,

/s/ Christa C. Leonard
Christa C. Leonard
SVP & Chief Financial Officer

ACCEPTED	Sean Wong Sean Wong
DATE	9/4/08

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Exhibit 10.3.20

EX-10.3.20.1

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Exhibit 10.3.20.1

        [LOGO]

Employment Contract

        This contract is entered into by and between Sean Wong (hereafter "you") and Westaff (USA), Inc. /Westaff Support, Inc. ("Westaff").

        Westaff hereby agrees to hire you or continue your employment and you agree to accept employment or continue your employment with Westaff upon the following terms and conditions:

1.    Duration.    Your employment shall start or continue as of September 22,2008 and shall continue thereafter until terminated by either party.

2.    Terminable-At-Will.    You are a "terminable-at-will" employee. You may resign at any time with or without a reason. Likewise, Westaff may dismiss you at any time with or without cause. You acknowledge that there are no other express or implied agreements between you and Westaff for any specific period of employment, or for continuing or long-term employment.

3.    Pay.    You will be paid a beginning salary of $175,000 per year. Your pay may be revised without impairing the effectiveness of any other provisions of this Contract. Your pay will be paid in equal installments every two weeks. Each pay period is distinct and severable, and your employment for part of a pay period or part of a year will not entitle you to pay for more than the time you actually worked. In the event your employment terminates during a pay period, your pay will be prorated to the date of termination, and will include earned vacation pay, if any.

4.    Confidentiality.    Westaff is a provider of temporary staffing and employment services. You acknowledge that by virtue of your employment, you will become familiar with or have access to Westaff's valuable proprietary information, confidential data and trade secrets which include but are not limited to, customers' and employees' names, addresses and telephone numbers, bill and pay rates, employees' pay and skills, other statistical information, sales techniques, methods of operation, advertising materials, formulas and operating manuals. As the misappropriation of such information, data or secrets would result in great damage or loss to Westaff, you agree not to use any of it for your own benefit and not to disclose it to, or allow the use of it by any person, firm or corporation, whether during your Westaff employment or thereafter.

5.    Non-Diversion.    You agree that you will not, directly or indirectly, either for yourself or for any other person, firm or corporation, solicit or attempt to divert any Westaff customer or recruit any Westaff employee during your Westaff employment and for a period of one year thereafter. For purposes of this paragraph, a Westaff customer is defined as any person, firm or corporation that Westaff has serviced within one year preceding the termination of your employment and with whom you have had contact on behalf of Westaff, and a Westaff employee is defined as any person who has received salary or wages from Westaff within one year preceding the termination of your employment.

6.    Non-Competition.    You agree to devote your best efforts to the performance of your Westaff duties and to perform no acts detrimental to Westaff's best interests. You will not engage in any other business nor work for any other person or entity during your Westaff workday. While employed by Westaff, you will not engage in any competitive temporary staffing or employment services business. Unless prohibited by the law in your jurisdiction, you further agree that you will not engage in a competitive temporary staffing or employment services business, in a same or similar capacity in which you were employed by Westaff, for yourself or for any other person, firm or corporation, within a radius of twenty-five miles from the Westaff office(s) where you were working for a period of one year after the termination of your Westaff employment.

7.    Authority.    You shall have no authority to enter into any contract or agreement or otherwise bind Westaff without the prior consent of an officer of Westaff.

8.    Property.    Upon termination of your employment, you agree to immediately deliver to Westaff all equipment, supplies, keys, manuals, monies, overpayments, lists, records, resumes, diskettes or other material related to the business of Westaff and all Westaff property of whatever nature in your possession or control or which you may have entrusted to any other party.

9.    Violation.    You acknowledge that the obligations and restrictions set forth in this Contract are reasonably necessary for the protection of Westaff's business, goodwill, property, and customer and employee relationships. You recognize that irreparable damage will result to Westaff in the event of any violation of this Contract and hereby agree to the issuance of a restraining order and/or an injunction against you for such a violation, in addition to any other legal or equitable remedies Westaff may have.

10.    Assignment.    Westaff's rights and/or duties under this Contract may be assigned or delegated to any successor of Westaff. However none of your rights and/or duties under this contract may be assigned by you to any other party.

11.    Modification.    The terms of this Contract may be amended, modified or replaced only by a subsequent written agreement signed by you and an authorized representative of Westaff.

12.    Severability.    Every provision of this Contract is distinct and severable. If any such provision is held to be illegal, unenforceable or void, it shall not affect the legality, enforceability or validity of any of the other provisions.

13.    Acknowledgment.    You hereby acknowledge that you have read and understood this Contract. By signing below, you acknowledge receipt of a copy of this Contract and agree to abide by its terms and conditions.

Employee:	/s/ Sean Wong Sean Wong	Date:	9/22/08
Westaff (USA), Inc.
By:	/s/ Debra L. Banks (Signature of Westaff representative)	Location:	Walnut Creek, Ca (City, State and Westaff office number)
Printed Name:	Debra L. Banks
Title:	HR Rep

Providing Essential Staffing Services

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Exhibit 10.3.20.1

Employment Contract

EX-10.8.37

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Exhibit 10.8.37

LOAN AGREEMENT

        This LOAN AGREEMENT (this "Agreement") is entered into as of August 25, 2008, among Westaff (USA), Inc., a California corporation (herein, together with its respective successors and assigns, referred to as "Westaff USA"), Westaff, Inc., a Delaware corporation (herein, together with its respective successors and assigns, referred to as "Westaff"), Westaff Support, Inc., a California corporation (herein, together with its respective successors and assigns, referred to as "Westaff Support"), and MediaWorld International, a California corporation (herein, together with its respective successors and assigns, referred to as "MediaWorld" and together with Westaff (USA), Westaff and Westaff Support, each individually, from time to time, referred to herein as a "Borrower" and collectively as the "Borrowers") and DelStaff, LLC, a Delaware limited liability company (herein, together with its successors and assigns, called "Lender") with reference to the following:

        A.    The Borrowers desire to have Lender make available to the Borrowers a revolving facility to advance Loans (as defined below) in the aggregate principal amount not to exceed THREE MILLION and NO/100 DOLLARS ($3,000,000), or such lesser amount as provided herein, in order to provide Borrowers with working capital and for Borrowers' general business purposes, but for no other purposes without Lender's consent, which Lender may withhold in its sole discretion.

        B.    The parties desire to set forth in this Agreement the terms and conditions of such loan.

        NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows:

ARTICLE I
DEFINITIONS

        The following words and terms as used in this Agreement shall have the meanings set forth below:

        "Advance" means each Loan made by the Lender to the Borrowers.

        "Advance Date" means any date on which an Advance occurs hereunder.

        "Aggregate Revolving Commitment" means a principal amount of Advances not to exceed THREE MILLION and NO/100 DOLLARS ($3,000,000) (exclusive of PIK Interest, the Facility Fee and Expenses hereunder that is added to principal pursuant to the terms of the Note and this Agreement).

        "Aggregate Revolving Commitment Sublimit" means a principal amount of Advances not to exceed ONE MILLION and NO/100 DOLLARS ($1,000,000) (exclusive of PIK Interest, the Facility Fee and Expenses hereunder that is added to principal pursuant to the terms of the Note and this Agreement).

        "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise.

        "Agreement" means this Loan Agreement, as the same may be amended, restated, supplemented, or modified and in effect from time to time.

        "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 as amended or modified from time to time (11 U.S.C. §101, et seq.).

        "Business Day" means any day other than a Saturday, Sunday or legal holiday on which banks in California are permitted to be closed.

        "Collateral" shall have the meaning set forth in the Security Agreement.

        "Default Rate" shall have the meaning set forth in the Note.

        "Expenses" means and shall include, but are not limited to: (i) reasonable attorneys' fees, costs and expenses; (ii) reasonable accountants' fees, costs and expenses; (iii) court costs and expenses; (iv) court reporter fees, costs and expenses; (v) long distance telephone charges; (vi) telegram charges; (vii) reasonable expenses for travel, lodging and food; (viii) fees of other professionals, all lien search fees and all filing fees.

        "Event of Default" shall have the meaning set forth in Section 5.1 hereof.

        "Facility Fee" shall have the meaning set forth in Section 2.2 hereof.

        "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

        "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (d) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (e) all obligations with respect to capital leases; and (f) all indebtedness referred to in clauses (a) through (e) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness.

        "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. federal, state or foreign law, including the Bankruptcy Code.

        "Intercreditor Agreement" means that certain Intercreditor and Subordination Agreement of even date herewith entered into by and between, the agent for Senior Lender, Lender and Borrowers, as the same may be amended, restated, supplemented, or modified and in effect from time to time.

        "Lien" means any pledge, security interest, encumbrance, lien (statutory or otherwise), mortgage, or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation.

        "Loan" means the aggregate Advances made by the Lender to the Borrowers.

        "Loan Documents" means this Agreement, the Security Agreement, the Note and any other document, agreement or instrument of any kind being delivered pursuant to or in connection with this Agreement.

        "Material Adverse Change" means a material adverse change, as determined by Lender in good faith, on (i) the Borrowers' (taken as a whole) ability to perform any of its or their payment or other

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material Obligations under this Agreement or any of the other Loan Documents, (ii) the enforceability of the Loan Documents, or (iii) the ability of Lender to exercise any of its remedies under the Loan Documents or provided by applicable law.

        "Material Adverse Effect" means a material adverse effect, as determined by Lender in good faith on (i) the Borrowers' (taken as a whole) (a) business, property, assets, operations, or condition, financial or otherwise, or (b) ability to perform any of its or their payment or other material Obligations under this Agreement or any of the other Loan Documents, (ii) the enforceability of the Loan Documents, or (iii) the ability of Lender to exercise any of its remedies under the Loan Documents or provided by applicable law.

        "Note" means that certain Subordinated Revolving Note dated as of even date herewith by the Borrowers in favor of Lender, as the same may be amended, restated, supplemented, or modified and in effect from time to time.

        "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loan, all accrued and unpaid fees arising under the Loan Documents and all expenses, reimbursements, indemnities and other obligations of the Borrowers to the Lender or any indemnified party hereunder arising under the Loan Documents.

        "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or government (whether national, federal, state, county, city, its municipality or otherwise, including without limitation any instrumentality, division, agency, body or department thereof).

        "PIK Interest" has the meaning as defined in the Note.

        "Revolving Advance" means an Advance under the Revolving Facility.

        "Revolving Facility Termination Date" means with respect to Revolving Advances the earliest of (i) August 15, 2009, or (ii) any earlier date on which the Aggregate Revolving Commitment or Aggregate Revolving Commitment Sublimit, as the case may be, is reduced to zero or otherwise terminated.

        "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject.

        "Security Agreement" means the Security Agreement dated as of even date hereof made by Borrowers in favor of Lender as the same may be amended, restated, supplemented or otherwise modified from time to time.

        "Senior Lender" means, collectively, the agent, lenders, letter of credit issuers and other creditors under the Senior Loan Agreement, and their respective successors, assigns and replacements under the Senior Loan Agreement and the loan documents described therein.

        "Senior Loan Agreement" means that certain Financing Agreement dated as of February 14, 2008, by and among Westaff (USA), Senior Lender, Westaff and certain other parties, as the same may be amended, restated, supplemented, modified, replaced, refinanced or otherwise modified from time to time.

        "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a

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combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Borrowers.

ARTICLE II
AGREEMENT FOR LOAN

        2.1    Commitment.    From and including the date of this Agreement and prior to the Revolving Facility Termination Date, the Lender agrees, on the terms and conditions set forth in this Agreement to make Advances to the Borrowers from time to time in amounts not to exceed the Aggregate Revolving Commitment. Notwithstanding the foregoing, any Advances made by the Lender to the Borrowers that are in excess of the Aggregate Revolving Commitment Sublimit shall be made by the Lender in its sole discretion. The commitment of the Lender to lend hereunder shall expire on the Revolving Facility Termination Date. All Advances hereunder will be evidenced by a single promissory note of the Borrowers payable to the order of the Lender and in form and substance satisfactory to the Lender in the amount of the Aggregate Revolving Commitment. Although the Note will be expressed to be payable in the full Loan amount, the Borrowers will be obligated to pay only the amounts actually disbursed hereunder, together with accrued interest on the outstanding balance at the rates and on the dates specified in the Note and such other charges provided for herein and therein. Amounts borrowed pursuant to the Aggregate Revolving Commitment or the Aggregate Revolving Commitment Sublimit, as the case may be, which are repaid or prepaid by the Borrowers may be reborrowed, only with Lender's prior written consent to such reborrowing, which Lender may withhold in its sole discretion. Lender is hereby authorized to record the principal amount of each Advance hereunder and each repayment on a schedule attached to the Note or otherwise in Lender's records, and such entries shall be prima facie evidence of the existence and the amounts of the obligations therein recorded; provided however, that neither the failure to so record nor any error in such recordation shall affect the Borrowers' obligations under the Note. The Borrowers hereby authorize Lender to extend, or continue Advances hereunder based on telephonic notices or email notices made by any authorized officer Lender in good faith believes to be acting on behalf of Westaff USA. Westaff USA agrees to deliver promptly to Lender a written confirmation if such confirmation is requested by Lender, of each telephonic notice or email notice signed by an authorized officer. If the written confirmation differs in any material respect from the action taken by Lender, the records of Lender shall govern absent manifest error. Notwithstanding anything herein or in any Loan Document to the contrary, all Advances made hereunder for the benefit of all the Borrowers shall be paid and made only to Westaff (USA).

        2.2    Facility Fee:    The Borrowers, collectively, shall pay to Lender a fee of One Hundred Thousand Fifty Thousand and NO/100 Dollars ($150,000) (the "Facility Fee"), which shall be added to the outstanding principal amount of the Note (although it will not reduce the Aggregate Revolving Commitment or Aggregate Revolving Commitment Sublimit, as the case may be) and shall bear interest at the Interest Rate set forth in the Note beginning on the date of disbursement of the initial Advance hereunder. The Facility Fee shall not be due until the Revolving Facility Termination Date, provided however such Facility Fee shall be fully earned on the date of disbursement of the initial Advance hereunder.

        2.3    Place of Payment; Order of Application; No Offset or Reduction.    All payments to Lender shall be made at the Lender's principal place of business or at such other place or places as Lender may designate in writing to Westaff USA. All of such payments to Persons other than Lender shall be payable at such place or places as Lender may designate in writing to Westaff USA. All payments shall be applied in such order of application as Lender may determine in its sole discretion. All payments are to be made by the Borrowers without offset or other reduction. Payment and performance of all of the Obligations shall be secured by the Collateral pursuant to the Security Agreement, which Lien shall be subordinate to the Lien of Senior Lender pursuant to the Intercreditor Agreement.

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        2.4    Subordination.    Notwithstanding anything contained in this Agreement to the contrary, this Agreement and the rights and obligations evidenced hereby are subordinate in the manner and the extent set forth in the Intercreditor Agreement.

        2.5    Prepayment and Termination.    The Borrowers shall have the right to prepay the Obligations under this Agreement, terminate the Aggregate Revolving Commitment and terminate this Agreement at any time, in whole or in part, without any penalty or fee.

        2.6    Loan Purpose.    The proceeds from Advances hereunder may be used by any Borrower for working capital purposes and for any Borrower's general business purposes, but for no other purposes without Lender's consent, which Lender may withhold in its sole discretion.

        2.7    Right of First Refusal.    If at any time prior to the Revolving Facility Termination Date, Westaff USA desires to obtain any additional contractual subordinate financing (other than from Lender or Senior Lender), Westaff USA shall give written notice thereof (the "Financing Notice") to Lender which shall state (i) the name of the Person with whom Westaff USA desires to obtain such subordinate financing from, and (ii) the terms of such financing. For a period of 5 Business Days after receipt of the Financing Notice (the "Option Period"), the Lender (or its designee) shall have the option to provide the subordinate financing on substantially the same terms contained in the Financing Notice. If the Lender (or its designee) elects to exercise its right of first refusal, the closing of the financing, subject to Westaff USA's satisfaction of usual and customary financing conditions precedent, shall occur no later than 30 days after the date of Lender's election to provide such financing or at such other time as the parties to the transaction may agree. The failure of the Lender (or its designee) to deliver written notice of exercise to Westaff USA within the Option Period shall be deemed to be an election by the Lender not to provide the financing. If the Lender elects to not provide such financing, Westaff USA shall be free, subject to the provisions of the Loan Documents, including Section 2 of the Note, to obtain such subordinate financing from such Person on substantially the same economic terms contained in the Financing Notice; provided that if Westaff USA has not consummated the closing of such financing within 90 days after the expiration of the Option Period, the restrictions provided for in this Section 2.7 shall again become effective.

ARTICLE III
CONDITIONS PRECEDENT

        3.1    Conditions Precedent.    Borrowers hereby agree that Lender's obligation to disburse any Advance is conditioned upon the following, all of which shall be deemed to be conditions precedent to such disbursement:

        (a)    Performance.    Borrowers shall have performed, observed and complied with all of their agreements and covenants herein and in the other Loan Documents;

        (b)    Representations and Warranties.    All of the representations, warranties and covenants of Borrowers contained in this Agreement or the other Loan Documents shall be and remain true and correct in all material respects;

        (c)    No Event of Default.    No Event of Default shall exist hereunder or under any of the other Loan Documents; and

        (d)    No Material Adverse Change.    No event or circumstance has occurred or exists that reasonably could be expect to cause or result in a Material Adverse Change.

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        3.2    Documents to be Furnished for Disbursement.    As a condition precedent to the disbursement of the initial Advance hereunder, Borrowers shall furnish or cause to be furnished to Lender the following documents, all in form and substance satisfactory to the Lender:

        (a)    Basic Documents.    This Agreement and duly executed originals of each of the Loan Documents and a consent from Borrowers to the Intercreditor Agreement;

        (b)    Resolutions.    Copies of the resolutions of the directors of the Borrowers duly adopted and which authorize the execution, delivery and performance by Borrowers of this Agreement and the Loan Documents, certified as of the date of the initial Advance hereunder;

        (c)    Payment of Fees.    To the extent permitted by the Intercreditor Agreement, evidence of payment by the Borrowers of all accrued and unpaid Expenses to Lender to the extent then due and payable on the date hereof, together with reasonable attorney costs of the Lender; provided however that Borrowers may elect to have the Facility Fee (but not the Expenses and other fees and costs arising out of the preparation and negotiation of the Loan Documents and the closing of this facility) added to the outstanding principal amount of the Note (which principal amount shall continue to accrue interest at the Interest Rate); and

        (d)    Other Documents.    Such other approvals, opinions, documents or materials as the Lender may request.

        3.3    Conditions to All Advances.    The obligation of the Lender to make any Advance to be made by it (including its initial Advance) is subject to the satisfaction of the following conditions precedent on the relevant Advance Date:

        (a)    Continuation of Representations and Warranties.    The representations and warranties contained herein shall be true and correct in all material respects on and as of such Advance Date with the same effect as if made on and as of such Advance Date (with the exception of such representations and warranties that are expressly made as of an earlier date, in which case such representations and warranties contained herein shall be true and correct in all material respects on and as of such earlier date);

        (b)    No Existing Default.    No Event of Default shall exist or shall result from such borrowing. Each Advance request submitted by the Borrowers hereunder shall constitute a representation and warranty by the Borrowers hereunder, as of the date of each such notice and as of each Advance Date that the conditions in this section are satisfied; and

        (c)    No Material Adverse Change.    No Material Adverse Change shall have occurred and be continuing.

ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS

        To induce Lender to make the Loan hereunder, Borrowers each represent, warrant and covenant to the Lender as follows:

        4.1    Company Existence and Power.    Each party: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has the power and authority and all authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance in all material respects with all Requirements of Law, except in the case of (c) and (d), where the failure to be in compliance with such representation is not reasonably likely to result in a Material Adverse Effect.

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        4.2    Company Authorization; No Contravention.    The execution, delivery and performance by the Borrowers of this Agreement and each other Loan Document to which any Borrower is party, have been duly authorized by all necessary action, and do not and will not: (a) contravene the terms of any of the organizational documents of the Borrowers; or (c) violate any Requirement of Law in any material respect.

        4.3    Binding Effect.    This Agreement and each other Loan Document to which the Borrowers are party constitute the legal, valid and binding obligations of the Borrowers, enforceable against the Borrowers, in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability.

        4.4    Notices.    The Borrowers shall promptly notify the Lender of the occurrence of any Event of Default, and of the existence of any event or circumstance that foreseeably will become an Event of Default.

        4.5    Inspection of Property and Books and Records.    The Borrowers shall maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Borrowers. As long as no Event of Default exists, no more than one time prior to the Revolving Facility Termination Date, the Borrowers shall permit representatives and independent contractors of the Lender to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at such reasonable time during normal business hours upon reasonable advance notice to the Borrowers; provided, however, that when an Event of Default exists the Lender may do any of the foregoing from time to time during normal business hours at the expense of the Borrowers and at any time and without advance notice.

        Notwithstanding the foregoing, to the extent the principal place of business of multiple Borrowers exist at the same address, Lender shall be permitted to conduct only one such audit at such address prior to the Revolving Termination Date, so long as no Event of Default has occurred and is continuing.

        4.6    Further Assurances.    Borrowers will execute and deliver or cause to be executed and delivered any and all further documents and instruments and to take any and all further actions as may be determined by the Lender to be necessary or appropriate to the transactions contemplated herein or in the other Loan Documents.

        4.7    Use of Proceeds.    Borrowers shall only use the proceeds from any Advance hereunder as provided in Section 2.6 hereof.

        4.8    Full Disclosure.    No representation or warranty made by any Borrower in this Agreement or the Security Agreement contains or will contain at the time such representation is made, any untrue statement of a material fact or omits or will omit to state any material fact or any fact necessary to make the statements contained herein or therein not misleading in any material respect.

ARTICLE V
EVENTS OF DEFAULT

        5.1    Event of Default.    Any of the following shall constitute an "Event of Default":

        (a)    Non-Payment.    The Borrowers fail to pay, (i) when and as required to be paid herein or in the Note, any amount of principal of the Loan, or (ii) any interest payable hereunder or under any other Loan Document, or (iii) any fee or any other amount payable hereunder or under any other Loan Document; provided that the failure to make such payment due to the operation of

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the Intercreditor Agreement shall not constitute an Event of Default hereunder, unless and until such payment is permitted to be paid by the terms of the Intercreditor Agreement; however the Interest Rate from and after such time shall be automatically increased to thirty percent (30%);

        (b)    Representation or Warranty.    Any representation or warranty by the Borrowers, made herein or in any other Loan Document is incorrect in any material respect on or as of the date made;

        (c)    Other Defaults.    The Borrowers fail to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue and not be remedied within thirty (30) days after the earlier of: (i) the date upon which the Borrowers knew of such failure or (ii) the date upon which written notice thereof is given to the Borrowers by the Lender;

        (d)    Cross-Acceleration; Cross-Default.    (i) The Senior Lender has accelerated the indebtedness under the Senior Loan Agreement; or (ii) other than such defaults which currently exist under the Senior Loan Agreement as of the date of this Agreement, if any additional Event of Default shall occur and be continuing after applicable cure periods, if any, under the Senior Loan Agreement and such Event of Default shall not have been waived or subject to forbearance by the Senior Lender within thirty (30) days after the occurrence of such Event of Default (e.g. pursuant to a waiver or forbearance agreement); or (iii) if the Borrowers fail to make any payment in respect of any Indebtedness (other than intercompany Indebtedness), in excess of $2,000,000 when due, after the expiration of any cure period (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise).

        (e)    Insolvency: Voluntary Proceedings.    Any Borrower (i) ceases or fails to be solvent, or generally fails or is unable to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself, or (iv) takes any action to effectuate or authorize any of the foregoing; provided, however, that a voluntary winding up or dissolution of MediaWorld that is permitted by the terms of the Senior Loan Agreement shall not constitute an Event of Default hereunder;

        (f)    Involuntary Proceedings.    (i) Any involuntary Insolvency Proceeding is commenced or filed against any Borrower, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of any Borrower's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within sixty (60) days after commencement, filing or levy; (ii) any Borrower admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) any Borrower acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business;

        5.2    Remedies.    If any Event of Default occurs, the Lender may, subject to Section 2.4 hereof:

        (a)   declare the commitment of the Lender to make Advances to be terminated whereupon such commitment and obligation shall be terminated; and/or

        (b)   declare the unpaid principal amount of the outstanding Loan, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; and/or

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        (c)   exercise all rights and remedies available to the Lender under the Loan Documents or applicable law and to pursue any and all available remedies for collection of such principal and interest, including but not limited to the exercise of all rights and remedies against Borrowers and the Collateral; and/or

        (d)   require the Borrowers make the Collateral and the records pertaining to the Collateral available to Lender at a place designated by Lender which is reasonably convenient or may take repossession of the Collateral and the records pertaining to the Collateral; and/or

        (e)   except as otherwise provided by law, sell the Collateral at public or private sale upon such terms and conditions as Lender may reasonably deem proper and Lender may purchase the Collateral at any such sale, upon commercially reasonable terms, and apply the net proceeds, after deducting all costs, expenses and attorneys' fees incurred by Lender at any time in the collection of the indebtedness and in the protection and sale of the Collateral, to the payment of the Obligations, returning the remaining proceeds, if any, to the Borrowers; and/or

        (f)    grant extensions, compromise claims, and settle accounts receivable for less than face value, all without prior notice to the Borrowers.

To the extent permitted by applicable law, all remedies contained herein or by law afforded shall be cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising and all shall be available to Lender until the Obligations hereunder have been paid and satisfied in full. During the existence of an Event of Default shall occur, interest, in lieu of the interest set forth in the Note, shall accrue on the Obligations then due and owing from the date of the same until cured, if cure is allowed, at the Default Rate set forth in the Note.

ARTICLE VI
MISCELLANEOUS

        6.1    Amendment; Assignment.    This Agreement and the other Loan Documents may not be modified, altered or amended except by an agreement in writing signed by Borrowers and Lender. Borrowers may not sell, assign or transfer this Agreement, the other Loan Documents or any portion thereof, including without limitation Borrowers' rights, titles, interests, remedies, powers and/or duties thereunder, without Lender's prior written consent. Borrowers hereby consent to Lender's sale, assignment, transfer or other disposition at any time and from time to time hereafter of this Agreement, or the other Loan Documents, or of any portion thereof, including without limitation, Lender's rights, titles, interests, remedies, powers and/or duties. In case of any such action by Lender, and provided that Lender has notified Borrowers in writing, Borrowers will accord full recognition thereto and hereby agrees that all rights and remedies of Lender in connection with the interests so transferred shall be enforceable against Borrowers by such transferee with the same force and effect and to the same extent as the same would have been enforceable by Lender but for such assignment. Lender shall provide Borrowers with prior notice of any such sale, assignment, transfer or other disposition, provided however that the failure of Lender to give Borrowers prior notice of any such sale, assignment, transfer or other disposition shall in no way affect such sale, assignment, transfer or other disposition. Lender shall have the right to share information concerning the Borrowers and the Loan documents with any potential transferees, subject to the obligations of Section 6.14 hereof.

        6.2    Waiver.    Lender's failure at any time or times hereafter to require strict performance by Borrowers of any provision of this Agreement shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lender of an Event of Default by Borrowers under this Agreement or the other Loan Documents shall not suspend, waive or affect any other Event of Default by Borrowers under this Agreement or the other Loan Documents, whether the same is prior or subsequent thereto and whether of the same or of

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a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrowers contained in this Agreement or the other Loan Documents, and no Event of Default by Borrowers under this Agreement or the other Loan Documents, shall be deemed to have been suspended or waived by Lender unless such suspension or waiver is by an instrument in writing signed by an officer of Lender and directed to Borrowers specifying such suspension or waiver.

        6.3    Severability.    If any provision of this Agreement or any of the other Loan Documents or the application thereof to any Person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the other Loan Documents and the application of such provision to other Persons or circumstances will not be affected thereby and shall be enforced to the greatest extent permitted by law.

        6.4    Binding Effect.    This Agreement and the other Loan Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrowers and Lender and their respective heirs, executors, administrators, personal representatives, successors and assigns.

        6.5    Other Loan Documents.    The provisions of the other Loan Documents are incorporated in this Agreement by this reference thereto. Except as otherwise provided in this Agreement and except as otherwise provided in the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in the other Loan Documents, the provision contained in this Agreement shall govern and control.

        6.6    Transactions Prior to Termination.    Except to the extent provided to the contrary in this Agreement and in the other Loan Documents, no termination or cancellation (regardless of cause or procedure) of this Agreement or the other Loan Documents shall in any way affect or impair the powers, obligations, duties, rights and liabilities of Borrowers or Lender in any way or respect relating to (i) any transaction or event occurring prior to such termination or cancellation, or (ii) any of the undertakings, agreements, covenants, warranties and representations of Borrowers contained in this Agreement or the Note. All such undertakings, agreements, covenants, warranties and representations shall survive such termination or cancellation.

        6.7    Borrowers Waiver of Notice, Etc.    Except as otherwise specifically provided in this Agreement, Borrowers waive any and all notice or demand which Borrowers might be entitled to receive with respect to this Agreement or the Note, or any document executed in connection herewith, by virtue of any applicable statute or law, and waives presentment, demand and protest and notice of presentment, protest, default, dishonor, non-payment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrowers may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard.

        6.8    Governing Law.    THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO CONFLICTS OF LAW PRINCIPLES).

        6.9    Costs and Expenses.

        (a)   The Borrowers, collectively, shall pay or, as applicable, reimburse Lender, and its successors and assigns, for all reasonable costs, fees, out-of-pocket expenses and obligations incurred by Lender, in connection with, arising out of, or related to: (1) the entering into, negotiation, preparation, closing, administration (including amendment, waiver, or other consent) of this Agreement, the Note and all other agreements contemplated herein, or the exercise of any of the rights or remedies of Lender under any Loan Document; (2) any transaction contemplated by the Loan Documents; and (3) any inspection, audit, appraisal, or verification of the Collateral

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or of the Borrowers; however, unless an Event of Default has occurred and is existing, Lender shall not seek reimbursement from the Borrowers for more than a total of one periodic, repeat audit (i.e., exclusive of any business audit in connection with any acquisition) per calendar year undertaken by Lenders' auditors or field examiners of the Borrowers, collectively (including of the Collateral).

        (b)   The Borrowers, collectively, shall pay or, as applicable, reimburse Lender, and its successors and assigns, for all reasonable costs, fees, expenses and obligations incurred by Lender, following the occurrence and during the continuance of an Event of Default, which are in connection with, arise out of, or are related to: (1) enforcing any obligation or in foreclosing against any of the Collateral or exercising, enforcing or preserving any other right or remedy available by reason of any Event of Default, (2) any refinancing or restructuring of the credit arrangements provided under the Loan Documents in the nature of a "work-out" or in any insolvency or bankruptcy proceeding, (3) commencing, defending or intervening in any litigation or in filing a petition, complaint, answer, motion or other pleadings in any legal proceeding related to the Borrowers and related to or arising out of the transactions contemplated by the Loan Documents, (4) taking any other action in or with respect to any suit or proceeding (whether in bankruptcy or otherwise), (5) protecting, preserving, collecting, leasing, selling, taking possession of, or liquidating any of the Collateral or (6) attempting to enforce or enforcing any Lender's liens on any of the Collateral or any other rights under the Loan Documents. Expenses are part of the Obligations, payable upon Lender's demand, and shall be secured by the Collateral.

All obligations, including, but not limited to, the payment of any Expenses, described under this Section 6.9 shall survive any termination of any Loan Document.

        6.10    Notices.    All notices, demands and other communications to be given or delivered under or by reason of the provisions of this Loan Agreement and the other Loan Documents shall be in writing and shall be deemed to have been given when personally delivered or delivered by facsimile, one Business Day after deposit with Federal Express or similar reputable overnight courier service or three Business Days after being mailed by first class mail, return receipt requested. Notices, demands and communications to Borrowers and Lender shall, unless another address is specified in writing, be sent to the addresses indicated below:

Notices to Borrowers:

Westaff (USA), Inc.
298 North Widget Lane
Walnut Creek, CA 94598
Attention: Chief Financial Officer
Facsimile: (925) 934-5489

Westaff, Inc.
298 North Widget Lane
Walnut Creek, CA 94598
Attention: General Counsel
Facsimile: (949) 481-7083

Westaff Support, Inc.
298 North Widget Lane
Walnut Creek, CA 94598
Attention: Chief Financial Officer
Facsimile: (925) 934-5489

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MediaWorld International
298 North Widget Lane
Walnut Creek, CA 94598
Attention: Chief Financial Officer
Facsimile: (925) 934-5489

with copies to:

Morrison & Foerster LLP
Attention: Jill Feldman
425 Market Street
San Francisco, CA 94105
Facsimile: (415) 276-7298

Notices to Lender:

DelStaff, LLC
c/o H.I.G. Capital, LLC
855 Boylston St.
Boston, MA 02116
Attention: John Black and Michael Phillips
Facsimile: (617) 262-1505

with a copy to:

Greenberg Traurig, LLP
77 West Wacker Dr., Suite 2500
Chicago, IL 60601
Attention: Paul Quinn
Facsimile: 312-899-0333

        6.11    No Third-Party Beneficiaries.    This Agreement is solely for the benefit of the parties hereto, their successors and assigns, and no other person or entity shall acquire or have any right hereunder, with the exception of the Senior Lender in respects of Section 2.4 hereof.

        6.12    Counterparts.    This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by the Lender shall deemed to be originals thereof.

        6.13    Indemnification.    Whether or not the transactions contemplated hereby are consummated, the Borrowers, joint and severally, shall indemnify, defend and hold the Lender and its officers, directors, representatives, advisors, successors and assigns (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable attorney fees) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loan) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or the other Loan Documents or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Borrowers shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this section shall survive payment of all other Obligations.

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        6.14    Confidentiality.    Lender agree to use commercially reasonable efforts (equivalent to the efforts Lender applies to maintaining the confidentiality of its own confidential information) to maintain as confidential all confidential information provided to them by Borrowers and their Affiliates and designated as confidential, except that Lender may disclose such information (a) to Persons employed or engaged by Lender who are informed of the confidentiality obligation hereunder; (b) to any bona fide assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 6.14 (and any such bona fide assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any Governmental Authority or reasonably believed by Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which Lender is a party; or (f) that ceases to be confidential through no fault of Lender or any of their employees or agents.

        6.15    Dissolution of MediaWorld.    Notwithstanding anything herein to the contrary, upon a legal dissolution of MediaWorld as permitted under the Senior Loan Agreement, MediaWorld shall cease to be a Borrower under and for the purposes of this Agreement and the other Loan Documents.

        6.16    Joint and Several Liability.    The obligations of each Borrower under this Agreement and the Loan Documents shall be joint and several. The joint and several obligations of each Borrower under this Agreement and the Loan Documents shall be absolute and unconditional and shall remain in full force and effect until all Obligations shall have been paid and, until such payment has been made, shall not be discharged, affected, modified or impaired on the happening from time to time of any event, including, without limitation, any of the following, whether or not with notice to or the consent of any of the undersigned: (a) the waiver, compromise, settlement, release or termination (including, without limitation, any extension or postponement of the time for payment or performance or renewal or refinancing) of any or all of the Obligations or agreements of any of the undersigned under this Agreement or any other Loan Documents; (b) the failure to give notice to any or all of the Borrowers of the occurrence of an Event of Default under the terms and provisions of this Agreement or any other Loan Documents, other than as required herein or as required by law; (c) the release, substitution or exchange by the Lender of any Collateral (whether with or without consideration) or the acceptance by the Lender of any additional collateral or the availability or claimed availability of any other collateral or source of repayment or any nonperfection or other impairment of any Collateral; (d) the release of any person primarily or secondarily liable for all or any part of the obligations, whether by Lender or in connection with any voluntary or involuntary liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors or similar event or proceeding affecting any or all of the undersigned or any other person or entity who, or any of whose property, shall at the time in question be obligated in respect of the Obligations or any part thereof; or (e) to the extent permitted by law, any other event, occurrence, action or circumstance that would, in the absence of this clause, result in the release or discharge of any or all of the Borrowers from the performance or observance of any obligation, covenant or agreement contained in this Agreement or any other Loan Documents. The joint and several obligations of each Borrower to Lender under this Agreement shall remain in full force and effect (or be reinstated) until Lender has received payment in full of all Obligations and the expiration of any applicable preference or similar period pursuant to any bankruptcy, insolvency, reorganization, moratorium or similar law, or at law or equity, without any claim having been made before the expiration of such period asserting an interest in all or any part of any payment(s) received by Lender. Each Borrower expressly agrees that the Lender shall not be required first to institute any suit or to exhaust its remedies against any Borrower or any other person or party to become liable hereunder or against any Collateral, in order to enforce this Agreement; and expressly agrees that, notwithstanding the occurrence of any of the foregoing, each Borrower shall be and remain, directly and primarily liable for all sums due under this Agreement and under the Loan Documents.

[SIGNATURES ARE ON THE FOLLOWING PAGE]

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        IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written

BORROWERS:		LENDER:
WESTAFF (USA), INC., a California corporation		DELSTAFF, LLC, a Delaware limited liability company
By:	/s/ Christa C. Leonard	By:	/s/ Michael Phillips
Its:	Chief Financial Officer	Its:	Manager
Printed Name:	Christa C. Leonard	Printed Name:	Michael Phillips
WESTAFF, INC., a Delaware corporation
By:	/s/ Christa C. Leonard
Its:	Chief Financial Officer
Printed Name:	Christa C. Leonard
WESTAFF SUPPORT, INC., a California corporation
By:	/s/ Christa C. Leonard
Its:	Chief Financial Officer
Printed Name:	Christa C. Leonard
MEDIAWORLD INTERNATIONAL, a California corporation
By:	/s/ Christa C. Leonard
Its:	Chief Financial Officer
Printed Name:	Christa C. Leonard

Signature Page to Loan Agreement

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Exhibit 10.8.37

LOAN AGREEMENT
ARTICLE I DEFINITIONS
ARTICLE II AGREEMENT FOR LOAN
ARTICLE III CONDITIONS PRECEDENT
ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS
ARTICLE V EVENTS OF DEFAULT
ARTICLE VI MISCELLANEOUS

EX-10.8.39

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Exhibit 10.8.39

SECURITY AGREEMENT

        THIS SECURITY AGREEMENT (this "Agreement"), dated as of August 25, 2008, is entered into by and among DELSTAFF, LLC, a Delaware limited liability company ("Lender"), WESTAFF (USA), INC., a California corporation ("Westaff (USA)"), WESTAFF, INC., a Delaware corporation ("Westaff"), WESTAFF SUPPORT, INC., a California corporation ("Westaff Support"), and MEDIAWORLD INTERNATIONAL, a California corporation ("MediaWorld"; and together with Westaff (USA), Westaff and Westaff Support, each is individually from time to time is referred to herein as a "Grantor" and collectively as "Grantors"), with reference to the following facts:

RECITALS

        A.    Grantors and Lender are entering into a Loan Agreement of even date herewith among Grantors and the Lender as the same has been amended or modified from time to time (the "Loan Agreement") pursuant to which Lender proposes to provide Advances in an aggregate principal amount of up to THREE MILLION and NO/100 DOLLARS ($3,000,000) (the "Loan") to Grantors. Any capitalized term used but not defined herein shall have the meaning ascribed thereto in the Loan Agreement.

        B.    Grantors are members of an affiliated group of companies that includes each other Grantor. Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the making of the Loan under the Note.

        C.    It is a condition to the effectiveness of the Loan Agreement that each Grantor enter into this Agreement with Lender and hereby grant Lender a security interest in the Collateral described below to secure the payment and performance of such Grantor's obligations to Lender under the Loan Agreement and the other Loan Documents entered into in connection with the Loan Agreement.

        D.    To induce Lender to enter into the Loan Agreement and the other Loan Documents with Grantors and provide Grantors the Loan contemplated thereunder, each Grantor is willing to enter into this Agreement with Lender and grant Lender a security interest in the Collateral.

        NOW, THEREFORE, for and in consideration of any Loan or Advance (including any loan or advance by renewal or extension) heretofore or hereafter made to Grantors or to their successors or assigns by the Lender pursuant to the Loan Agreement or the Note, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.    DEFINITIONS.

        1.1    Defined Terms.    In addition to the other terms defined in this Agreement, whenever the following capitalized terms (whether or not underscored) are used, they shall be defined as follows:

        "Capital Stock" means all shares, interests, participations, rights to purchase, options, warrants, general or limited partnership interests, or limited liability company interests or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity, whether voting or nonvoting, including common stock, preferred stock or any other "equity security" (as such term is defined in Rule 3a11-1 of the Rules and Regulations promulgated by the Securities and Exchange Commission (17 C.F.R. § 240.3a11-1) under the Securities and Exchange Act of 1934, as amended).

        "Code" means the Uniform Commercial Code, as enacted in the applicable jurisdiction, as amended or superseded from time to time after the date of this Agreement.

        "Collateral" means all of each Grantor's right, title and interest in and to all of each such Grantor's personal property and assets, tangible and intangible, now existing or hereafter acquired or arising, and wherever located, including:

          (i)  all of such Grantor's accounts, chattel paper, deposit accounts, documents, equipment, fixtures, instruments, inventory, investment property, general intangibles, goods, and letter-of-credit rights;

         (ii)  all of such Grantor's right, title and interest in and to the commercial tort claims;

        (iii)  without limiting the description of the property or any rights or interests in the property described above in this definition of Collateral, all of such Grantor's right, title and interest in and to (a) all of such Grantor's money, cash, and other funds; (b) all attachments, accessions, parts and appurtenances to, all substitutions for, and all replacements of any and all of such Grantor's equipment, fixtures and other goods; (c) all of such Grantor's agreements, as extracted collateral, tangible chattel paper, electronic chattel paper, health-care-insurance receivables, leases, lease contracts, lease agreements, payment intangibles, proceeds of letters of credit, promissory notes, records and software; and (d) all of such Grantor's franchises, customer lists, insurance refunds; insurance refund claims, tax refunds, tax refund claims, pension plan refunds, pension plan reversions;

        (iv)  all supporting obligations;

         (v)  all of the products and proceeds of all of the foregoing described property and interests in property, including cash proceeds and noncash proceeds, and including proceeds of any insurance, whether in the form of original collateral or any of the property or rights or interests in property described above in this definition of Collateral; and

        (vi)  all of the foregoing, whether now owned or existing or hereafter acquired or arising, or in which such Grantor now has or hereafter acquires any right, title or interest; provided, however, that the Collateral shall not include any Excluded Property.

        "Domestic Subsidiary" means any Subsidiary that is organized under the laws of the United States or any State or other political subdivision of the United States.

        "Excluded Property" means collectively,

          (i)  any equipment, fixture, inventory or other goods of such Grantor which is subject to a Permitted Lien, but solely to the extent that the documents evidencing such Permitted Lien explicitly prohibit the grant of a security interest in or Lien on such property or asset; provided, however, that at such time as such property or asset is no longer subject to such Lien or such prohibition, such property or asset shall (without any act or delivery by any Person) constitute Collateral hereunder;

         (ii)  any rights of such Grantor under any general intangible existing prior to the date hereof (other than with respect to any account, payment intangible, chattel paper or promissory note related thereto or as may otherwise be provided under applicable law) (the "Affected Collateral") if and solely to the extent the creation by the relevant Grantor of a security interest pursuant to this Agreement in such Grantor's right, title and interest in such Affected Collateral (A) is prohibited by legally enforceable provisions of any contract, agreement, instrument or indenture governing such Affected Collateral and such prohibition is not otherwise ineffective as a matter of law (such as pursuant Section 9-406(f), 9-407(a) or 9-408(a) of the Code), (B) would give any other party to such contract, agreement, instrument or indenture a legally enforceable right to terminate its obligations thereunder or (C) is permitted only with the consent of another party, if the requirement to obtain such consent is legally enforceable and is not otherwise ineffective as a matter of law (such as pursuant Section 9-406(f), 9-407(a) or 9- 408(a) of the Code) and such

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consent has not been obtained, provided, that in any event any account or any money or other amounts due or to become due under any such contract, agreement, instrument or indenture shall not be Excluded Property to the extent that any of the foregoing is (or if it contained a provision limiting the transferability or pledge thereof would be) subject to Section 9-406 of the Code); provided, however, that, notwithstanding the foregoing, at such time as such Affected Collateral is no longer subject to such prohibition, such right of termination or such consent requirement, as the case may be, such Affected Collateral shall (without any act or delivery by any Person) constitute Collateral hereunder;

        (iii)  35% of each class of the issued and outstanding voting Capital Stock of any Foreign Subsidiary owned by any Grantor, if and solely to the extent that the grant of a Lien herein in the Capital Stock of such Foreign Subsidiary would constitute an investment of earnings in United States property under Section 956 (or a successor provision) of the Internal Revenue Code, which investment would trigger any increase in the gross income of a United States shareholder of such Grantor pursuant to Section 951 (or a successor provision) of the Internal Revenue Code (it being understood and agreed that the remaining 65% of each class of the issued and outstanding voting Capital Stock of each such Foreign Subsidiary and all non voting Capital Stock of each such Foreign Subsidiary shall constitute Collateral hereunder owned by any Grantor);

        (iv)  as long as Westaff Support is prohibited from pledging the Capital Stock of Westaff (Australia) Pty Limited pursuant to a subordinated deed in favor of the lender to Westaff Australia Pty Limited, the Capital Stock of Westaff Australia, provided that the Collateral shall, automatically and without further action, include 65% of Capital Stock of Westaff Australia upon the termination, extinguishment or other removal of such prohibition;

         (v)  any indebtedness or obligations owing by Westaff (Australia) Pty Limited to any Grantor; and

        (vi)  any Permit now or hereafter acquired or held by any Grantor, together with all amendments, modifications, extensions, renewals and replacements of any thereof, solely to the extent the granting of a security interest therein in favor of Lender would be prohibited by applicable law and such prohibition is not otherwise ineffective as a matter of law; provided, however, that at such time as such Permit is no longer subject to such prohibition, such Permit shall (without any act or delivery by any Person) constitute Collateral hereunder.

        "Foreign Subsidiary" means any Subsidiary that is not a Domestic Subsidiary and shall include Westaff NZ Limited, Westaff (Australia) Pty Limited and Westaff (Singapore) Limited).

        "Governmental Authority" means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, government or any agency or instrumentality thereof (including any central bank).

        "Government Contracts" means each of the contracts entered into by any Grantor with Government Authorities, as such contracts may be amended, restated, replaced, extended or reaffirmed from time to time.

        "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, charge, security interest, encumbrance, lien (statutory or other), or any preference, priority or other security agreement or any preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any lease deemed under the UCC to be intended for security, and the authorized filing by or against a Person as debtor of any financing statement under the UCC or comparable law of any jurisdiction).

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        "Permit" means any and all permits, certificates, approvals, authorizations, consents, licenses, variances, franchises or other instruments, however characterized, of any Governmental Authority (or any Person acting on behalf of a Government Authority).

        "Permitted Lien" means the Lien granted to the Senior Lender, any Lien granted to a subordinate lender pursuant to Section 2.7 of the Loan Agreement, and any other Lien permitted or allowed under the Senior Loan Agreement, including but not limited to the Liens granted hereunder.

        "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, limited liability company, corporation, institution, entity, party or Governmental Authority.

        "Surety Account" means that certain U.S. Bank National Association Account no. 98554000 which has been pledged by Westaff (USA) to the Washington State Department of Labor and Industries as security for providing workers' compensation benefits and assessments in the event of default by the self insurer.

        "Westaff Australia" means Westaff (Australia) Pty Limited.

        1.2    Other Definitional Provisions; Construction.    Unless otherwise specified,

          (i)  As used in this Agreement, accounting terms relating to Grantors not defined in this Agreement have the respective meanings given to them in accordance with GAAP.

         (ii)  The definition of any document, instrument or agreement includes all schedules, attachments and exhibits thereto and all renewals, extensions, supplements, restatements and amendments thereof. All Exhibits and Schedules attached to this Agreement are incorporated into, made and form an integral part of this Agreement for all purposes.

        (iii)  "Hereunder," "herein," "hereto," "this Agreement" and words of similar import refer to this entire document; "including" is used by way of illustration and not by way of limitation, unless the context clearly indicates the contrary; the singular includes the plural and conversely; and any action required to be taken by Grantors is to be taken promptly, unless the context clearly indicates the contrary.

        (iv)  All of the uncapitalized terms contained in this Agreement which are now or hereafter defined under the Code will, unless the context indicates otherwise, have the meanings provided for now or hereafter in the Code.

2.    GRANT OF SECURITY INTEREST; SET-OFF AND RELATED MATTERS.

        2.1    Security Interest.    As security for the full, prompt and complete payment and performance by each Grantor of its respective obligations under the Loan Agreement and the other Loan Documents, including, without limitation, the joint and several obligations of Grantors under the Loan Agreement (collectively, for purposes of this Agreement, the "Obligations"), each Grantor hereby grants to, and creates in favor of Lender, for the benefit of Lender, a continuing security interest in, and Lien on, all of the Collateral subject to the terms of the Intercreditor Agreement.

        2.2    Government Contracts.    In addition to, and without limiting any of the foregoing, in order to support the payment and performance of the Obligations and subject to the terms of the Intercreditor Agreement and the rights of the Senior Lender therein, and until the full repayment of the Note, each Grantor hereby absolutely assigns, sells and transfers to Lender, for benefit of the Lender, all claims and moneys due or to become due under the Government Contracts, and agrees that all payments due or to become due under the Government Contracts shall be made to and at the direction of Lender.

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3.    PERFECTION OF LENDER'S SECURITY INTEREST; DUTY OF CARE.

        3.1    Required Grantor Actions.    Until the termination of this Agreement and subject to the terms of the Intercreditor Agreement and the rights of the Senior Lender in and to the Collateral, each Grantor shall perform any and all steps and take all actions reasonably requested by Lender from time to time to perfect, maintain, protect, and enforce Lender's security interest in, and Lien on, the Collateral, including (i): executing and delivering all appropriate documents and instruments as Lender may determine are necessary or reasonably desirable to perfect, preserve, or enforce Lender's interest in the Collateral, all in form and substance satisfactory to Lender, (ii) delivering to Lender any warehouse receipts or other documents of title covering that portion of the Collateral which may be located in warehouses and in respect of which warehouse receipts are issued, (iii) upon the occurrence and the continuance of any Event of Default, transferring inventory to warehouses approved by Lender, (iv) placing notations on such Grantor's books of account to disclose Lender's security interest and Lien therein, and (v) taking such other steps and actions as deemed necessary or reasonably desirable by Lender to perfect and enforce Lender's security interest in, and Lien on, and other rights and interests in, the Collateral; provided that, in no case shall any Grantor be required to: (i) obtain a bailee letter agreement or financing agreement with regard to Collateral that is subject to such a bailee letter or financing agreement in favor of the Senior Lender or that is otherwise having a value less $100,000 individually or $250,0000 in the aggregate which is in the possession or control of any warehouseman or any of Grantor's consignees, agents, processors, customers or other bailees, (ii) deliver a control agreement with regard to Collateral in any deposit, investment or securities accounts which are subject to a control agreement in favor of the Senior Lender to that otherwise have a balance of less than $25,000 (or $750,000 with respect to the Surety Account), or in the aggregate have balances of less than $250,000 (excluding the $750,000 maintained in the Surety Account) and (iii) deliver any promissory notes or tangible chattel paper evidencing obligations owing to such Grantor that have been delivered to the Senior Lender or that otherwise are in an amount less than $100,000 (individually or as part of a series of related transactions) or which consists of Excluded Property.

        3.2    Financing Statements; Notices.    Each Grantor hereby irrevocably authorizes Lender at any time and from time to time to file in any filing office in any jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of such Grantor, whether now owned or hereafter acquired or arising, and all proceeds and products thereof, (ii) as being of an equal or lesser scope or with greater detail, and (b) provide any other information required by Part 5 of Article 9 of the Uniform Commercial Code as enacted in any jurisdiction for the sufficiency or filing office acceptance of any financing statement or amendment, including whether such Grantor is an organization, the type of organization and any organizational identification number issued to such Grantor. Each Grantor hereby irrevocably authorizes Lender at any time and from time to time to correct or complete, or to cause to be corrected or completed, any financing statements, continuation statements or other such documents as have been filed naming such Grantor as debtor and Lender as secured party. Each Grantor agrees to furnish any such information to Lender promptly upon request. At Lender's request and in accordance with the terms of the Intercreditor Agreement, each Grantor will execute notices appropriate under any applicable requirements of law that Lender deems desirable to evidence, perfect, or protect its security interest in and other Liens on the Collateral in such form(s) as are satisfactory to Lender. Each Grantor, jointly and severally, agrees to pay the cost of filing all financing statements and other notices in all public offices where filing is deemed by Lender to be necessary or desirable to perfect, protect or enforce the security interest and Lien granted to Lender hereunder. A carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. Lender is hereby authorized to give notice to any creditor, landlord or any other Person as maybe necessary or desirable under applicable laws to evidence, protect, perfect, or enforce the security interest and Lien granted to Lender in the Collateral.

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        3.3    Impositions; Protection of Lender's Interests.    To protect, perfect, or enforce, from time to time, Lender's rights or interests in the Collateral, Lender may, in its discretion (but without any obligation to do so) and in accordance with the terms of the Intercreditor Agreement, (i) discharge any Liens (other than Permitted Liens) which are levied or placed on the Collateral after the date hereof, (ii) pay any insurance to the extent any Grantor has failed to timely pay the same, (iii) if determined by the Lender, in its reasonable judgment, to be necessary to protect the Collateral, maintain guards where any Collateral is located if an Event of Default has occurred and is continuing, and (iv) obtain any record from any service bureau and pay such service bureau the cost thereof. All costs and expenses incurred by Lender in exercising its discretion under this Section 3.3 will be part of the Obligations, payable on Lender's demand and secured by the Collateral.

        3.4    Lender's Duty of Care.    Lender shall have no duty of care with respect to the Collateral except that Lender shall exercise reasonable care with respect to the Collateral in Lender's custody. Lender shall be deemed to have exercised reasonable care if (i) such property is accorded treatment substantially equal to that which Lender accords its own property or (ii) Lender takes such action with respect to the Collateral as the applicable Grantor shall reasonably request in writing. Lender will not be deemed to have, and nothing in this Section 3.4 may be construed to deem that Lender has, failed to exercise reasonable care in the custody or preservation of Collateral in its possession merely because either (a) Lender failed to comply with any request of any Grantor or (b) Lender failed to take steps to preserve rights against any Persons in such property. Each Grantor agrees that Lender has no obligation to take steps to preserve rights against any prior parties.

        3.5    Verification.    After the occurrence and during the continuance of any Event of Default, Lender, in its own name or in the name of others, may periodically communicate with each Grantor's account debtors, customers and other obligors to verify with them, to Lender's satisfaction, the existence, amount and terms of any sums owed by such account debtors, customers or other obligors to each Grantor and the nature of any such account debtor's, customer's or other obligor's relationship with such Grantor.

        3.6    Electronic Chattel Paper and Transferable Records.    From and after the date of the repayment in full of all indebtedness and other obligations owing to the Senior Lender, if any Grantor at any time holds or acquires an interest in any electronic chattel paper or any "transferable record," as that term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, such Grantor shall promptly notify Lender thereof and, at the request and option of Lender, shall take such action as Lender may reasonably request to vest in Lender control, under Section 9-105 of the Uniform Commercial Code, of such electronic chattel paper or control under Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record.

        3.7    Letter of Credit Rights.    From and after the date of the repayment in full of all indebtedness and other obligations owing to the Senior Lender , if any Grantor is at any time now or hereafter a beneficiary under a letter of credit having a face amount in excess of $100,000, such Grantor shall promptly notify Lender thereof and, at the request and option of Lender, such Grantor shall, pursuant to an agreement in form and substance satisfactory to Lender, either, at the option of Lender, (i) arrange for the issuer and any confirmed or other nominated person of such letter of credit to consent to an assignment to Lender of the proceeds of the letter of credit or (ii) arrange for Lender to become the beneficiary of the letter of credit.

        3.8    Commercial Tort Claims.    If any Grantor shall at any time hold or acquire a commercial tort claim for an asserted amount in excess of $100,000, such Grantor shall promptly notify Lender in a writing signed by such Grantor of the particulars thereof and grant to Lender in such writing a security

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interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Lender.

4.    POWER OF ATTORNEY.

        4.1    Grant of Power.    Subject to the terms of the Intercreditor Agreement, each Grantor does hereby severally make, constitute and appoint Lender (or any officer or agent of Lender) as such Grantor's true and lawful attorney-in-fact, with full power of substitution, in the name of such Grantor or in the name of Lender or otherwise, for the use and benefit of Lender, but at the joint and several cost and expense of Grantors, (i) to endorse the name of such Grantor on any instruments, notes, checks, drafts, money orders, or other media of payment (including payments payable under any policy of insurance on the Collateral) or Collateral that may come into the possession of Lender or any affiliate of Lender in full or part payment of any of the Obligations; (ii) upon the occurrence and during the continuance of any Event of Default, to sign and indorse the name of such Grantor on any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with any Collateral, and any instrument or document relating thereto or to any of such Grantor's rights therein; (iii) to file financing statements pursuant to the Code and other notices appropriate under applicable law as Lender deems necessary to perfect, preserve, and protect Lender's rights and interests under this Agreement; (iv) after an Event of Default has occurred and is continuing, to give written notice to the United States Post Office to effect change(s) of address so that all mail addressed to such Grantor may be delivered directly to Lender; and (v) to do any and all things necessary or desirable to perfect Lender's security interest in, and Lien on, and other rights and interests in, the Collateral, to preserve and protect the Collateral and to otherwise carry out this Agreement.

        4.2    Duration; Ratification of Acts.    This power of attorney, being coupled with an interest, will be irrevocable for the term of this Agreement and all transactions under this Agreement and thereafter until the Obligations have been paid in full. Each Grantor jointly and severally ratifies and approves all acts of such attorney, and neither Lender nor its attorney will be liable for any acts or omissions or for any error of judgment or mistake of factor law, other than as results from such Person's own gross negligence or willful misconduct. Each Grantor shall execute and deliver promptly to Lender all instruments necessary or desirable, as determined in Lender's discretion, to further Lender's exercise of the rights and powers granted it in this Section 4.

5.    WARRANTIES AND REPRESENTATIONS.    To induce Lender to make the Loan pursuant to the Loan Documents, each Grantor severally represents to Lender that the following statements are, and will continue throughout the term of this Agreement to be, true:

        5.1    Jurisdiction of Organization; Places of Business, etc.    Such Grantor's (i) jurisdiction of organization is the jurisdiction identified on Exhibit 5.1, (ii) exact legal name is as set forth in the first paragraph of this Agreement (as may be updated from time to time as provided in Section 6.2), (iii) chief executive office and principal place of business are set forth on Exhibit 5.1 (as may be updated from time to time as provided in Section 6.2), (iv) offices or locations where such Grantor keeps the Collateral (except for inventory in transit) or conducts any of its business are listed on Exhibit 5.1 (as may be updated from time to time as provided in Section 6.2), and (vi) organizational identification number in its jurisdiction of organization is identified on Exhibit 5.1.

        5.2    Instruments.    Exhibit 5.2 lists all of such Grantor's rights, titles or interests in, or with respect to, any instruments, including promissory notes having an outstanding or committed principal amount in excess of $100,000, as of the date of this Agreement.

        5.3    State of Title.    Such Grantor has good and marketable title to, and ownership of, all the Collateral not owned by the other Grantors, free and clear of all Liens except to the extent, if any, of the Liens in favor the Senior Lender and Permitted Liens.

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6.    COLLATERAL COVENANTS.    Until the Obligations are fully paid, performed and satisfied and this Agreement is terminated and in accordance with terms of the Intercreditor Agreement, each Grantor shall:

        6.1    Claims Against Collateral.    Maintain the Collateral, as the same is constituted from time to time, free and clear of all Liens, except to the extent, if any, of the Permitted Liens, and defend or cause to be defended the Collateral against all of the claims and demands of all Persons whomsoever (except to the extent, if any, of the Permitted Liens).

        6.2    Notice of Change in Place of Business; Names, etc.    (i) Give Lender at least 30 Business Days advance notice in writing of any change in any Grantor's (a) chief executive office or (b) exact legal name as set forth in the first paragraph of this Agreement, and (ii) not, without the prior written consent of Lender, change Grantor's jurisdiction of organization.

        6.3    Notice of Adverse Information.    Promptly notify Lender in writing of any Lien or claim known to the Grantors which could reasonably be expected to materially and adversely affect the value of any material portion of the Collateral or the rights of Lender with respect thereto.

        6.4    Equipment.    Maintain the equipment in good operating condition and repair in accordance with the Grantors' standard business practice, ordinary wear and tear excepted.

        6.5    Insurance.    Insure the Collateral in accordance with the Senior Loan Agreement.

        6.6    No Liens.    Not create or permit to be created or to exist any Lien on any of the Collateral except to the extent, if any, of the Permitted Liens.

7.    TERM.    Subject to Section 11.6 below, this Agreement will terminate on the payment in full of the Obligations under the Note and under the Loan Agreement.

8.    LENDER'S RIGHTS AND REMEDIES.

        8.1    Remedies.    Subject to the terms of the Intercreditor Agreement, (i) On the occurrence and during the continuance of an Event of Default and after the lapse of any applicable period of cure, if any, Lender may immediately, at any time, while such Event of Default is continuing, take anyone or more of the following actions, without notice, demand or legal process of any kind (except as may be required by law), all of which each Grantor waives to the fullest extent permitted by law:

        (a)   proceed to enforce payment of the Obligations and to exercise all of the rights and remedies afforded to Lender by the Uniform Commercial Code as enacted in any jurisdiction, under the terms of the Loan Documents and by law and in equity provided, including those set forth below in this Section 8.1;

        (b)   take possession of the Collateral and maintain such possession on any Grantor's premises at no cost to Lender, or remove the Collateral, or any part thereof, to such other place(s) as Lender may desire;

        (c)   enter on any premises on which the Collateral, or any part or records thereof, may be situated and remove the same therefrom, for which action no Grantor shall assert against Lender any claim for trespass, breach of the peace or similar claim and no Grantor shall hinder Lender's efforts to effect such removal;

        (d)   require Grantors, at their joint and several cost, to assemble the Collateral and make it available at a place designated by Lender;

        (e)   collect, compromise, take, sell or otherwise deal with the Collateral and proceeds thereof in its own name or in the name of any Grantor, including (l) bringing suit on anyone or more of the accounts, chattel paper, instruments, documents, leases or other agreements (collectively, "Contracts") in the name of any Grantor or Lender, and exercise all such other rights respecting

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the Contracts, in the name of any Grantor or Lender, including the right to accelerate or extend the time of payment, settle, release in whole or in part any amounts owing on any Contract and issue credits in the name of any Grantor or Lender, and including proceeding against any collateral or security provided in respect of any Contract and (2) bringing suit on any one or more of the general intangibles, in the name of any Grantor or Lender, and exercise all such other rights respecting the general intangibles, including the right to accelerate or extend the time of payment, settle, release in whole or in part any amounts owing on any general intangible and issue credits in the name of any Grantor or Lender, and including proceeding against any collateral or security provided in respect of any general intangible;

        (f)    sell part or all of the Collateral at public or private sale(s), for cash, upon credit or otherwise, at such prices and upon such terms as Lender deems advisable, at Lender's discretion, and Lender may, if Lender deems it reasonable, postpone or adjourn any sale of the Collateral from time to time by an announcement at the time and place of sale or by announcement at the time and place of such postponed or adjourned sale, without being required to give a new notice of sale, and without being obligated to make any sale of the Collateral regardless of notice of sale having been given;

        (g)   to the extent Lender has not so acted or is currently so acting pursuant to the other terms of this Agreement, notify any Grantor's customers, account debtors and any other Persons (1) obligated on the Collateral to make payment or otherwise render performance to or for the benefit of Lender and (2) that, without limiting the generality of clause (1), the Contracts and general intangibles have been assigned to Lender and that payments should be made directly to Lender;

        (h)   require any Grantor, using such form as Lender may approve, to notify such Grantor's customers, account debtors and any other Persons, and to indicate on all of any such Grantor's correspondence to such customers, account debtors and other Persons, that the Contracts and general intangibles must be paid to Lender directly;

        (i)    sign any endorsements, assignments or other writings of conveyance or transfer in connection with any disposition of the Collateral;

        (j)    sell, assign, transfer or otherwise dispose of all or any part of the Collateral in any manner permitted by law and do any other thing and exercise any other right or remedy which Lender may, with or without judicial process, do or exercise under applicable law, and in any such sale Lender may sell, assign, transfer or otherwise dispose of all or any part of the Collateral without giving any warranties and Lender may specifically disclaim any warranties of title and the like;

        (k)   apply for and have a receiver appointed under state or federal law by a court of competent jurisdiction in any action taken by Lender to enforce its rights and remedies under this Agreement and, as applicable, the other Loan Documents in order to manage, protect, preserve, and sell and otherwise dispose of all or any portion of the Collateral and continue the operation of the business of any Grantor, and to collect all revenues and profits thereof and apply the same to the payment of all expenses and other charges of such receivership, including the compensation of the receiver, and to the payment of the Obligations until a sale or other disposition of such Collateral is finally made and consummated;

        (l)    enforce the obligations of an account debtor or other Person obligated on collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other Person obligated on collateral to make payment or otherwise render performance to any Grantor, and with respect to any property that secures the obligations of the account debtor or other Person

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obligated on collateral, in any case directly or through collection agencies or other collection specialists; and

        (m)  without limiting the provisions of Section 2.3 above, apply (or instruct another Person to apply) to the Obligations the balance of any deposit account that is part of the Collateral.

        (n)   Each Grantor acknowledges that portions of the Collateral could be difficult to preserve and dispose of and be further subject to complex maintenance and management. Accordingly, Lender, in exercising its rights under this Section 8.1, shall have the widest possible latitude to preserve and protect the Collateral and Lender's security interest in and lien thereon. Moreover, each Grantor acknowledges and agrees that Lender shall have no obligation to, and each Grantor hereby waives to the fullest extent permitted by law any right that it may have to require Lender to (i) clean up or otherwise prepare any of the Collateral for sale, (ii) pursue any Person to collect any of the Obligations or (iii) exercise collection remedies against any Persons obligated on the Collateral. Lender's compliance with applicable local, state or federal law requirements, in addition to those imposed by the Uniform Commercial Code as enacted in any jurisdiction, in connection with a disposition of any or all of the Collateral will not be considered to adversely affect the commercial reasonableness of any disposition of any or all of the Collateral under the Uniform Commercial Code as enacted in any jurisdiction.

        8.2    Notice of Disposition; Allocations.    If any notice is required by law to effectuate any sale or other disposition of the Collateral, (i) Lender will give the applicable Grantor(s) written notice of the time and place of any public sale or of the time after which any private sale or other intended disposition thereof will be made, and at any such public or private sale, Lender may purchase all or any of the Collateral; and (ii) Lender and each Grantor agree that such notice will not be unreasonable as to time if given in compliance with this Agreement ten days prior to any sale or other disposition. The proceeds of the sale will be applied first to all costs and expenses of such sale including attorneys' fees and other costs and expenses, and second to the payment of all Obligations in the manner and order determined by Lender in its discretion. Each Grantor shall remain jointly and severally liable to Lender and the Lenders for any deficiency. Unless otherwise directed by law, Lender will return any excess to Grantors.

        8.3    Payment of Expenses.    Grantors shall, jointly and severally, pay to Lender, on its demand, all costs and expenses, including court costs, attorneys' fees and costs of sale, incurred by Lender in exercising any of its rights or remedies hereunder, all of which constitute part of the Obligations and are secured by the Collateral.

9.    INDEMNIFICATION.    In consideration of the execution and delivery of the Loan Agreement and the making of the Loan to Grantors, each Grantor agrees, jointly and severally, to indemnify and hold Lender and each of Lender's directors, affiliates and agents (for the purposes of this Section 9 each is an "Indemnified Party") harmless from and against any and all claims, losses, obligations and liabilities arising out of or resulting from any or all of (i) this Agreement and (ii) the transactions contemplated by this Agreement (including enforcement of this Agreement), except for claims, losses or liabilities to the extent resulting from an Indemnified Party's gross negligence or willful misconduct. The indemnification provided for in this Section 9 is in addition to, and not in limitation of, any other indemnification or insurance provided by any Grantor to Lender.

10.    NOTICE.    Any notice, certificate, request, notification and other communication required, permitted or contemplated hereunder must be in writing and given in accordance with Section 6.10 of the Loan Agreement.

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11.    GENERAL.

        11.1    Severability.    If any term of this Agreement is found invalid under California law or other laws of mandatory application by a court of competent jurisdiction, the invalid term will be considered excluded from this Agreement and will not invalidate the remaining terms of this Agreement.

        11.2    GOVERNING LAW.    THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO CALIFORNIA CONFLICTS OF LAW PRINCIPLES).

        11.3    Survival and Continuation of Representations and Warranties.    All of each Grantor's representations and warranties contained in this Agreement shall (i) survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto and (ii) shall be brought down from time to time as provided in the Loan Agreement.

        11.4    Lender's Additional Rights Regarding Collateral.    All of the Obligations shall constitute one obligation secured by all of the Collateral. In addition to Lender's other rights and remedies under the Loan Documents, Lender may, in its discretion exercised in good faith, following the occurrence and during the continuance of any Event of Default, but subject to the terms of the Intercreditor Agreement: (i) exchange, enforce, waive or release any of the Collateral or portion thereof, (ii) apply the proceeds of the Collateral against the Obligations and direct the order or manner of the liquidation thereof (including any sale or other disposition), as Lender may, from time to time, in each instance determine, and (iii) settle, compromise, collect or otherwise liquidate any such security in any manner without affecting or impairing its right to take any other further action with respect to any security or any part thereof.

        11.5    Application of Payments; Revival of Obligations.    Lender shall have the continuing right to apply or reverse and reapply any payments to any portion of the Obligations. To the extent any Grantor makes a payment or payments to Lender or Lender receives any payment or proceeds of the Collateral or any other security for any Grantor's benefit, which payment(s) or proceeds or any part thereof are subsequently voided, invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee; receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) or proceeds received, the Obligations or part thereof intended to be satisfied shall be revived and shall continue in full force and effect, as if such payment(s) or proceeds had not been received by Lender.

        11.6    Additional Waivers by Grantors.    Each Grantor waives presentment and protest of any instrument and notice thereof, and, except as expressly provided in the Loan Documents, demand, notice of default and all other notices to which such Grantor might otherwise be entitled. No Grantor shall assert any claim against Lender on any theory of liability for consequential, special, indirect or punitive damages.

        11.7    Equitable Relief.    Each Grantor recognizes that, in the event any Grantor fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy of law may prove to be inadequate relief to Lender; therefore, each Grantor agrees that Lender, if Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

        11.8    Entire Agreement; Counterparts; Fax Signatures.    This Agreement and the other Loan Documents set forth the entire agreement of the parties with respect to subject matter of this Agreement and supersede all previous understandings, written or oral, in respect thereof. Any request from time to time by any Grantor for Lender's consent under any provision in the Loan Documents must be in writing, and any consent to be provided by Lender under the Loan Documents from time to time must be in writing in order to be binding on Lender; however, Lender will have no obligation to provide any consent requested by any Grantor, and Lender may, for any reason in its discretion

11

exercised in good faith, elect to withhold the requested consent. Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. Any documents delivered by, or on behalf of, any Grantor by fax transmission (i) may be relied on by Lender as if the document were a manually signed original and (ii) will be binding on such Grantor for all purposes of the Loan Documents.

        11.9    Headings.    Section headings in this Agreement are included for convenience of reference only and shall not relate to the interpretation or construction of this Agreement.

        11.10    Cumulative Remedies.    The remedies provided in this Agreement and the other Loan Documents are cumulative and not exclusive of any remedies provided by law. Exercise of one or more remedy(ies) by Lender does not require that all or any other remedy(ies) be exercised and does not preclude later exercise of the same remedy.

        11.11    Waivers and Amendments in Writing.    Failure by Lender to exercise any right, remedy or option under this Agreement or in any Loan Documents or delay by Lender in exercising the same shall not operate as a waiver by Lender of its right to exercise any such right, remedy or option. No waiver by Lender shall be effective unless it is in writing and then only to the extent specifically stated. This Agreement may only be amended, modified, supplemented or restated in a writing signed by Lender and each Grantor affected thereby and may not be amended, modified, supplanted or otherwise changed orally.

        11.12    Recourse to Directors or Officers.    The obligations of each party under this Agreement are solely the corporate obligations of each party. No recourse shall be had for any obligation or claim arising out of or based upon this Agreement against any stockholder, employee, officer, or director of each party.

        11.13    Assignment.    Lender shall have the right to assign this Agreement and the other Loan Documents in accordance with Section 6.1 of the Loan Agreement. No Grantor may assign, transfer or otherwise dispose of any of its rights or obligations hereunder, by operation of law or otherwise, and any such assignment, transfer or other disposition without Lender's written consent shall be void. All of the rights, privileges, remedies and options given to Lender under the Loan Documents shall inure to the benefit of the successors and assigns of Lender, and all the terms, conditions, covenants, provisions and warranties herein shall inure to the benefit of and bind the permitted successors and assigns of each Grantor and Lender, respectively.

        11.14    Conflict.    If there is any conflict, ambiguity, or inconsistency, in Lender's judgment, between the terms of this Agreement and any of the other Loan Documents, then the applicable terms and provisions, in Lender's judgment, providing Lender with greater rights, remedies, powers, privileges, or benefits will control.

        11.15    WAIVER OF JURY TRIAL.    AS A SPECIFICALLY BARGAINED INDUCEMENT FOR LENDER TO ENTER INTO THIS AGREEMENT AND FOR TE LENDERS AND THE OTHER SECURED PARTIES TO EXTEND CREDIT TO GRANTORS, EACH GRANTOR AND LENDER EACH WAIVES TRIAL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT OR THE CONDUCT OF THE RELATIONSHIP BETWEEN LENDER AND GRANTORS.

        11.16    Release of Lien.    Notwithstanding anything to the contrary contained herein or in any Loan Document, the Lender agrees that, (a) upon the repayment in full of the Obligations of the Grantors under the Loan Agreement and the Note, the Lender shall take all such actions and execute all such releases as are requested by the Grantors (at the Grantors' expense) to release the Lender's Lien upon the Collateral; and (b) any sale or transfer of assets of any Grantor permitted under the terms of the Senior Loan Agreement or otherwise permitted by the Senior Lender shall be made free and clear of the Lender's Lien, and the Lender shall take all such actions and execute all such releases as are requested by the Grantors (at the Grantors' expense) to release the Lender's Lien upon the Collateral that is subject to such sale.

[SIGNATURES ARE ON THE FOLLOWING PAGE]

12

        IN WITNESS WHEREOF, this Agreement has been duly executed by each of the undersigned as of the date first set forth above in the preamble to this Agreement.

		GRANTORS:
		WESTAFF (USA), INC., a California corporation
		By:	/s/ Christa C. Leonard
		Printed Name:	Christa C. Leonard
		Title:	Chief Financial Officer
		WESTAFF, INC., a Delaware corporation
		By:	/s/ Christa C. Leonard
		Printed Name:	Christa C. Leonard
		Title:	Chief Financial Officer
		WESTAFF SUPPORT, INC., a California corporation
		By:	/s/ Christa C. Leonard
		Printed Name:	Christa C. Leonard
		Title:	Chief Financial Officer
		MEDIAWORLD INTERNATIONAL, a California corporation
		By:	/s/ Christa C. Leonard
		Printed Name:	Christa C. Leonard
		Title:	Chief Financial Officer
LENDER:
DELSTAFF, LLC, a Delaware limited liability company
By:	/s/ Michael Phillips
Printed Name:	Michael Phillips
Title:	Manager

13

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Exhibit 10.8.39

SECURITY AGREEMENT
RECITALS

EX-21.1

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EXHIBIT 21.1

SUBSIDIARIES OF THE COMPANY

ACTIVE DOMESTIC SUBSIDIARIES
Westaff (USA), Inc.
MediaWorld International
Westaff Support, Inc.
INACTIVE DOMESTIC SUBSIDIARIES
Western Medical Services, Inc.

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EXHIBIT 21.1

SUBSIDIARIES OF THE COMPANY

EX-23.1

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EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

        We hereby consent to the incorporation by reference in the Registration Statement on Form S-4 No. 333-55831 and in the Registration Statements on Form S-8 (No.'s 333-10429, 333-48143 and 333-137743) of Westaff, Inc. of our report dated February 11, 2009, relating to the consolidated financial statements, which appears in this Form 10-K. Our report contains an explanatory paragraph regarding Westaff Inc.'s ability to continue as a going concern.

/s/ BDO SEIDMAN, LLP
San Francisco, California
February 11, 2009

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EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-23.2

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EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in Registration Statement No. 333-55831 on Form S-4 and in Registration Statement Nos. 333-137743, 333-10429 and 333-48143 on Form S-8 of our report dated January 26, 2007, relating to the 2006 consolidated financial statements (before retrospective adjustments to the consolidated financial statements for the discontinued operations discussed in Note 5 and the reclassifications related to interest expense described in Note 1 to the consolidated financial statements) of Westaff, Inc. and subsidiaries (not presented herein) (which report expresses an unqualified opinion and includes an explanatory paragraph related to a change in accounting for share-based payment arrangements) appearing in this Annual Report on Form 10-K of Westaff, Inc. and subsidiaries for the year ended November 1, 2008.

/s/ DELOITTE & TOUCHE LLP
Oakland, California
February 11, 2009

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EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

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EXHIBIT 31.1

RULE 13a-14(a) CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

        I, Michael T. Willis, certify that:

        1.     I have reviewed this annual report on Form 10-K of Westaff, Inc.

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

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

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 11, 2009

  
Michael T. Willis
Chief Executive Officer
Westaff, Inc.
(Principal Executive Officer)

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EXHIBIT 31.1

RULE 13a-14(a) CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

EX-31.2

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EXHIBIT 31.2

RULE 13a-14(a) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

        I, Christa C. Leonard, certify that:

        1.     I have reviewed this annual report on Form 10-K of Westaff, Inc.

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

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

        4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 11, 2009

  
Christa C. Leonard
Senior Vice President and Chief Financial Officer
Westaff, Inc.
(Principal Financial Officer)

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EXHIBIT 31.2

RULE 13a-14(a) CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

EX-32.1

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EXHIBIT 32.1

Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code

        I, Michael T. Willis, hereby certify, pursuant to 18 U.S.C § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of Westaff, Inc. (the "Company"), that, to the best of my knowledge:

(i)

The Annual Report of the Company on Form 10-K for the period ended November 1, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(ii)

The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.

Date: February 11, 2009

By:  
Michael T. Willis
Chief Executive Officer

        A signed original of this written statement required by Section 906 has been provided to Westaff, Inc. and will be retained by Westaff, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT 32.1

Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

EX-32.2

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EXHIBIT 32.2

Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code

        I, Christa C. Leonard, hereby certify, pursuant to 18 U.S.C § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of Westaff, Inc. (the "Company"), that, to the best of my knowledge:

(i)

The Annual Report of the Company on Form 10-K for the period ended November 1, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and



(ii)

The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.

Date: February 11, 2009

By:  
Christa C. Leonard
Senior Vice President and Chief Financial Officer

        A signed original of this written statement required by Section 906 has been provided to Westaff, Inc. and will be retained by Westaff, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT 32.2

Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code